People that make things are instinctively concerned about someone else selling something similar at a lower price. A florist for example worries that a new shop might open up across the street and offer lower prices – if they typically sell roses for $50 they don’t want a competitor nearby selling for $40.
At the same time they tend to worry much less about a competitor that charges a lot more. In fact most small vendors would be happy if a competitor charged higher prices, assuming that they would price themselves out of the market. If another florist started charging $100 for roses they might even be relieved.
Unfortunately it’s not that simple. The most successful understand that high prices are a powerful tool, and they are just as concerned about a competitor that charges more.
High Prices Make a Credible and Authoritative Statement About Quality
Any business can explain why their product or service is the best, but it doesn’t carry much weight. Everyone expects them to say that. This is why peer reviews have become so popular – reviews are seen as being much more credible than the marketing material and claims prepared and presented by the vendor.
High prices also carry a great deal of authority. People draw a very strong connection between price and quality, and high prices are a more convincing argument for the quality of a product than any promotional copy. Anyone can say they have the best product, but having higher prices comes much closer to proving they have the best product.
This is one of the reasons to be concerned about a competitor that charges more – a higher price is a very credible claim that a product is superior.
High Prices Can Improve Enjoyment and Satisfaction
In many cases the more that someone pays the more likely they are to enjoy and be satisfied with the purchase. A famous study called Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness proved this.
BabaShiv – Professor, Stanford Graduate School of Business and study co-author
"What we document is that price is not just about inferences of quality, but it can actually affect real quality. So, in essence, [price] is changing people's experiences with a product and, therefore, the outcomes from consuming this product."
In the study subjects were told that they would sample five different Cabernet Sauvignons, and misled to believe that the purpose of the experiment was to examine the effect of sampling time on flavor and intensity.
The trick was that the different wines were deliberately identified within the experiment by a retail price that was sometimes real and sometimes grossly exaggerated – the real goal of the experiment was to see how those prices would affect enjoyment.
There were actually only three wines – two were used twice, and were presented at both their true retail prices ($5 and $10 a bottle respectively) and again marked up by 900% ($45 and $90 respectively). A third wine was presented at it’s actual retail value of $35.
The subjects noted that the more expensive wines tasted better even though the $45 and $90 wines were exactly the same as the $5 and $10 wines, and presumably inferior to the $35 bottle of wine.
More interesting was the data from the MRI machines that were studying brain activity during the test. They picked up greater activity in the pleasure center (the medial orbitofrontal cortex) of the brain when the subjects were drinking the wine they believed to be more expensive. In other words the effect was “real” – simply believing that a particular wine was more expensive led to the brain truly sensing greater pleasure.
This effect lingers. Dr. Robert Cialdini has done a great deal of research into commitment and consistency. People want to think they made the right choice and the effect is very powerful. For example it led affluent patrons to brush off official reports of a pest infestation (rodents and roaches) at their favorite upscale boutique grocery store.
Nobody wants to be a sucker or think that they were “taken”. If they pay more and the quality is acceptable they are more likely to perceive it as being excellent because that is consistent with their decision to have spent more money. Charging more can actually lead to happier, more satisfied customers.
High Prices Act As An Anchor
High prices can effectively used as anchors that make other prices seem better in comparison. Take the example of a florist again – in a market where roses typically sell for $50 a dozen it might seem crazy to offer them for $100.
But if that is really an anchor price that is used to make a $60 or $75 alternative seem like a better value it suddenly makes a lot more sense.
When you know the costs and the local market it’s easy to look at high prices and think “that’s just silly – they are totally out of line with costs and what these people will pay” but it’s not that simple. High prices can indicate that a competitor is taking a much more sophisticated approach to pricing and claiming a higher echelon of quality.