Price: A Signal of Quality

Many buyers use price as a signal of quality, but what does that mean to you if you set price? First, let's see this phenomenon in action.

Think about wine at a grocery store. When I want to buy a bottle I've never had before, here’s my usual thinking: “Hmmm, a $10 wine is a good value, but it probably won’t taste very good. $20 wines probably taste pretty good. $40 is expensive, but I’d buy one as a gift or for a special occasion. $80, who would buy that? Can people really tell the difference between a $40 and an $80 bottle?”

If it's for me, I probably buy the $20 bottle.

You likely do something similar. You use the price as a proxy for how good the wine will taste. As further evidence, the most frequently purchased bottle on a restaurant wine list is the second least expensive. Nobody would buy the cheapest, but the next one up seems reasonable.

Yet there are many studies using blind tastings where master sommeliers, the best of the best, choose less expensive bottles of wine as best in class. Of course when that happens, the wine producer smiles and wisely raises the price of their winning bottle.

Sometimes using price to indicate quality makes sense. Logic dictates that when buyers estimate quality over price, they rely on the buyers who came before them. They assume that many of the previous buyers could actually determine quality, and only bought the product because it was worth the price.

Of course, this isn't always true. Almost everybody buys wine as described above. People rarely know, even after tasting it, what a wine is "worth." What we have in the wine industry is the blind leading the blind.

However, in most industries people can tell the quality, especially after using a product or service. But even in those industries, people use price as a proxy for quality. It's easier than doing the work to determine the actual quality before purchasing.

As a businessperson, what does this mean to you? If it is possible to determine the true quality of your product, either before or after purchase, then you want to price consistent with your relative level of quality.

If you have a high-quality product, but try to gain share by charging a lower price, you may lose your position as a high-quality brand. Look at IZOD in the 1980s. They had a high-quality brand, (remember the alligators on the shirts?), but lost that brand because they extended their distribution into discount retailers. They boosted short-term revenue, but their brand image degraded.

Also, it is impossible in the long term to set a high price hoping to trick customers into thinking you have high quality. You may fool some people into buying, but they won't give positive word-of-mouth and they certainly won't purchase again.

The big takeaway: price consistent with your quality.

Cheers,

Mark


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