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.********************
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.
