Price placebos are weaker than we thought

High prices increase expectations, but not how we actually perceive the product’s quality once we try it.

May 23, 2023

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📝 Intro

Imagine two friends are buying chocolates in a store. One buys a chocolate bar for $1.99, while the other buys a ‘premium’ chocolate bar for $3.98.

With a 2x price you’d expect the second to be much higher quality.

But we’ve long thought that this expectation would also make the chocolate actually taste better too.

That effect is sometimes known as the marketing or pricing placebo.

Turns out, we were probably wrong.

P.S.: Are your prices maximizing your profits? Quickly get yourself up to speed with the latest pricing & promotions techniques with Ariyh’s Pricing & Promotions playbook.

Previous insight: How one-click buy buttons boost sales (more insights here)

High prices increase expectations for a new product, but only until the product is experienced

Channels: Pricing | Product | Brand Positioning
For: B2C. Can be tested for B2B
Research date: February 2023

📈 Recommendation

Be careful when increasing your prices. Higher prices can make your product more attractive by increasing expectations. But they don't work as a placebo that makes people enjoy your product more - once they actually use it.

If your quality does not deliver the increased expectations, you risk unhappy customers who won’t return.

🎓 Findings

People use price as a tool to set expectations for a new product's quality and how much they will like it. But once they use it, their experience with the product is what determines how much they like it and what they think of its quality.
As part of a series of 6 experiments, researchers:
- Showed people the same product (coffee, an art piece or a song), with either a high or low price, and then made them experience it
- People expected the pricier coffee ($5.99 per cup instead of $0.99) to taste 6.8% better and have 9.6% higher quality. After trying the coffee, their liking and quality ratings were similar.
- People had similar reactions both before and after listening to a song that cost $1 or $100 and when judging an art piece that cost either $6.99 or $699

🧠 Why it works

When we judge a product, especially one we’re not familiar with, we look for signals to judge its quality (e.g. price, packaging, country of origin). If it’s more expensive, we assume it’s higher quality, to justify that price.
Previous research found that when we expect something from a product, such as better quality or taste because it’s more expensive, that expectation can influence our actual experience - this is called the marketing placebo effect. Similar to how we can convince ourselves that we feel better if we think we’ve taken medicine, when we try something expecting it to have better quality or taste, it sometimes actually does taste better.
A product’s price has a weaker placebo effect on us than we thought it did, so it often does not change how we actually perceive the product when we try it.

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✋ Limitations

The study analyzed products that were bought for pleasure (piece of art, song, or cup of coffee) - not more functional products (e.g. cleaning supplies). Because we tend to look at functional items more objectively (e.g. does it do what it’s supposed to), a mismatch between the price and quality is likely to lead to even stronger negative reactions from people. However, this was not tested.
The study used very large price differences (e.g. $1 vs. $100 or $6.99 vs. $699). The effect on expectations is likely weaker when smaller price differences are used (e.g. $200 vs. $300).
The research did not directly test whether the mismatched expectations from high prices (but not as high quality) hurt sales.

🏢 Companies using this

Companies seem to understand that their customers rely on signals like price if they don’t know too much about the category or specific products. Most of the time, they also correctly adjust their price to their product’s quality.
On occasion, mismatched price expectations can sometimes have extreme consequences. For example, Juicero, a startup that raised $120m from investors, shut down soon after people discovered that the $400 juicer it produced was less effective at squeezing juice than doing it by hand.

⚡ Steps to implement

A higher price can make your product seem higher quality to new customers, and make them expect that they’ll like it more than cheaper alternatives.
But you must be realistic about the link between your price and product performance - the more you charge, the higher your customers’ expectations of your product will be. If those expectations aren’t met once they use the product, they will be critical of it.
You can still benefit from the price-expectations link:
- If your customers can’t sample your product before buying it.
- By pricing your product slightly more than alternatives to make yours seem higher quality.

🔍 Study type

Lab and online experiments.

📖 Research

Pricey therefore good? Price affects expectations, but not

quality perceptions and liking. Psychology & Marketing (February 2023).

🏫 Researchers

Jacqueline Kurz. School of Business and Economics, Maastricht University.
Emir Efendić. School of Business and Economics, Maastricht University.
Caroline Goukens. School of Business and Economics, Maastricht University.

Remember: This is a new scientific discovery. In the future it will probably be better understood and could even be proven wrong (that’s how science works). It may also not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.

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