Over the weekend, I was reading the book Priceless by William Poundstone. It’s an interesting discussion on why companies can charge thousands of dollars for one item. Companies, like Prada and Gucci, carry a few obscenely expensive items in order to boost the sales for everything else.
In a landmark study, he recounts that a consumer when given a choice between an inexpensive, low-quality item and an expensive, high-quality item, the consumer often cannot decide. Therefore, the marketing solution was to drastically increase the price of the high-end item, and introduce to the consumer a third option – a product of slightly better quality and higher price (making the mid-option seem like a bargain).
A great real-world example – found on the website (www.humuch.com)- is the market for Cognacs.
Cognacs are blended brandy sold in three major categories:
- XO (Extra Old), which are required to have the youngest blend aged at a minimum of six years. The average price of XO Cognacs are an astounding USD $210 per 750ml bottle.
- VSOP (Very Special Old Pale) are required to have the youngest blend at a minimum of four years. Yet, the average price of VSOP Cognacs are only USD $75. That’s almost a 3x discount.
- VS (Very special) are the least rigorous, requiring the youngest blend at a minimum of two years. The average price of VS Cognacs are only USD $35. That’s about half the price of VSOP at half the aged difference. It’s all a wonderful eye opener on how products are priced today.