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High prices can increase perception of value January 29, 2008

Posted by jeremyliew in digital goods, framing, signalling, virtual goods.
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A recent study by Stanford and Caltech found that increasing the perceived price of a bottle of wine increased the ACTUAL and perceived enjoyment that tasters derived from drinking the wine:

According to researchers at the Stanford Graduate School of Business and the California Institute of Technology, if a person is told he or she is tasting two different wines—and that one costs $5 and the other $45 when they are, in fact, the same wine—the part of the brain that experiences pleasure will become more active when the drinker thinks he or she is enjoying the more expensive vintage…

The study

The researchers recruited 11 male Caltech graduate students who said they liked and occasionally drank red wine. The subjects were told that they would be trying five different Cabernet Sauvignons, identified by price, to study the effect of sampling time on flavor. In fact, only three wines were used—two were given twice. The first wine was identified by its real bottle price of $5 and by a fake $45 price tag. The second wine was marked with its actual $90 price and by a fictitious $10 tag. The third wine, which was used to distract the participants, was marked with its correct $35 price. A tasteless water was also given in between wine samples to rinse the subjects’ mouths. The wines were given in random order, and the students were asked to focus on flavor and how much they enjoyed each sample.

Results

The participants said they could taste five different wines, even though there were only three, and added that the wines identified as more expensive tasted better. The researchers found that an increase in the perceived price of a wine did lead to increased activity in the mOFC because of an associated increase in taste expectation.

The ability of “framing” to impact perceived value is consistent with the signalling function of digital virtual goods in the gifting use case.

Comments»

1. harsh shah - January 29, 2008

A little off topic but Robert Parker’s ratings seem to do the same thing to wine. His ratings increase the prices, and for many people the newfound prestige associated with a vintage/vineyard then seems to drive enjoyment.

Great, insightful blog.

2. robertjohned - January 29, 2008

I read something similar in a recent Economist. In fact, it may be the same test. I think that most people that have any idea or control over pricing understand this point and often use it to their benefit.

Good stuff.

What I’d like to see is the similar testing for a sample of people who buy a product at significant discount despite the cost usually being premium. Same bottle of wine, just heavily discounted. What reactions are illicited in comparison to paying full premium price, what is the differential between getting a discount and paying full price in terms of satisfaction? What sells more? Is the price discount worth while to a company who has a choice in heavily discounting price points intially (constant low price) or making discounts at peak buying times, etc.

It would be a great follow up study. Nice post.

3. Casey - January 29, 2008

While I don’t disagree that price probably does influence perception of wine (and other products), that study which received lots of media attention was perhaps somewhat flawed, as it overlooked an element of human anatomy. It seems the study failed to take into consideration whether the 5 participants were at least average tasters. I’m NOT being a wine snob here, there are differences in the composition of people’s tastebuds such that nontasters would not be able to sense acidity when biting into a lemon, vs. avg tasters (about 1/2 population) have normal perception, vs. supertasters have receptors such that they can discern REALLY slight nuances. [supposedly the distribution of supertasters and nontasters is roughly the same proportion of the pop.]

I would be interested in the results if the study were conducted with avg tasters, as the possibility of nontasters in the group of 5 could bias the results. Lacking the ability to taste, it’s reasonable that a nontaster may look to other cues.
[sorry, like the sometimes bad use of stats in press, I have a peeve if studies aren’t well-constructed. nails on chalkboard…]

4. Casey - January 29, 2008

my bad (above), 11 students. Apparently I was too busy with my soapbox…

5. It cost more, so it must be better « The thing about useful stuff is - March 11, 2008

[…] cost more, so it must be better Lightspeed Venture Partners Blog have a post here about a study in which students were given five wine samples to taste and rate. Each had a price […]

6. PJ - March 26, 2008

Behaviorial economists explain something similar. They say that an people use price as a proxy for quality. Often this is because they do not know how else to evaluate two products. This happens more when the person is not knowleable nor educated on the subject. Happens in the stock market – “prices are rising and so must be a good company”! Happens in medicine! see this related article.

http://www.nytimes.com/2008/03/05/health/research/05placebo.html?_r=1&st=cse&sq=%242.50+placebo&scp=1&oref=slogin

7. Lisa - March 27, 2008

Hi !

I am a student and writing on a master’s thesis on virtual worlds.

I was wondering what they key success factors for building a virtual world (mmog) are?

Do you have any report you can link me to?

Thank you in advance!

Lisa


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