The price-quality heuristic

Explanations > Decisions > The price-quality heuristic

Description | Example | Discussion | So what

Description

When you buy something, how do you know the quality of the product you are buying?

Many people use price as a guide. If something is expensive, then it is likely to be of higher quality than something that is cheaper.

Even relying on the brand is suspect in these days of brand extension, for example where you can buy a cheap Sony hi-fi product that is significantly lower quality than a higher-priced Sony product.

Example

A cider maker wanted to increase profits, which they did simply by putting the same cider in a more elegant bottle and charging twice as much!

A house-cleaning service charges more than some of its competitors. Although they clean less houses, they make more profit. And their customers are more pleasant as well!

Discussion

Although price is often a fair guide ('you get what you pay for'), it is not definitive.

Pricing, generally, is a black art and is based more on what people are prepared to pay than on the actual cost of what you are selling (although, of course, you probably need to recover your costs).

Low pricing can actually damage sales, as people who might buy the product equate the low price with low quality.

From economics is the notion of 'price elasticity', which considers how, as you increase your price, you will sell a few less (elastic demand) or many less (inelastic demand). When considering pricing, you may also want to consider this factor.

Quality is also signaled by other items such as external product finish and packaging. Where these visible signs are at odds with the price, then the mixed message may result in a conclusion of low quality.

So what?

Price items according to the means and value expectations of your target market (this means getting a good understanding of the people who you want to buy what you are selling).

Ensure other signals, such as packaging and finish, are aligned with the message that the price signals.

See also

The size heuristic