Question

Joseph Gallo, the founder of the famous wine company that bears his name, said that when he first started selling wine right after Prohibition (laws outlawing the sale of alcohol), he poured two glasses of wine from the same bottle and put a price of 10 cents a bottle on one and 5 cents a bottle on the other. He let people test both and asked them what they wanted. Most wanted the 10-cent bottle, even though they were the same wine.

• What does this tell us about people?
• Can you think of other areas where that may be the case?
• What does this suggest about pricing?

Answer 1

It is normal thinking that higher the price the better is the quality of the product. People wish complement more for an item that is overly priced. This they do in order to prove that they are using a higher end product by establishing their status quo and their social status. People think that using a high priced product will improve their social status and they will be considered as rich and prosperous.

When we go to the market we will be thinking or give preference to particular products as suggested by our friends and family members. This is because of the Utity value. The utility value is the ability of a person to help another achieve his or her goals. For Example If someone had knowledge about gardening and you want to start a garden and they give you their insight. Similarly if our friend has used a particular product he will be well aware of pros and cons and can guide us whether to buy the product or not. People make purchases on the basis of utility value or feedbacks given by other customers because they don't want that their hard earned money is wasted by wrong Investment.

Pricing is dependent upon psychological pricing. Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics. Sellers may consider that keeping a price high partucular in case of products like wine, luxurious holiday packages etc will create an image in the minds of customers that product is of superior quality and hence will help sellers to earn more revenue.

Pricing is also dependent upon feedbacks and positive comments received from customers. For Example A pair of shoes available for online sales has received many positive comments regarding quality, durability, comfort etc. In such a case customers won't mind to pay a little extra for such shoes.

Another thing which may affect pricing is transactional utility. Transactional utility is a term to describe the happiness a consumer gets from the perceived value of the deal. For Example you are expected to pay $50 for a new dress but when you went to store you found that same dress being sold at 40% discount. You gain the utility of buying the new dress but you also gain a transactional utility because you feel like you have saved money from your expected reference price.