We learn, therefore 2 things: one is that socio-economic micro-management is still alive and well amongst the leaders of our neighbour down south! More relevant to this column, however, is another insight: that pricing and the human psyche have a more complex relationship than given credit for.
Nobody knows their wine
A recent study by academics at the California Institute of Technology highlights this. In the experiment, 20 volunteers were given 5 sips of wine each. The volunteers were told that the 5 sips of wine corresponded to 5 different wines at 5 different price levels, from $10 to $90 a bottle. However, what the volunteers did not know was that they were actually only being served 3 wines – and that 2 of the wines were being served twice, once with a fake price and another time with its true price.
While sipping their wines, the volunteers also had their brains scanned to monitor the neural activity in the medial orbitofrontal cortex - an area of the brain believed to encode pleasure related to taste, odors and music.
The result was simple and stark: inflating the price of the bottle enhanced a volunteer’s pleasure at drinking it, as shown by the neural activity from the brain scanners. When the experiment was repeated without price information to the volunteers, they reported differences in ratings in line with the 3 “real” wines and no difference between the ones served twice – which means pricing was the key variable which affected their pleasure cortices.
And if you still think that’s because lay people don’t know their wines, the experiment was duplicated with volunteers from the Stanford University Wine Club with similar results.
Evolutionary explanations
Most media reporting on this research have basically homed in on the simple extrapolation: in certain products, you can make your customers enjoy them more, simply by increasing the price. The Economist, however, probes deeper into the question of why this occurs, drawing from evolutionary perspectives. In conversations with Dr. Antonio Rangel from the research team, it is postulated that pricing is an efficient mechanism for learning quickly from the collective wisdom of the community: what is good is in higher demand and therefore has a higher price; in the case of what is bad, the opposite is true.
This is the same mechanism which explains why queues that form around eating outlets, whether they be humble rojak vans or high-priced doughnut stores, tend to lead to even longer and longer queues. “If there are so many people eating there, then it must be good,” goes the collective wisdom.
Another possible explanation is that higher priced, exclusive products provide avenues to show off, projecting a higher status and, of course, increased mating opportunities – the “power and sex” argument. This would explain how certain establishments can get away with charging exorbitant figures for set meals, especially on Valentine’s Day, with customers still claiming to have enjoyed the experience.
Marketing implications
Either or both of these explanations may be true. The Economist’s review of the research ends on a coy note: “[this] research also has implications for retailers, marketing firms and luxury-goods producers. It suggests that a successful marketing campaign can not only make people more interested in a product, but also, truly, make them enjoy it more.”
BMW owners out there can certainly attest to the cerebral pleasure of seeing a well-produced BMW ad on TV, complementing the visceral pleasure of actually driving one. But since this column started with the house brand discussion, let us end with 2 somewhat rhetorical questions on their effectiveness:
1) If a retailer chooses to sell house brand items (such as tissues, canned food, water and other necessities), is it pursuing the best strategy by packaging it in bland, plain, boring colours which signal “cheap, cheap, cheap” to customers, therefore robbing them of any sensory pleasure or confidence in the product, no matter how small?
2) In this era of food scares, lead and cadmium contamination, does a retailer have any business selling anything that is unbranded and brought in by a margin-hungry purchasing department buying directly from China manufacturers without a quality program in place? The bottom end of the market is sometimes as dangerous a place to be as the top end.
Retailers out there, good luck. Solving this problem may boost your profits while serving the greater good of reducing inflation.
As appeared in "The Sun", 15th February 2008. PDF version here.
