A Price Hike Can Increase Demand

Over at Landing the Deal, Dan Tudor uses the launch of the $2,500 Tata Nano automobile as a jumping-off point in the debate over whether the lowest price always wins. Below are a couple of cases where it doesn’t:

In his book Influence: The Psychology of Persuasion, Robert Cialdini writes of a jewelry store owner in Arizona who was stuck with some turquoise jewelry that wasn’t selling. She told one of her employees to cut the price, but the clerk misunderstood her and doubled the price instead.

A few days later, before they’d realized the mistake, the entire allotment of jewelry had sold out. The increased price had managed to make the jewelry more desirable to the customers who walked into the store. Cialdini explained the phenomenon this way:

You and I exist in an extraordinarily complicated environment, easily the most rapidly moving and complex that has ever existed on this planet. To deal with it, we need shortcuts. We can’t be expected to recognize and analyze all the aspects in each person, event and situation we encounter in even one day. We haven’t the time, energy or capacity for it. Instead, we must very often use our stereotypes, our rules of thumb, to classify things according to a few key features and then to respond without thinking when one or another these trigger features is present…

The customers, mostly well-to-do vacationers with little knowledge of turquoise jewelry, were using a standard principle — a stereotype — to guide their buying: “expensive = good”.

The higher price told them that this was “good” jewelry, so they bought it. Cutting the price would have steered them in the opposite direction.

Another example of this phenomenon at work appears (thank you, Chris Speer of 1190 KEX Radio) in a recent Associated Press article on a wine tasting. A research crew at California Institute of Technology discovered that a higher price tag on the bottle made the wine inside tasted better.

The lesson here is that the supply-and-demand price equation from your college economics doesn’t always take consumer psychology into account. Sometimes a price hike will help your sales.


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2 thoughts on “A Price Hike Can Increase Demand

  1. Oenophiles and jewelry buyers aren’t the only ones whose perceptions are shaped – and sometimes misguided – by price or brand cachet. A few years back a fellow named Steve Lampen, an engineer and technology guru at Belden Labs, wrote a piece in Radio World in which he described an experiment he conducted for the ostensible purpose of evaluating various high-end audio cables. The assembled audiophiles listened carefully to a selection of music played through a reference system, then the wires were changed out and they listened again to the same selection. The experts described in delicious detail the characteristics and relative merits of each new set of cables so tested.

    Only the group was never told (Lampen didn’t have the heart to tell them) that the cables were never changed; in every case, the only wiring used was the same consumer-grade lamp wire found throughout a typical home.


    Always enjoy your observations, Phil. Have a fine three days with Dan O’Day. I’ve never met him personally, but I’ve devoured much of his recorded material over the years, and I respect his instincts and insights. Your clients will undoubtedly enjoy reaping the benefits of your investment in Dan’s class – and their investment in you.

    Stay healthy!