I was doing my grocery shopping yesterday when I stumbled upon a discount that I assumed was a clerical mistake: some fancy olive oil had been reduced from $23 to $9. Needless to say, I immediately put a bottle in my cart, even though I didn’t need another bottle of olive oil.
But then, just a few minutes later, I began to wonder: why was the olive oil so drastically reduced in price? Is something wrong with it? What isn’t Whole Foods telling me? That nagging suspicion – and I’m sure it was completely unfounded – was enough for me to put the bottle back on the shelf. It was too good a deal.
My perverse behavior illustrates something interesting about consumers. In general, people rely on a simple heuristic, or mental short-cut, when trying to evaluate the quality of a product: we assume that more expensive things are of higher quality. In other words, you get what you pay for. As a result, we automatically suspect products on sale of being faulty, or inferior. And because our expectations profoundly influence our experience, an olive oil that we expect to be lower in quality will actually taste lower in quality.
Look, for example, at this witty little experiment, which I describe in my book. Baba Shiv, a neuroeconomist at Stanford, supplied a group of people with Sobe Adrenaline Rush, an “energy” drink that was supposed to make them feel more alert and energetic. (The drink contained a potent brew of sugar and caffeine which, the bottle promised, would impart “superior functionality”). Some participants paid full price for the drinks, while others were offered a discount. The participants were then asked to solve a series of word puzzles. Shiv found that people who paid discounted prices consistently solved about thirty percent fewer puzzles than the people who paid full price for the drinks. The subjects were convinced that the stuff on sale was much less potent, even though all the drinks were identical.
Why did the cheaper energy drink prove less effective? According to Shiv, consumers typically suffer from a version of the placebo effect. Since we expect cheaper goods to be less effective, they generally are less effective, even if they are identical to more expensive products. This is why brand-name aspirin works better than generic aspirin, or why Coke tastes better than cheaper colas, even if most consumers can’t tell the difference in blind taste tests. “We have these general beliefs about the world⎯for example, that cheaper products are of lower quality⎯and they translate into specific expectations about specific products,” said Shiv. “Then, once these expectations are activated, they start to really impact our behavior.
Over time, the presence of sales can really diminish a brand. I used to buy all my clothes at the Gap – I’m stuck with the fashion sense of an 8 year old boy – but, starting a few years ago, I noticed that everything at the Gap appeared to be on sale. This is problematic for two reasons: 1) It triggers deflationary expectations – why buy the t-shirt now when you can buy the same t-shirt for less in two weeks, after yet another “final” sale? and 2) It erodes the quality of the brand, at least as perceived by consumers. I implicitly assume that Gap has to put t-shirts on sale because they’re of lower quality, when the actual reason might have to do with the overproduction of some factory in Turkey, or an inventory accounting rule, or some other banal corporate mistake. Nevertheless, the sale has had a psychological impact – I associate the brand with stuff people don’t like. There must be a reason why that shirt is so cheap and why the price of that olive oil has been slashed.
For comparison, look at American Apparel. Have you ever seen an American Apparel store advertise a sale in the window? Or slash the price of their t-shirts? I thought not. They know that they are in the perception business, and that how we perceive a t-shirt depends on many other factors that have nothing do with the quality of cotton. Sometimes, the easiest way to make the consumer happier with a purchase is to increase the price.