Selling More by Charging More? For Certain Products, Yes.

Seems kind of weird, no? But in the wacky world of conspicuous consumption, where price and flash is the objective, it is not so strange. And this clearly applies to goods like $3,000 cashmere sweaters and $2,000 pairs of shoes. But what about things like Starbuck's Coffee? $5 for a chai latte? Would it sell as well at $1.50? This concept was highlighted in a story in today's New York Times:

“Price certainly plays into a product’s allure,” said Robert Burke, a retail consultant in New York. “For certain people, the higher the price, the more attractive the item becomes.”

An exorbitant price can confer exclusivity. “People are willing to pay a significant amount of money to make sure they don’t see their purchase on other people,” Mr. Burke said.

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Among merchants and manufacturers, consumer psychology can be as significant as economics in setting prices. “Luxury makers are not necessarily forced to raise prices above the exchange-rate factor, but sometimes they do,” said Milton Pedraza of the Luxury Institute, a research group in New York. “Why? They know that consumers are resilient. For manufacturers, it’s really about asking for a price increase because you can.”

It is an interesting concept. Paying a higher price can have a powerful psychological effect on the purchaser, making them feel as if they are receiving something of higher quality, of greater exclusivity, of, in short, higher value. Or at least higher utility. It is pretty easy to understand the example of luxury goods, where they can be displayed in order to show one's wealth, taste and distinction.

But what about a thing like information? If someone charges $50 for something that is really good, will anyone important really pay attention? Because if you are important, you don't have time for messing around with $50 things, right? But what about if that thing is priced at, say, $5,000? Does that important person now have the time to consider it? They may well be more apt to consider it due to its price, because the assumption is that if something is priced that high, it must be important. This is a kind of tortured example of a Giffen Good, one whose demand actually goes up as price goes up. Now my example doesn't strictly meet the test of such a good, but the concept is similar. Higher price, higher demand. This is a concept that I find very interesting, and represents a "holy grail" of any product development effort.

 

Comments

[jreid]

As a consultant who deals in risk, a more experienced consultant gave me some wise advice that I will share. He told me that if my clients weren't listening to my recommendations, it was because they weren't paying me enough.

His point was that if they paid me more they couldn't afford to ignore me, and therefore I should raise my rate if I wanted to be more successful - and as a result, be in higher demand.

If you have ever been an amateur athlete, look at how much coaches charge, and who pays them. Unfortunately I shared this advice with my own coach, and I was rewarded with a %20 increase in my bill, and admittedly I do value his advice more, perhaps even %20.

[Bond investor]

Some researchers have suggested that high-momentum common stocks are Giffen goods. People buy more of a high-flying stock just because it has gone up in price (often regardless of or in excess of the fundamental values of its future free cash flows).

[Darren Herman]

Yaser, I believe that once you throw in the element of personalization, the product doesn't follow Roger's initial posting. Personal = custom = high price.

I think Roger is getting at commodity goods, such as Starbucks coffee. Pricing is powerful, which is why it's one of the 4ps of marketing.

Remember the expensive t-shirt fad? How about watches? If a Tag Heuer cost $10, would you buy it? Probably not... the watches themselves aren't too solid.

[Jed Christiansen]

I once worked with a guy that founded a company (in the mid to late 90's) that did searches of public databases to find long-lost friends, boyfriends/girlfriends, etc. This was exactly the phenomenon he experienced.

He had fairly low costs, and didn't think he could charge much more than (I think) $15 or so for a search. But every time he raised the price more people bought it, up to $80 the last time I checked, and probably much more since then.

Part of this experience for him might be his marketing; he was widely featured on day-time talk shows like Oprah, Leeza Gibbons, etc. But he certainly noticed the effect where his service just didn't seem that valuable unless it was priced high enough to be a significant purchase for his customers.

[Munish Chopra]

While I fully agree with your main point, I would not consider this a Giffen good (even a tortured one), as Giffen goods are by definition inferior goods and the dynamics behind them are caused by the income and substitution effects. A more accurate description of your information example would be a Veblen good, which people want to increasingly purchase solely due to price increases (this also explains a lot of luxury goods).

[Yaser Anwar]

One important concept I feel this post hasn't alluded to is- personalization. Be it a Bentley GT; Tiffany's locket; and/or a 30-only custom made Mont Blanc pens with diamonds, personalization is a key factor that adds to the allure of exclusive and high-end goods. Sure it makes on feel great when they buy something limited and expensive; but IMO its also the customization and personalization these products can offer (alongside customer service) that are also key factors in price markups.

Wouldn't you agree?