I was thinking about when looking for video games, if I’m looking at some title from a power company that is priced too cheaply for what is supposed to be a new, full, well designed game (i.e. instead of a shorter episodic game or a game from an Indy company), I whip out my phone and search to see if something wrong instead of instantly taking the deal.
I was wondering if this sort of thing is common, is there any documented data/research that pricing things at some artificial “too cheap” price, as compared to the rest of the market has some sort of effect? Is there a margin at which you can break this? (I.E. If you figured out how to price a quality equivalent HD TV $100 cheaper for a similar profit you sell less, but $1000 cheaper and you make a killing). Does the TYPE of product affect this? For instance, video games have a rather normal pricing standard, these days for console games it’s pretty much $60 for any non-indie new release, period, whereas other markets, even within the electronics department are much less uniform. I imagine this would affect the outcome of different pricing some (specifically, I suspect it’s not “cheaper than the competitors” directly, so much as “x many standard deviations from the normal price”).
And for bonus points: Conversely, is there a similar effect for pricing something too high? People are often going to not pay if something is just a LITTLE too much higher than the competitor, but for some things such as audio cables, it seems marking things up 1000% can sometimes make them sell better due to an illusion of “extra quality” that really isn’t there. I’d like similar data/product type breakdown if it’s available for this extreme too.
Note this is GQ, not IMHO/GD. This is economics, so feel free to speculate if necessary, but I’m really looking for actual studies/news reports/economist opinions if available at some point…
For sure there is “too cheap” price for a product. There’s a well-known technique used in retail pricing that is based on surveying shoppers to assess their views on a fair price for a product that they would normally buy. Among the outputs is a “too cheap” price – it’s the price that is considered so inexpensive that the quality of the product comes into question and would hinder sales. So too cheap is no good, as is too expensive. There is a sweet spot to price any product.
Sure, and retailers know this. However, if it can be called marked down, then people think they’ve got a good deal. So they mark things way, WAY up, and then if they don’t sell the items can be marked down. (They do have to be offered at the top price for a certain period of time or it’s some kind of violation.)
Often a manufacturer will play all parts of the scale. Even with what is essentially the same product, but pitched at different price points with differing packaging and image. Cars are of course a great example. You can typically get a two to one price variation with what is essentially the same basic platform. At the high end it is even more extreme, with cars built simply so that a buyer with an extreme amount of money can be separated from it. The Mercedes SL series is a good example. But even mundane things like washing powder or biscuits are pitched like this. Some major supermarket own brands exist at three price points, budget, everyday, and premium, with packaging, marketing pitch and prices to match. You can guess which end has the higher margin, but also guess that they are all carefully pitched to fit every buyer’s purse and self perception.
Speaking as someone who’s worked in retail for a long time- yeah, there’s a price where something is perceived as being “too cheap” and therefore “something must be wrong with it”, even when that’s absolutely not the case.
Having said that, it’s not true of all items- it really depends what the item is and how expensive it was to begin with.
My Dad’s craft club is full of honest, salt-of-the-earth type old guys who have trouble marking up their handiwork, but it sells far better when it is overpriced than when it is cheap. The same handcrafted wooden bowl that won’t sell for $5 will be snapped up for $80.
I’ve actually seen this with skilled labor. Here’s how it works.
You have a limited number of workers to choose from. One will take work for less than the going rate, so you hire him. Then you need to hire a second worker, then a third, and the other workers refuse to budge from the going rate.
The lower paid worker is now the outlier who messes up the budget – if you budget at his price, and he isn’t available, your budget figures don’t work. So you go ahead and budget for the higher-priced workers. The less-expensive worker doesn’t get additional work, because his schedule is already full. Eventually he wises up and raises his price to what everyone else is getting.
There’s also the phenomenon known as “fear, uncertainty and doubt” (aka FUD) where people don’t want to take a chance on a cheaper, but lesser-known, product. In the business world this gave birth to the saying “Nobody ever got fired for buying from IBM.”
The painfully ironic thing is that publishers know games are too expensive, but no one wants to be the one to pull the trigger on lowering them. It’s hard to believe that the NFL 2K5 experiment was seven years ago. And that even though it was a huge success it’s hardly ever been duplicated.
I have a friend who used to own a quite well known seafood restaurant (The Salt Cellar, for those of you in Phoenix). He told me this great story:
Years ago, they used to have escargot on the menu, at very the best price in town. There was a regular group of people who would come in on Fridays, and order plate after plate of them. One day, this group came in, and when they ordered, my friend mentioned that the escargot wasn’t selling very well, and he was thinking of taking them off the menu. One of the guys in the group said “I hate to say this, but, double your prices” My friend was somewhat shocked by this, and when he said so, the guy remarked “nobody wants to eat cheap snails.” So, he doubled the price of the escargot, and sales went through the roof.
So, this is an example of perceived value - sometimes if an item is priced too cheaply, it is perceived as low quality, or defective in some way.
This behavior was well enough known even back in 1935 to be parodied in a Buster Keaton comedy short “One Run Elmer” - Buster is a gas station owner in a price war with a gas station directly across the street (well, near-deserted one lane road - it is a comedy) - the gas prices start at 33 cents a gallon (which according to an on-line inflation calculator is about 5 bucks in 2011), then the owners mark their prices down in a race to the bottom till Buster finally marks his 18cents/gal (about 3 bucks 2011) - then a driver compares the two prices, says “I don’t want any of that cheap gas” and fills up at Buster’s more expensive competitor.
The Mercedes SL isn’t a higher-priced version of any other car. The R230 platform is unique to the SL. If you’re referring to the wide price range between the now “base” SL550 and AMG models, they only share about 30% of parts, including the floorpan.
For video games specifically, I’ve seen articles (but don’t have a cite at hand, sorry) that state that many games make a lot more profit during Steam sales than during normal pricing periods.