Pricing is … How Buyers Compare Value

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Let’s simplify the world into experts and the naive. Of course there are many shades of gray, some say 50, but for now let’s go with black and white.

Experts use price to compare value by considering the price differences between two offerings, considering the attribute differences between the same products, and then deciding if the one that costs more is worth it.  They know so they make a (mostly) logical decision.

The naive behave differently. For them to know if the price difference is worth it, they would have to research and understand all of the differences in features and capabilities. That’s a lot of work. Instead, they use signals and clues. They might look at packaging, the retailer who is selling it, or even third party testimonials. However, one of the largest signals is price.

Using price to infer quality is extremely common. Think of wine. One bottle costs $10, another $20. Which is better? Odds are good you haven’t tasted them both. You don’t REALLY know. You guess. One indicator to help you is the price.

In a way using price to indicate quality is very rational. I do it all the time. Here’s the thinking: many people spend more time than I do figuring out if something is worth the price. If they are willing to spend $20 for a bottle instead of $10 it must be worth it. Besides, there are experts publishing their knowledge which keeps pricing in order.

We looked at how experts and naive people make choices. Of course there is a continuum. But every place in between these two extremes, the people use a combination of the two strategies just described. In some way they are trading off price for quality or capability and in another way they are using the price (and other signals) to infer the quality and capabilities of one product relative to another.

Either way, they are using price to compare the value of two products.

Photo by Michael Coghlan