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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