Does Price Signal Quality?

The higher the price, the better the quality of whatever you’re getting. This seems a complete fact to most people. Of course the phone for which I just paid $900 is going to be better then the one I only would have had to pay $600 for. Now I have two specific phones in mind: the iPhone 9 and the OnePlus 6. And I don’t mean to start a war here, but that $300 difference is by no means justified in quality alone. I also have to admit that these prices are guesstimates at best, but you get my point.

We are aware that there is more than just quality at play here. When buying any kind of apple-product, you are mainly purchasing its name, rather than its many qualitatively well-established(?) features. You are buying into the image of a generation. Fine. If that’s your thing, go for it. But the reason many apple-heads use for justifying their purchase has nothing to do with the brand and all with the quality. They buy apple because: “it’s just the best.” And dear lord it is not. But how else will you justify to yourself spending that much money?

The general belief has become that vendors or producers ask for high(er) prices, with justification. This justification being that the product is of rare excellence. It is higher quality than all the rest of the products it is “supposedly” competing with. We have heard this excuse very often. We get spun a tale of how the product is so much better than anything else out there. It has come from an exotic place in the world, where only the best of its kind come from. It has been made from the finest ______, you can fill in whatever resource really.

I am sure the relationship between quality and price used to be a proper one. And as a result, we have developed the heuristic: price = quality. Associating low price with low quality, and a high(er) price with high(er) quality. It might even be that there was never such an actual relationship and it was all just a marketing ploy. As a result, those who fell into the trap told themselves, and potentially others, that what they had was better, of higher quality and that the higher price paid was justified. Whatever the story, as I just said, seamlessly assuming a price-quality relationship is a heuristic. And those aren’t always correct.

The biggest example I have about linking price and quality is an example I have been told various times when in my Behavioural Econ. Master’s degree. It’s the one about charging 0$ vs. charging about $2000, keep in mind this is in Australian dollars if that matters to you. The two different prices were charged for taking a government-organised business or entrepreneurial course. The Australian government had seen a swift rise and then fall in its entrepreneurs, most of them going out of business quite quickly. As entrepreneurial activity is great for a country’s economy, the government identified the main issues and designed a course around them, to teach individuals how to be a more successful entrepreneur. I personally think this is very nice of the Australian government, it’s a win-win, especially as this course was offered for free. One issue though, no one wanted it.

The Australian government was baffled. They had identified a problem, now offered a solution, yet there were no takers? But how?! Someone in the team must have been either a behavioural scientist, or just an opportunist, and decided it would be a great idea to just charge money for the same course, no other changes made. It worked. All of a sudden, applications were flooding in. When charging $2000 the course was perceived as worth it. When charging $0, the course was perceived to be of lower value. After all, how can something you get for free actually be useful? The things we get for free tend to be small bits and bobs that just lie around the house and clutter up the area. Am I right?

So charging (more) money helps. The seller can give the product an air of excellence and higher quality. The buyer will be seduced by having some really good and pay up. But this works in reverse as well. If, due to different production costs, a company is unable to provide competitive market prices, they need to be able to market their product differently. Because no one is going to pay more for the same product without any justification. Right?

Another context in which price is definitely not signalling quality is clothing. I mean check-out different clothing stores. H&M is known for its “fast-fashion,” which is not exactly a positive thing. They’ll charge you about 40 euros for a faux-leather jacket. Now when I hop into Zara, it’s the same jacket, but for 80 euros. If I go up the chain the same jacket will just get more expensive, and that’s about it. If you think I’m lying just find yourself a nice documentary on fast-fashion, where it shows you per market segment how things are done. I promise you, after watching it, you’ll agree with me that it’s not just H&M that deserves the bad reputation they got. At least to some extent they are honest about the price of the product…..

Even the expensive, “high-quality” stores have issues with producing clothes cheaply abroad, in unethical circumstances, exploiting employees and producers (depends on the resource), and adding a high price ticket just because of their mark-up. That jacket is literally the same jacket, with the same ethically-questionable process. There is no quality difference, just a mark-up and marketing difference. I am not paying for that bull---.

Now this article is not to state that there is no relationship between price and quality. There often is. But it might take some more research than you’d initially expect. Just because things are more expensive does not make them better. Ask yourself what you are paying for: function, aesthetic, brand name (reputation), material value, etc. Are you paying for all the extra detail and attention that went into the product? Or are you paying for the extra detail and attention that went into its marketing campaign? That is a big difference. Talking about marketing campaigns, in an upcoming post we will be discussing a phenomenon which I have dubbed “fake scarcity.” In which products or services are either offered exclusively, or not offered at all, and how demand increases as a response to it. Great information for someone hunting for a job, or just general negotiation tips!