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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