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Innovation Insights by Stephen Shapiro

I wrote a blog entry entitled, “How to Lose a Sale By Charging Too Little.” In it I describe why charging too little reduces the perception of value.

According to a recent Stanford Graduate School of Business study, there are biological reasons why price impacts perception.

Subjects were given a number of wines for tasting and were told their price. Some of the wines were given to tasters more than once, with a different price tag each time.

What did they find?

The same wine, when given a higher price tag, tasted better.

Surprisingly, according to fMRI scans, the pleasure centers of their brains light up more, even though the “taste” centers do not. The body knows the wine tastes the same.  Regardless, it is enjoyed more when it is more expensive.

“We have known for a long time that people’s perceptions are affected by marketing, but now we know that the brain itself is modulated by price,” said Baba Shiv, an associate professor at the Stanford Graduate School of Business, and one of the authors of the study.

As the recession looms on the horizon, companies may be tempted to drop their prices to stay competitive. But there may be powerful biological reasons not to do so. Price can drive perception. And perception is reality.

  1. I completely agree. I’ve had experiences where I’m giving the same advice to two people. One is a client, she listens, make the change and see the results. The other one is a friend…she listens, doesn’t make the change… project doesn’t move forward.

    Why? It’s the same advice but one respects your business relationship since they are paying you and the other one takes it for granted.

    I think that pricing is crucial, especially during tough times.

  2. Steve:

    This reminds me of the old joke that says an ignoramus is someone who doesn’t know what you learned 10 minutes ago. In the absense of a frame of reference, we look to mental shortcuts that help us make sense out of subjective decisions. Like wine, for example.

    This would be a good example of a “decision trigger” — higher price is our mental shortcut to judge quality when we don’t have the time or expertise to know otherwise. Jewelry falls in the same bucket.

    Thanks – I enjoy your writing!

  3. Stephen,
    So that’s why the government bought those $400 hammers!!! It was a biological thing!!!

    It’s just kind of sad isn’t it? People can’t seem to judge something for what it is. It’s not about the taste, it’s about how much the wine cost. Similarly, it’s not about the concert it’s about how much the ticket cost, or how long the person waited in line to get it. It’s not about how the clothes fit, again, it’s how much they cost and what’s on the label.

    If people are willing to part with their treasure for those reasons, I suppose we should adapt accordingly. I am certainly willing to do my part to help!

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