Question

Joeseph 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 which 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

What does this tell us about people?

This tells us that people often associate quality of a product with the price it bears. If a certain product is expensive than the other similar product, people will still choose the expensive product over the other. This is because people believe that cost of producing expensive products are more and hence carry a larger value.

Can you think of other areas where that may be the case?

Example of such other case can be - A t-shirt sold at a mall and the same t-shirt sold at a small retail store. People will still prefer the t-shirt sold at the mall because it is more expensive than the retail store t-shirt. And since people associate quality with price, people will assume that the t-shirt sold at the mall is of superior quality even if it is same as t-shirt sold at the retail store.

What does this suggest about pricing?

This suggests that prices are a way of putting value to a product. Whereby, high prices of a product will be associated with superior quality even if the products are similar in nature. This leads to psychological pricing strategies.