Resources > Articles

Price: A Signal of Quality

Post Author
Price: A Signal of Quality

Many buyers use price as a signal of quality, but what does that mean to you if you set price? First, let’s see this phenomenon in action.

Think about wine at a grocery store. When I want to buy a bottle I’ve never had before, here’s my usual thinking: “Hmmm, a $10 wine is a good value, but it probably won’t taste very good. $20 wines probably taste pretty good. $40 is expensive, but I’d buy one as a gift or for a special occasion. $80, who would buy that? Can people really tell the difference between a $40 and an $80 bottle?”

If it’s for me, I probably buy the $20 bottle.

You likely do something similar. You use the price as a proxy for how good the wine will taste. As further evidence, the most frequently purchased bottle on a restaurant wine list is the second least expensive. Nobody would buy the cheapest, but the next one up seems reasonable.

Yet there are many studies using blind tastings where master sommeliers, the best of the best, choose less expensive bottles of wine as best in class. Of course when that happens, the wine producer smiles and wisely raises the price of their winning bottle.

Sometimes using price to indicate quality makes sense. Logic dictates that when buyers estimate quality over price, they rely on the buyers who came before them. They assume that many of the previous buyers could actually determine quality, and only bought the product because it was worth the price.

Of course, this isn’t always true. Almost everybody buys wine as described above. People rarely know, even after tasting it, what a wine is “worth.” What we have in the wine industry is the blind leading the blind.

However, in most industries people can tell the quality, especially after using a product or service. But even in those industries, people use price as a proxy for quality. It’s easier than doing the work to determine the actual quality before purchasing.

As a businessperson, what does this mean to you? If it is possible to determine the true quality of your product, either before or after purchase, then you want to price consistent with your relative level of quality.

If you have a high-quality product, but try to gain share by charging a lower price, you may lose your position as a high-quality brand. Look at IZOD in the 1980s. They had a high-quality brand, (remember the alligators on the shirts?), but lost that brand because they extended their distribution into discount retailers. They boosted short-term revenue, but their brand image degraded.

Also, it is impossible in the long term to set a high price hoping to trick customers into thinking you have high quality. You may fool some people into buying, but they won’t give positive word-of-mouth and they certainly won’t purchase again.

The big takeaway: price consistent with your quality.

Cheers,

Mark

Author

Author:

Other Resources in this Series

Most Recent

The image features the term use scenario being revealed underneath a ripped piece of paper
Article

What is a Use Scenario [ +7 Examples]

The purpose of drafting use scenarios is to help your development and design teams to start thinking about solutions. Context is the foundation of innovation, and you’ll be providing a tool that will be the starting point for collaborative and productive meetings.
Article

[Comprehensive Guide] Product Owner vs Product Manager

Learn how to separate the roles of product owner and product manager on Agile teams and uncover some common challenges with confusing these roles. Including a short primer on the Agile revolution.
Article

Use Scenarios are Stories That Provide Context

The problem with today’s user stories is that they aren’t interesting. And they aren’t stories. The solution is use scenarios. It’s a narrative. It explains the problem in the form of a real-life story.
Article

Benefits of Bundle Pricing

Bundle pricing is simply a strategy where services or products are packaged together for one (often reduced) price rather than priced separately. This article covers some benefits of bundle pricing followed by a system for getting started.
Article

A Quick Guide to Value-Based Pricing

Value-based pricing begins with knowing the customer’s willingness to pay based on the perceived value of your product. You can charge less than a customer’s willingness to pay, and they feel like they’ve received an

OTHER ArticleS

The image features the term use scenario being revealed underneath a ripped piece of paper
Article

What is a Use Scenario [ +7 Examples]

The purpose of drafting use scenarios is to help your development and design teams to start thinking about solutions. Context is the foundation of innovation, and you’ll be providing a tool that will be the starting point for collaborative and productive meetings.
Article

[Comprehensive Guide] Product Owner vs Product Manager

Learn how to separate the roles of product owner and product manager on Agile teams and uncover some common challenges with confusing these roles. Including a short primer on the Agile revolution.

Sign up to stay up to date on the latest industry best practices.

Sign up to received invites to upcoming webinars, updates on our recent podcast episodes and the latest on industry best practices.

Subscribe

Subscribe

Training on Your Schedule

Fill out the form today and our sales team will help you schedule your private Pragmatic training today.

First Name*
Last Name*
Email Address*
Phone
Company
Job Title
Location
How can we help you?
Preferred method of contact
Privacy Policy*
Map Your Message to Its Audience with the Communication Compass
Map Your Message to Its Audience with the Communication Compass
Ensure your message hits the mark. This eBook helps you visually map communication styles so you can tailor your design story to a stakeholder or business partner.

Download Ebook

Demystifying Data Projects: A Guide for Business Leaders
While data science is a competitive advantage, data isn’t magic. Learn how to make magic happen by partnering more effectively with data professionals. This eBook delves into types of data projects, sample questions, tools and methods, key points and cautions—so stakeholders like you can initiate data projects with real business impact.

Download Ebook

Define Ebook Thumbnail
What’s the difference between a successful data analysis project and one that falls flat? 

Before you begin working with the data, you need to understand what you’re solving for. Gathering context and aligning around goals with your stakeholders from the outset will help you avoid disconnects and deliver actionable insights. Discover the most vital questions to ask before embarking on a data analysis project in our in-depth guide, “Define: Laying the Foundation for Successful Data Analysis.”

Download Ebook

Download Now