Friday, March 13, 2009

The Placebo Effect ... on Pricing

OK, so here's an interesting dilemma for many businesses out there, including us here at IPOWER.

I just read this fascinating article from The Washington Post on "The Price-Placebo Effect." Most people understand the Placebo Effect as it pertains to medication studies: "control" participants are blindly administered a sugar pill instead of actual medication, and yet still experience improved symptoms, probably as a result of their belief that they have received real medication.

The Price-Placebo Effect takes the same tack, but instead of medication being the agent of change, price is strangely the culprit. The Price-Placebo Effect, according to the article, is basically the notion that people experience more pleasure (i.e. larger activation in their medial orbitofrontal cortex) when they consume a product that they pay a higher price for, compared to those who pay a less-expensive price.

While the article leads off referencing the uncomfortable Eliot Spitzer scandal, the more relevant story revolves around a study in which two groups of participants were asked to drink some wine: one group from a bottle priced at $90, and the other group from a bottle priced at $10. The participants who drank the $90 bottle not only indicated an overall higher level of enjoyment (as to be expected), but they also had experienced more activity medial orbitofrontal cortex than those who drank the $10 bottle. The catch? They drank the exact same wine.

So what does this tell us about pricing our products? Well, for one thing, Apple's got it right. The price of their notebooks is significantly higher than it needs to be, and yet they don't have much trouble (a) selling them like hotcakes or (b) cultivating a dedicated (some might say fanatic?) userbase. In fact, it wasn't until the end of last year that they even contemplated releasing a notebook under $1000. So what's the story here? Great products justifying expensive prices? People paying for the "brand"? Or is there something actually physiological going on?

It's tough to say, but notions like these definitely make us think about our strategies. The webhosting industry is a complicated one--commodization is driving prices down and requiring hosts to underprice their services. Two years ago it was ludicrous to advertise a price under $6/month. Now that price is considered expensive. And yet does our catering to the competitive nature of the hosting market mean our product is any less valuable to consumers than it was two years ago? In fact, no--our product is constantly improving and evolving and a hosting plan now is "worth" more than ever. It would be great to price our plans to invoke the "Price-Placebo Effect," but unfortunately, the likely result would be potential customers hammering the "Back" button as soon as the images start to load on

So how do we tap into this pricing enigma? Have you tapped into it?


Kelli Piperata said...


Anonymous said...

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Matt Averill said...

I think most people want good quality and a low price but are willing to pay for quality if the cost is justified in the quality of the product. I think this is harder to measure in products such as web hosting since there are so many offering this service now but the word definitely travels quickly when customer service is poor. I have been have with for the last 10 years. Both price and quality are good.