Pricing and expensive wines
Researchers at Caltech and Stanford University recently organized a wine tasting experiment.
Twenty people tasted five cabernet sauvignons that were separated solely by their retail prices, with bottles ranging in cost from five dollars to $90. Although the samplers were told that all five wines were different, the scientists lied: there were only three different wines.
This meant that the same wines often reappeared, but they had different price labels. For example, the first wine offered during the tasting. It was a bottle of a cheap California cabernet - was labeled as a five-dollar wine (its actual retail price) and as a $45-dollar wine, a 900% markup.
The subjects reported that the more expensive wines tasted better. They preferred the $90 bottle to the $10 bottle and believed the $45 cabernet was far better than the five-dollar rubbish.
Of course, the wine preferences of the subjects were clearly nonsensical. Instead of acting like rational agents - getting the most utility for the lowest possible price - they were choosing the spend more money for an identical product. When the scientists repeated the experiment with members of the Stanford University wine club, they got the same results. In a blind tasting, these so called experts were also misled by the made-up price tags. Isn’t it remarkable how powerful our expectations are?
These experiments and a number of other remarkable experiments on how customers make decisions comes from a remarkable book by Jonah Lehr, The Decisive Moment. If you want to know when we go for instinct and when we go for analysis, read this fascinating book. In the meantime, remember that when you price, managing perception is critical.
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