I have posed at two different business schools the following problem. I say, “You have studied supply and demand curves. You have learned that when you raise the price, ordinarily the volume you can sell goes down, and when you reduce the price, the volume you can sell goes up. Is that right? That’s what you’ve learned?” They all nod yes. And I say, “Now tell me several instances when, if you want the physical volume to go up, the correct answer is to increase the price?” And there’s this long and ghastly pause. And finally, in each of the two business schools in which I’ve tried this, maybe one person in fifty could name one instance. They come up with the idea that occasionally a higher price acts as a rough indicator of quality and thereby increases sales volumes.
This happened in the case of my friend Bill Ballhaus. When he was head of Beckman Instruments it produced some complicated product where if it failed it caused enormous damage to the purchaser. It wasn’t a pump at the bottom of an oil well, but that’s a good mental example. And he realized that the reason this thing was selling so poorly, even though it was better than anybody else’s product, was because it was priced lower. It made people think it was a low quality gizmo. So he raised the price by 20% or so and the volume went way up.
That’s from a 2003 talk by Charlie Munger.
I was reminded of that lecture when I came across this recent article in Forbes:
Social psychologist Robert Cialdini suggests that in some cases, businesses can actually increase their sales by raising prices. The reason behind this surprising phenomenon, he revealed in a recent podcast interview, is that in “markets in which people are not completely sure of how to assess quality, they use price as a stand-in for quality.” While most customers wouldn’t pay $20 for paper towels because it’s easy to compare them to other products on the store shelves, it’s much harder to evaluate certain categories of products or services.
Art is notoriously challenging – what makes a Damien Hirst sell for millions while a similar piece by someone else might languish? Consulting or other professional services are also hard to compare, because practitioners may have different approaches or skill levels, so you’re not comparing apples to apples. Thus, says Cialdini, “especially when they’re not very confident about being able to discern quality in their own right, people who are unfamiliar with a market will be especially led by price increases to go in that direction [and purchase more expensive offerings].”
Pricing is such an important signifier, says Cialdini, that “organizations will sometimes raise their prices and as a consequence, will be seen as the quality leader in their market,” regardless of whether they’ve upgraded their offerings.
Still curious? Robert Cialdini’s is the author of two books: Yes!: 50 Scientifically Proven Ways to be Persuasive and Influence: The Psychology of Persuasion.