Wednesday, March 30, 2011

Moderate Discounts to Project Quality

When putting items on sale, set the discount at a price low enough to draw in customers, but not so low as to make the customer think the item is of unacceptably low quality. The price is itself a compelling signal. That second part of the formula—“Don’t set the price too low”—is especially important when the product is purchased for its effectiveness.
     Researchers at Stanford University asked two groups of study participants to try out an “energy drink.” One group was told that they were imbibing a full-price, no-discount drink. The other group was told that the cost of the drink was at a substantial discount off the regular price. Sure enough, although the two groups received the identical potion, the participants with the “discount” drink performed about one-third less well than did the “full-price” group on a task requiring mental agility.
     In a parallel study, consumers were asked to taste five wines and to rate their quality. They also were told the costs of the wines—five prices which ranged from relatively inexpensive to relatively expensive. What the study participants did not know was that the five wines tasted actually came from only three different bottles. One pair was presented as two different wines, one at a $45 price point and one at a $5 price point. This was also true for another pair of wines.
     Yes, the identical wine was rated by the consumers as being of higher quality when the price was higher. But there’s more to the story: Brain scans showed that when the people were tasting the more expensive wines, there was enhanced activity in the medial orbitofrontal cortex. That’s an area of the brain associated with consumer decision making based on emotions. Compared to when a study participant tasted a wine identified as low priced, the participant tasting the identical wine identified as high priced experienced greater pleasure of the sort that translates into an increased likelihood of buying the wine.
     …if the price is low enough to be attractive. There’s the rub. The price needs to be low enough to pull the shopper and convince them they’re getting a good deal. When you’re discounting merchandise to clear it out fast and save on storage costs, cut pricing to the bone. But when you’re discounting to draw in footsteps or to encourage sampling a new offering, show moderation in the cuts.

Click below for more:
Allow Modest Expectations of Discounted Products
Give Free Samples of New Products
Answer Van Westendorp Pricing Questions

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