In this episode of Pricing College – Joanna asks a question that every CFO wants to know – can you grow your sales by increasing the price of products? Aidan discusses the concept of a Giffen good in economics and whether anything similar occurs in the 21st century. Ask yourself – have you ever assumed a product must be better just because it costs more? We look at the examples of toothpaste and a nice bottle of red wine!

 

 

 

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TIME-STAMPED SHOW NOTES: INCREASING THE PRICE

[00:00] Introduction

[00:38] What is Giffen Products?

[02:52] Customer segmentation

[04:48] Value drivers

[12:17] Psychological Aspect of Pricing

 

 

 

Today, we’ll be asking the question: Will people buy more of a product that costs a lot more? Let’s talk about increasing the price.

 

I’ll kick off with this one because I want to reminisce about my university days. And when doing economics, there was a famous concept of a Giffen good or a Giffen product, which I believe stems from a couple of 100 years ago in France. It’s where people say they had staple goods, such as flour bread, potatoes, that sort of thing, rice. And the poor people could only afford that and that was their staple food.

 

Now, the concept was if you increase the price of that food, there’ll be even worse off. And so, they’d have to get all the nutrients from that one product. So in theory, if you increase the price of bread in pre-revolutionary France, the theory was potentially people would buy more of the brand.

 

As we reminisce about university days, maybe I’ll reminisce about my psychology course and talk about price perception. It’s quite a common theme in psychology like people perceive prices in different ways. And research shows that when a price is lower, people perceive that product to be, maybe inferior, cheaper, and maybe not aligned to their needs.

 

Equally, if a price point is higher, people tend to perceive that as having more quality, more value, something they want. And even down to those status sorts of drivers we’re talking about in earlier episodes, they want to align themselves to that product. 

 

Yeah, I think there’s a very old common saying that says, “If it seems too good to be true, it probably is.”

 

INCREASING THE PRICE: TOOTHPASTE

 

A lot of people, there’s a couple of things they don’t have specific knowledge about the product they’re buying. Especially if it’s a little bit more complex like a chemical product or even as simple as a toothpaste. It was something like that they don’t have that knowledge.

 

But there’s also the safety in crowd’s mentality. There’s an idea that if you go into a shop and see a price set at a certain price point, and other people have already purchased at that point. And so, you feel they’ve already made the choice. It makes you feel more content and comfortable in the choices you make.

 

And looking at that example of toothpaste, there are so many different types of brands and versions of toothpaste. But toothpaste is an interesting one because it’s a high-risk factor when you buy toothpaste. And there’s a lot of chemicals that go in it, especially if you’ve got yourself, your children, your family. You want to know that the toothpaste is not going to kill you. It has good qualities, it’s got the right chemical components and the right balance.

 

We’re not pharmacists or chemists. We don’t know what we’re buying here and it’s a lot of trusts involved. When you buy that toothpaste, you can be sort of split off into groups. And we’re talking about that before, segmentation.

 

What type of buyer are you?

Are you going to go for that sort of lower-priced groups segmentation?

Or are you going to go for a more expensive toothpaste that you believe is more trustworthy?

 

It’s not going to kill you, it’s got all the research, the latest research around it. And the price point is high and that therefore, you align yourself with a higher price point based on all those value drivers combined. 

 

I think you go into a supermarket, say in Australia or most countries, there are probably 10 or more options for toothpaste. I don’t think any more than 1 in 100 people would read through the chemical components that make up that toothpaste.

 

In reality, we’ve no idea what we’re purchasing. The price differential can be very large. You could go from like $1.50 for a tube of toothpaste to even up to 10 or 12 bucks.

 

Fundamentally, it’s a small difference in your weekly or monthly grocery bills. So, a lot of people think they risk it and think of the money. They’re going to see if down the line it’s better teeth and a brighter smile, etc. So, they pay more and they choose the better one. And they think, it costs more. So, it must be better.

 

Yeah, in terms of that toothpaste example we touched on health, people buy because they’re risk-averse because of the trust. We also buy, as Aidan mentioned there, because aesthetically they want brighter teeth. You can see some of the brandings on toothpaste boxes a Hollywood smile. And those types of products have a higher price premium on them, even more so than health and chemical production and everything being sort of scientifically examined.

 

I think the ones with a cosmetic appeal on top of that whitening, it has a higher price premium. You could even get up to $12 a packet for those type of products. Even often with those, they have an additional sort of attachment. Like maybe a special toothbrush that works well with that toothpaste to get you that brighter smile.

 

So, that goes into a premium, higher price, and price bundling to appeal to a certain segment that wants that Hollywood smile. Maybe they’re thinking about a Hollywood actress, their favourite and they want to be like that, who knows? But that price premium is all based on those particular value drivers.

 

 

We go from teeth whitening to a product that can make your teeth darker. And that’s an example I think of is purchasing red wine.

 

INCREASING THE PRICE FOR WINE

 

So, say you’re going to visit a friend or family. You’d be invited over for dinner and you think “I have to bring something. I have to bring a gift with me, so I bought a nice bottle of wine,” is a classic example. 

 

I’ll be honest, I put my hand up and said, “I like wine, but I’m not an expert.” I don’t know the vineyards, or I don’t know enough about where the product comes from to know what a bottle of wine is worth. And if I’m going in to buy a bottle of wine to bring to as a gift, I’ll be honest. I’ll be picking very generic, I know Shiraz and all this sort of stuff. But I’ll be very much guided by the price points in the shop.

 

I don’t want to embarrass myself or come across cheap. So, I won’t buy a very cheap bottle to bring to my friend’s house. I’ll have a price point in mind that I’m not ashamed of and that hopefully will reflect well on me. I’ll pick one of the shop guides. For all I know, that wine is not a great wine but the shop is selling it at that price. And so I assume they sell at this price. More knowledgeable people than me or, you know crowds, the statistical validity of crowds purchasing this bottle of wine must be good.

 

And the same would go for when you’re inviting some friends. You want to take some friends out for dinner. The question is, where do you take them? They might not be your best friends. So, we want to make a good impression.

 

So, you’ll be thinking about, “What restaurant, what experience would suit us and would identify with? I’d want them to understand me within that context.” You’re even then thinking about anchoring yourself, sort of like framing value in terms of the restaurant that you choose.

 

So, within all of this when we asked the questions, would people pay more for products? I think they would. But a lot of techniques are involved in this like framing, anchoring, and segmentation.

 

Do you agree with Aidan? It’s not just a simple question.

 

No. I think this is segmentation why people are buying. I certainly do believe that by increasing the price in certain areas, you will sell more of a product and its other products or just standalone. Like the examples we give are two tangible ones. And I think there’s a whole fleet of other examples, even buying batteries.

 

INCREASING THE PRICE FOR BATTERIES

 

So, you need batteries for your remote control for your television set which we covered in the previous ad or episode. In this simple example, you could buy a branded battery which will be Duracell which will be sort of at a price premium to some of the cheaper brands.

 

For all I know, I don’t run statistical tests. I don’t know if its battery lasts longer, or it’s more reliable. It costs more and they claim on the label that it does. I don’t know if it does or not. So yeah, generally, I will pay more for the Duracell branded battery. And I do believe that the higher price point of Duracell is pushing people to buy more of it.

 

I suppose you probably wouldn’t buy it if you learned that after you bought it, it didn’t meet its service. It was broke down. All the guarantees that were given weren’t abided by. And the company just didn’t do anything those sorts of things. Then you would think, “I will switch to another brand and I think this is a problem that is occurring.”

 

I think a lot of brands say one thing but they don’t live by that. And customers are quite savvy and they will work out whether you know the value proposition is real or not. Now, if they find out that it’s not, then they’ll try alternatives. 

Yeah. I think even just discussing this topic, I sort of have the opinion that people will buy more of an item if it’s more highly-priced in the area where there’s a lack of expert knowledge. They’re not experts in what they’re purchasing. And we cover procurement in a previous episode and I think this is where procurement comes into its own.

If you’re choosing two types of toothpaste and the procurement people were experts in toothpaste and chemical make-up, they could get a great bargain by choosing the cheaper one. It’s almost like a premium you’re paying to compensate for the lack of knowledge or the time that you would have to invest to know which is which.

 

The same way the battery, in reality, we all expect batteries to give out sooner or later. And so, as long as it’s not immediately, a couple of weeks, a couple of months that battery gives out, we’re not going to complain. And we’re not going to notice it. It’s not that important to us.

 

So, I think we pay that premium. We trade premium and we trade money for the time that we would need to invest to research the product.

 

This is common in pricing strategy. New, novel, and unusual products tend to be priced using this scheming approach. Then, products that we kind of are aware of, they’re already out in the market.

 

INCREASING THE PRICE: PAYING PREMIUM

 

Companies usually use a penetration pricing strategy for those types of products which is quite a more competitive pricing strategy. But yeah. Overall, I think people are willing to pay a higher price when the value is there, when it’s proven. And they’ll continue to pay that price within reason.

 

I mean obviously, there’s going to be a shift in the economy and crisis that we’re all aware of. And we’re living through right now.

 

But still, people will pay for value because it’s meeting a need. It’s serving a problem and it’s addressing a problem that customers may have. There’s nothing worse than having to go back into the shop and rethink this all the way through.

 

Fundamentally, we’re all quite lazy. We want things to work and it’s better just to pay a little bit of price premium for that convenience.

 

You know, we are pack animals at the end of the day and we move in crowds. It’s very rare for people to be real lone wolves to use another example.

 

So, I think if you have a high price tag, the price tag on a product or service is a price. It’s the number you pay but it’s also some form of branding. There are also other psychological aspects with that.

 

It’s a confidence in the company selling it to put that high price on that product. In fact, it insinuates that this may not be for everyone but this is a high-quality product. And I think that translates somewhere into our minds. And we will buy more of these products, under certain circumstances.

 

Can You Sell More of A Product by Increasing the Price?

 

LINKS MENTIONED IN TODAY’S EPISODE: INCREASING THE PRICE

Duracell

Procurement

Segmentation

Anchoring

 

 

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