This article from the LA Times discusses the importance of reference points in assessing the “fairness” of prices. The article notes:

If you ask college students if the average price of a textbook is more or less that $7,000, they look at you like you’re crazy and say “less, of course.” If you ask other students if the average price of a textbook is more or less than $12, they wonder if you’ve been asleep for 30 years and say “more, of course.” Then ask both groups of students what they think the average price of a textbook actually is, and the first group will give an estimate that is more than twice the second group’s.

Reference points are important for sellers. Lower priced offerings make explicit comparisons to higher priced offerings. Premium providers should not position against the low-price providers, but against the value they provide. For instance, there’s a classic ad for synthetic motor oil, displaying dozens of cars and their price, making the few extra dollars for premium motor oil seem worthwhile.

As the Williams-Sonoma example illustrates, having multiple offerings in your own line also helps frame prices. Two may be better than one, but “good, better, best” is preferable. For example, if W-S introduced a $1000 breadmaker, they probably wouldn’t sell too many of them, but they’d sell a lot more of the $450 model.

One Comment

  1. Anonymous

    It is really important to note that Pricing is relative. Completely relative.
    In fact, the value provided is not only a function of product/service, but mostly of what the customer thinks he/she will feel after buying.

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