High Pricing Benefits Your Customers

According to research by Baba Shiv, associate professor of marketing at the Stanford Graduate School of Business and others, pricing and advertising changes customers perception, experience and even the benefit they get from your products and services.

Buyers' beliefs and expectations influence their judgment of products and services. For example, you often judge lower-priced items to be of lower quality. A well-known study showed beer was judged better tasting when it had a best selling brand's label on it compared to no label.

In other studies, people selected energy drinks that they expected would make them feel more alert and energetic. Some paid full price for the drinks; others had cheap prices.

Here's the interesting part: The people then worked word puzzles. In all three studies, the people who paid lower prices consistently solved fewer puzzles than the people who paid full price for the drinks.

Your customers belief in "You get what you pay for" is so strong that it can affect the results they get from your product or service.

Advertising impacts the effectiveness of a product. "Promoting the efficacy of a medication can have significant improvements to a consumer's health," said Shiv. "Advertising, if done well, can give rise to a positive placebo effect."

These were strong research results. "We thought pricing might shape behavior at the margins, but it turned out to be a pretty strong effect across the board," Shiv said. "We ran the study again and again, not sure if what we got had happened by chance or fluke, but every time we ran it we got the same results." It was clear from the studies that people had no idea that price was actually influencing their performance. "The results signaled to us that this was largely a non-conscious effect," he said.

In further study by Shiv, and a group of researchers at California Institute of Technology showed that people experience an increase in activity in pleasure centers within the brain when they consume wine that is priced higher.

From "Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness," published online Jan. 14 in the Proceedings of the National Academy of Sciences…

According to Shiv, the assumption is that a person's "experienced pleasantness" from a product comes from its properties and their need. Yet, several studies have shown that marketing can influence how people experience and value goods. Again because ideas about quality are connected to price, people tend to expect an expensive wine to taste better than a cheaper one.

Students were placed in a MRI and given red wine. They got the same one twice, but with different price tags: $5.00 (real price) and $45.00. They liked the expensive wine more than the cheaper wine even though it was the same wine – this was also shown by the MRI. Previous studies have looked at how marketing affects behavior… this is the first to show that it has a direct effect on the brain.

According to Shiv, "What we document is that price is not just about inferences of quality, but it can actually affect real quality. So, the price is changing people's experiences with a product and, therefore, the outcomes from consuming this product."

What does that do to a strategy of lowering prices?

The Breakthrough Idea

Business owners AND their customers will do better having the most expensive product or service in their category.

Most owners I work with, at first want to place themselves in the center of the pricing range. This doesn't have an advantage and taking into account the research, is a poor choice for their customers as well.

Stanford Graduate School of Business

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