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 which they wanted. Most wanted the 10-cent bottle, even though they were the same wine.

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

Answer 1

Answer:

What does this tell us about people?

We all know that the value of good wine increases with age. So most of the people think that older one is of higher price.

Mostly people connote higher quality in cases of more expensive wines. The quality of wine certainly matters. Therefore the wine-drinkers are willing to pay for a bottle of high cost.

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

Prices have a powerful informational value, based on which customer desires to purchase the product.

Facial products, Smart phones, Handcrafted wood products, luxury items, Medicines, etc.

For example:

The Behemoth P&G Company evaluated various price ranges of $12.99, $15.99, and $18.99 in the late 1990s as consumer packaged goods decided to launch the new Olay Total Effects product to decide which price would be the most attractive to potential consumers. Presumably they would have made a profit on all those rates. A fair number of traditional customers who shopped in grocery stores or drug stores showed interest in Olay at the low price point but the luxury shoppers who purchased it in department stores were not as receptive. They felt department stores were too cheap to be. The amount of buy interest from both classes decreased at the price point of $15.99. Still amazement, when Olay’s price was increased to $18.99, both groups, and particularly, the department store shoppers’ intentions to purchase shot up to levels higher than the $12.99 price. More people wanted to buy the same product at a higher price.

What does this suggest about pricing?

The price level of an item per se offers valuable, and often critical, product information. The informative value of the price is particularly powerful when the price of the item is extreme, either at the high end or at the low end. It can function in ways that are counter-intuitive and make no economic sense.

In soothing the prestige shoppers by signaling the value of the product and by making the product aspirational for the customers, it is presented as an affordable luxury item they could splurge on.

This is a strategy by which we are using the prices as detrimental factor to the quality of the new product.

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