When browsing through toys, wine or other products, consumers may not necessarily flock to the cheapest product. According to research from Marshall Fisher, Wharton professor of operations and information management, people may actually shell out more money for a product they do not understand.
The classic example of this phenomenon is wine: uneducated consumers equate a higher price tag with a better quality product. “Most people in a restaurant will look at the price of a bottle and assume that the product is priced proportionately,” said Fisher, who is also co-director of Wharton’s Fishman-Davidson Center for Service and Operations Management.
Fisher’s research on this subject, which was conducted in 1999 with New York University Operations Management Professor Vishal Gaur, analyzed the impact of price on sales at high-end toy retailer Zany Brainy (which went out of business in late 2003). Their research was part of a larger project, in which Fisher and Gaur explored the range of tests retailers can perform to discern which products sell and how to market and price them.
With an item such as an electronic walkie-talkie—one of three products Fisher and Gaur studied at Zany Brainy—they found that customers were inclined to buy neither the most expensive nor the cheapest product, instead opting for the moderately priced option. Fisher called this the “Aha!” moment in his research. He realized that many customers assumed the cheapest walkie-talkie, which was priced at $9.99, was inferior to a similar product priced $10 higher. By selecting the mid-priced item, customers believed they were getting a good deal and not sacrificing quality for price.
When his research began, Fisher said, he realized that retailers can be on the cutting edge of change. “We thought, Wow, this is so different from General Motors or Procter & Gamble. As a retailer you can test something today and test it at the end of the week.”
Fisher found, however, that while chain retailers can perform these tests and either promote products or cut back on inventory of certain items based on the results, few actually do. “It’s harder than you might think to do an accurate test,” he said. “Retailing is very incentive-driven and a test is not going to help you make this quarter’s numbers.”
Fisher and Gaur have now turned their research into a business, 4R Systems, where they put their theories into practice. Currently, they are working with Linens ’n Things to assess how to price items during markdowns.
The question at the heart of pricing remains: Are customers wising up to the tricks of the trade, where retailers sell toy walkie-talkies or wine for higher prices just because they can? Fisher said customers are beginning to catch on to the process of “high-low,” where a store will bring in a product at, say, $25 and then quickly slash it to $15. But for wine and other products that are not widely understood, customers are still willing to reach deeper into their wallets.
Originally published on March 18, 2004