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Beware the All-You-Can-Eat-Shrimp for 99¢

Dustin, CEO of a successful manufacturing company, emailed me this question:

“In all the books I read last year on pricing, there is one phenomenon that no author ever discussed or said was possible. That is: when we raise prices, why does unit volume actually increase? All of the books and videos I studied said that raising prices will decrease the number units sold, not increase.”

Oh, Dustin.  Excellent question.  There is something called the Price-Quality Effect, which is when we infer quality from pricing. If it’s expensive, it must be good, right?  If it’s cheap, it must be poor quality, right?  It’s the classic refrain of “you get what you pay for.” That’s why you never eat at an all-you-can-eat 99¢ shrimp buffet.

We can send a signal of high quality OR a signal of low quality with our pricing. What kind of signal do you want to send? We all know this from being consumers: there is such a thing as suspiciously cheap. We all also know that there is such a thing as reassuringly expensive. I would wager that 100% of the people reading this, either in a physical store or online shopping, have put the more expensive version of something in their cart because you wanted high quality. You didn’t have any other reason, no any other data to support that you were getting the better version, the better quality. Human beings use price as a proxy for quality. The Price-Quality Effect is real.

How can volume increase with price?  Customers may start to take your solution more seriously and want it more. You can also attract a different category of customers looking for a different caliber of product or service.  I know a consultant who doubled his prices to try to manage demand, as he was out of capacity. What happened?  Demand for his services rose by 20%.  He was now seen as a different caliber of expert in the space and taken more seriously by larger firms with bigger budgets.

There are industries where this effect matters very much. Customers use price as the indicator for quality all the time. There are other industries where price plays a much smaller role in customer opinion of quality. There is no industry in the world where this effect doesn’t matter at all. The dire implication is this: some of your customers, some of the time, on some of your products and services are judging your quality because of your price.  What are you telling them about you? Don’t be suspiciously cheap.

Find this interesting?  In my next post, I’ll dive into Dustin’s question further by examining lies we learned in economics class.  Don’t miss it; subscribe here.