Price as substitute for quality in unfamiliar territory

Cash Money Pound Signs.

“In the absence of information, people tend to take a price of the unfamiliar product as a signal of its quality, so high prices do not diminish the quantity demanded very much. When information is provided, the signalling content of the price diminishes. As a result, demand becomes more elastic. In particular, informed consumers see no reason to pay more for the new product given that it has the same ingredients as the familiar one. The effect of the information is thus to encourage more people to switch from the substitute product to the target one at low prices, and vice versa at high prices.”

That’s an extract from an academic paper (PDF) on the behaviour of purchasers of medical products in Zambia, but you’ll encounter versions of this argument everywhere from self-help books on how to sell! sell! sell! to articles in the business press.

The conclusion often drawn is that, perhaps counter-intuitively, if you price your product higher than the competition, many consumers will assume yours is better and worth the extra money.

Conversely, if your product is too cheap, it might seem suspicious: “Hmm. What’s wrong with it?”

Does all of this also apply to beer?

Twenty years ago, we were certainly aware of the aura that surrounded Premium Lager, and Pete Brown has written memorably about the damage Stella Artois did to its brand by reducing the price.

But drinkers these days have lots more information to go on, from beer style to ABV, from hop varieties to brewing location. All or any of these might override price in the decision making process.

And, of course the actual relationship between price and quality in beer is complex: there are lots of bad expensive pints out there, and some really good ones that are relatively cheap.

Our suspicion is that price might be a proxy for quality in situations where none of the brands are familiar, and the only other information is price; or (as this paper suggests) where the choice is between broadly similar products under the same brand name: Carlsberg, or Carslberg Export?

With all this in mind we find ourselves once again thinking about the Drapers Arms, where not only is branding held at arm’s length but also the price structure is flat. As a result, we’ve probably tried a greater variety of beer there than anywhere else, even allowing for the fact this is where we do most of our drinking by default.

3 thoughts on “Price as substitute for quality in unfamiliar territory”

  1. I have no idea what this signifies but when faced with an unfamiliar board, I tend to order whatever is only one-third up the price list. Not so cheap as to go bottom, it’s a test to see if there is quality to be had.

  2. The key price differential in the licensed trade tends to be between different pubs, not between different beers in the same pub. Within the one pub, there will be obvious differentials based on strength and type of beer, but the effect of differentials between different beers of similar type and strength is probably pretty limited. Obviously there will be some people who say “wow, that’s five quid a third, I must try some”, but they’re not very great in number, and more would be deterred.

    Probably the main area where this applies is that, if you’re in an unfamiliar town and see a pub with a board outside saying “Fosters, John Smith’s £2.20 a pint all day,” you may well decide to give it a swerve.

    It’s probably more of a factor in the off-trade, where “too cheap” tends to ring alarm bells, especially with unfamiliar brands, and “too dear” may be offputting, but may also suggest something of particular quality.

  3. Yep. I think we knew this. Although the effect is most marked going from cheap to medium price, whereas medium to high is a “bad” sign. If you’re currently selling at the cheap end, it will probably be worth bumping yr prices up towards average. But if you’re already in the middle, no. Of course, if the consumers can actually recognise quality…

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