Image Description

Prices As a Signal of Quality

We don’t always have a good nose for how much certain items generally cost or for the difference in price between high quality, average, and low quality in that type of item. When it’s something we don’t often buy or where quality is rather subjective, we may use price as a short-cut indicator of quality. For instance, if we don’t know much about furniture, we may assume that a table with a price tag of $1,500 is better constructed or better in some other way than the one tagged $150.

For entrepreneurs, this has some head-scratching and perhaps disquieting implications. Sometimes when something doesn’t sell well at a low price, it flies out the door at a higher price. Psychologist Robert Cialdini says a shop-owner friend of his had a bunch of nice turquoise jewelry that wouldn’t sell, no matter how she showcased it. She told her assistant to cut the prices in half, and then she went on vacation. When she came back, she discovered that every last piece of turquoise jewelry had sold - but her assistant had misunderstood and doubled instead of halved the prices.

“These were people who had been brought up on the rule “You get what you pay for” and who had seen that rule borne out over and over in their lives,” explains Cialdini in his classic book, Influence. “Before long, they had translated the rule to mean “expensive = good.” The “expensive = good” stereotype had worked quite well for them in the past, since normally the price of an item increases along with its worth; a higher price typically reflects higher quality. So when they found themselves in the position of wanting good turquoise jewelry without much knowledge of turquoise, they understandably relied on the old standby feature of cost to determine the jewelry’s merits.”

A client of mine who had been charging bargain-basement fees for her virtual assistant services saw this dynamic play out when she nearly tripled her hourly rate and arranged to be listed in a virtual assistant directory where very little information other than the business name, location, phone number, and hourly rate was posted. Almost immediately she started getting calls from potential clients who said, “I want you. I want the best.” Those business owners didn’t want to slave away at comparison shopping, reading full websites, and following up references to try to determine who was the best. Their rule of thumb was “highest price = best.”

Of course, the obverse of this rule of thumb is “low price = low quality.” And “unbelievably low price = scam.” If someone told you they knew how you could get a round-trip economy class ticket from Boston to Brussels for $10, would you chase it down? Chances are, you’d hold back wondering what the catch was because everyone knows you can’t fly that far for so little.

And if you did rush to buy it, thinking it must be a typo that’s going to be corrected soon, you might hesitate before getting on the plane. After all, by flying a no-maintenance airline you’d be risking your life.

These are the same kind of mental gyrations your potential customer goes through when your price seems too good to be true - way too low. Your incredible deal can actually go begging because buyers worry that the ultra-low price will bring them something horribly substandard or downright dangerous.

In the book Priceless, William Poundstone reports that the Hollywood Bowl, run by the County of Los Angeles, offers $1 seats for some of its summer concerts, as a public service. Much of the time, the $1 seats go unfilled while the $100 seats sell out. According to Poundstone, the $1 seats give you much the same musical experience as the $100 seats and a better view of the sunset and the city. But ticket buyers shy away from the $1 seats because they assume they must be horrendous.

With business-to-business products and services, risk aversion rules too. Clients stand to lose time, energy, money, and possibly their own reputation if your software or air conditioning doesn’t work as promised. They are risking more than what you’re charging. So most feel a too-low fee means the risk is too high. As with the Hollywood Bowl $1 tickets, your low price itself telegraphs to them, “Stay away. This isn’t even worth investigating.”

Keep in mind that we all normally rely on a host of clues, some in our conscious awareness and others not, in order to judge whether something is worth a lot of money - that is, a high price - or worth next to nothing. An incident involving the acclaimed violinist Joshua Bell illustrates this beautifully. In 2007, Bell played Bach and Schubert on his 1713 Stradivarius violin for 43 minutes in a Washington DC Metro stop, wearing a baseball cap and a long-sleeved T-shirt. More than a thousand people passed by. Of course, not all commuters are familiar with classical music and know excellence when they hear it, but you’d assume that a crowd would gather around a world-class musician performing for free in the subway and that there would be a chorus of oohs and ahs. In fact, though Bell played his heart out amidst outstanding acoustics, a grand total of seven commuters stopped to watch him, and only $32 was thrown into his hat. When he performs on stage, his take normally amounts to more than $1,000 a minute.

Nothing in the context in that Metro station signaled, “Pay attention! This is one of the best violinists in the world playing on an instrument worth millions!” In contrast, when he performs in Avery Fisher Hall or the Kennedy Center, Bell comes out on stage wearing elegant black attire, and concert-goers have a program containing his photo and bio in their hands. In that setting, you know without a doubt, even if you don’t particularly enjoy the performance, that the concert is worth the ticket price of $70, $270, or whatever you paid for it.

In another experiment illustrating the influence of context over price and appreciation, consumers were asked to rate bottles of wine that were labeled at $5 and $45. Overwhelmingly, the testers said that the more expensive wine tasted better than the cheaper ones. However, the wines were, in fact, identical. Associating higher prices with higher quality is a cognitive shortcut people use to simplify interaction with a complex world. Sometimes that shortcut leads them astray, but not always.

Well, some things in life are free. But in our economic system, something that costs nothing may come with its own set of problems, as we find out in the next lesson.

Image Description
Written by

Marcia Yudkin