Does Price Affect Value Perception – Wine for Thanksgiving

This is not yet another blind taste test study on how price of wine affects how we perceive its quality and taste. There are enough of those stydies. Here wine is simply a tool to test a hypothesis of whether or not the price we paid affects how we later perceive the value of a product. If you have not answered the poll I asked you to, stop here and answer it so you do not see the spoiler.

Wine-choice

 

So here is my hypothesis – I do believe we closely align our value perception to the price we paid even in situations where clearly the price should not diminish the value in any way.

The case here is buying wines on a Buy one get second one for 5 cent deal.

Suppose you bought two identical bottles of wine, price exactly the same. Just randomly you paid full price for first bottle and got the second one for 5 cents. Later you have to make a decision choosing a bottle to give away and a bottle to keep for your own consumption.

Theoretically it should not matter which you decide to keep and which you want to give away after controlling for all wine factors. In fact if you did not know which bottle is which you would have picked one at random. However if you clearly see which bottle cost 5 cents you are more likely to view its value by that price. Hence you most likely will decide to keep the other full price bottle and take the one that you know you paid 5 cents to your friends Thanksgiving dinner.

I however think the answer will differ between men and women.

What do you think?

Point of all the discounting is to earn shoppers’ loyalty for future

The title is a quote from one of the retail managers we will meet later in the article. Write down whether or not you agree with this quote before reading further.

If you look at it carefully, it is not difficult to see that retailers should have no pricing power. After all they are just the channels.

They do not know why the end customers are buying the products (What job is the customer hiring the product for?.

They do not make the products and do not take the risk of investing in R&D, design, supply chain etc.

They do not build the product brands and take the marketing investment.

But they do add one important value – connecting the producers with their target customers and enabling customers get the products they want, providing convenience, service, experience and information to make informed decision. So they get their a share of the value from the producers in the form of low prices they pay to producers or taking a cut of list price (think 30% fee by Apple or Amazon for Apps).

They can choose to share some of this value with end customers in the form of price discounts. They can choose all of the value and more for certain products in the hope of making up for it from selling other products at fuller prices (Loss Leaders).

some we won’t make money on, some we do

What we see with Black Friday deals is even deeper discounting and far too many loss leaders.

Black in Black Friday is supposed to mean ‘turning profitable for the year’ for the retailers. How can the retailers expect to make profit with deep discounts? Best Buy’s chief of retail operations had this to say about his store’s policy of deep discounting:

the point of all the discounting is to earn shoppers’ loyalty for future purposes

Let us stop and take a careful look at this. The only reason we see mob scenes on Black Friday is the deep discounts. Given that customers are willing to shop anywhere and if needed stay in long lines just for lower prices, how can you expect any loyalty?

If they were attracted by deep discount, and ONLY deep discount, to come to Best Buy, what makes you think they will remain loyal when some other store offers same or deeper discount in the future?

This brings us back to second part of the question we did not address on value add – what unique value does the retailer, the channel, add to end customers? When they have no products, no brand power or a compelling unique value to offer and compete only on price, they should not be rationalizing their discounting with hopes of future loyalty.

The deal seeking Black Friday shoppers, having scores their 60-inch flat screen TVs have moved on. Nothing other than even more discounting will bring them back.

The Point of all the discounting is not to earn shopper’s loyalty but a reality forced by the channel’s lack of value add to its end customers.