Placebo Pricing: Why We (Might) Pay More For Less

Last Updated Mar 18, 2008 11:11 AM EDT

Under the intriguing title Are Your Prices High Enough? Harvard Business Review senior editor Bronwyn Fryer blogs on the idea that people's expectations about a product influence how they ultimately respond to it.

Put two unmarked but identical bottles of wine before your friends. Tell them the one on the left is a a $200 Chateau Lafite Rothschild, the one on the right a vin ordinaire. They will much prefer the faux Lafite. Fryer suggests this phenomena is equivalent to the placebo effect in drug testing, where participants report an improvement in their condition even though the drug they were given was inactive. They expected to improve, so they did.

Fryer asks, should some prices be set based on consumer expectations rather than on market analysis?

Pricing is always fascinating fodder for business researchers. Recent research at Harvard Business School has sought answers on several powerful questions.

Can Higher Prices Stimulate Product Use? In research in Africa over the last few years, researchers from Harvard Business School and other institutions studied the question of pricing for water purification supplies in Zambia. You might ask, why charge at all? Why not provide the supplies to these poor areas for free?

And the counterintuitive answer is, because when these particular supplies are given away they are not used as much as when there is a small charge for them. The researchers (as well as policy makers and social scientists) want to determine a mechanism for finding the optimum price for encouraging most use.

What Should Price Tags Reveal? Time was when a price tag simply delivered a number to the consumer: Here is what this product will cost you. But in recent years, companies have experimented with so-called partitioned prices: Cost of the chair: $80. Delivery cost: $15. Total cost: $95. Do consumers prefer a partitioned price or just one total?

According to the research paper The Framing Effect of Price Format, the question has a very strong practical side. Consumers may form an opinion about your company based on the price format.

The researchers recommend an all-in-one price when your product has one focal attribute -- the one thing you want the consumer to focus on when making a purchase decision. A partitioned price works best when the product is a commodity. "Yes, our toaster is no better than others you'll find, but we'll give you a great deal on shipping!"

Should I Respond To A Competitor's Price Cut? Harvard Business School marketing expert Benson Shapiro suggests that if you are chasing competitors all over the pricing map, or offering steep discounts to woo big-name customers, you are playing a fool's game. In this article from 2003, Shapiro encourages companies to be "price makers, not price takers."

In other words, infuse your product with so much value, quality, and uniqueness, that you drive pricing in your segment.

If you are a marketer, how do you set prices? What metrics do you use? If you are a consumer, how do you decide when a price is too high? Will a low price sometimes persuade you not to buy an item?

  • Sean Silverthorne

    Sean Silverthorne is the editor of HBS Working Knowledge, which provides a first look at the research and ideas of Harvard Business School faculty. Working Knowledge, which won a Webby award in 2007, currently records 4 million unique visitors a year. He has been with HBS since 2001.

    Silverthorne has 28 years experience in print and online journalism. Before arriving at HBS, he was a senior editor at CNET and executive editor of ZDNET News. While at At Ziff-Davis, Silverthorne also worked on the daily technology TV show The Site, and was a senior editor at PC Week Inside, which chronicled the business of the technology industry. He has held several reporting and editing roles on a variety of newspapers, and was Investor Business Daily's first journalist based in Silicon Valley.