When it comes to consumer buying behavior, there are often two contradictory forces at work. First, consumers believe that when a product is more expensive, it is of a higher quality and therefore, more desirable. Second, the Law of Demand (you may recall it from economics classes), which states that when something is more expensive, people will buy less of it. So which force ultimately has a bigger effect on purchasing decisions?
To answer this question, Ori Heffetz, an assistant professor of economics at Cornell’s Johnson Graduate School of Management, along with Moses Shayo of the Hebrew University of Jerusalem, conducted research examining the extent to which price influences a consumer’s perception of a food product and subsequent purchasing decisions. The result?
“When something is more expensive, consumers do think it’s better, but they also think it’s more expensive. With this specific set-up, economics won by a large margin,” Heffetz said during our recent conversation.
The research has implications for companies trying to determine the price point at which to place certain products.
Although economics in this experiment largely determined consumer buying, positioning a product at the high end of the pricing scale can still have benefits. For example, Heffetz explains that consumer experiences are often ambiguous with products such as wine. They may not be able to taste the difference between a $15 bottle and a $100 bottle, so they rely on price as an indicator of quality.
Similarly, if a consumer has very little knowledge about the product, then having some items at the high end of the scale will expand the buyer’s price range. Using the example of a shoe store, Heffetz says:
If I see a few shoes selling for a few thousand dollars each, I will feel less reluctant to spend a few hundred on shoes because they are not even close to top of range. It’s possible that no one ever buys these shoes that cost a few thousand; but still, they help to sell the few hundred dollar pairs of shoes.
However, if a company’s ultimate goal is to move as many units of a product as possible, then economics should be the main factor to consider when deciding the price. For example, a winemaker trying to sell a large quantity of one specific bottle should “more or less ignore the idea of perception and ask themselves, ‘How many do you think we can sell if it costs $12? How many do you think we can sell if it costs $15?’ Look at profits and see which one is better,” says Heffetz.
