In its April 28th edition, Business Week reports on a study in the Proceedings of the National Academy of Sciences that may require re-thinking a little bit the economic theory of the diminishing marginal value of the dollar and price elasticity. In the study the subjects who were students were placed in an MRI machine and given sips of red wine. One of the wines was presented twice, first as a $5 per bottle wine which was its real price and then as $45 per bottle wine.
All the subjects said that they preferred the “more expensive” wine. This was mirrored by increased activity in their prefrontal cortexes. In other words, the perception created the reality. The fact that they thought they were sipping a more expensive wine really was more pleasurable.
The article also quoted Baba Shiv, an associate professor of marketing at Stanford, where the study was conducted. “There’s a temptation among marketers to keep reducing prices,” he said. “We’re saying be careful before embarking on that strategy.”
In an earlier post here we speculated how the sellers of a luxury estate near Lake Tahoe arrived at the nice round number of $100M for a price. Wouldn’t it make more sense to drop the price by a thousand dollars and make it eight figures instead of nine? Not necessarily. Isn’t it interesting that that the price might be part of the product and not just related to the product for the same reason that the points on a buck’s rack are important to a trophy deer hunter. When I see a luxury home priced a thousand or a hundred dollars less than a round number, for example, $899,900 instead of $900,000, I alway think of the Wal-Mart smiley face with the “falling prices” sign in their TV ads. The more unique a luxury home is, the more difficult it is to objectively determine a “market price” and until the right buyer comes along even deep price cuts may have little impact. Unlike most segments of the housing market, price is less a factor in the marketing mix for luxury homes.
