aiaio - the Alexander Interactive blog

A fascinating study was released last week that observed people find expensive items more desirable simply because they're more expensive. The same bottle of wine is more appealing to consumers who believe it's worth $90 than others who are told it's worth $10.

Pricing reactions also rely on contextual cues. Panasonic has found midprice items sell better when shown next to pricier models. The "reference prices" around a product significantly affect their perceived value.

These discoveries are not really new. Consider the make-up artist my wife hired for our wedding five years ago. After agreeing on a price, he forgot what they had decided, and quoted a second rate 80% higher. When my wife expressed shock, he quickly reverted to the original price. He explained that many of his clients were upper-class women who wouldn't think he was as good a stylist at the rate we were paying. Raising prices actually appeals to his audience, the cost verifying the talent on offer.

These theories are particularly interesting with regard to online merchants. As noted in the New Yorker article, websites create price transparency, which makes for savvier consumers both online and off, and forces retailers to compete in other ways.

The most intriguing question is raised by reading the two articles above as a single unit. In the first, The Economist argues that prices create emotional response, which could be used to sellers' advantage. In the second, James Surowiecki suggests almost the opposite: that the Internet has eliminated much pricing opacity, creating empowered consumers who understand right-priced items. Observing which one proves more accurate--or whether these theories work in parallel--will help define a generation of sales strategies.