Marketing Idea No. 286: What paying high price actually means

Its often said that price war is the last resort of stupid marketers. However when it comes to over pricing, such beliefs are less commonly held. Unless of course you are the unlucky middle class consumer who is caught between two irrepressible forces: savvy marketers and rich consumers A lot of products can justify their high price of course.

When you pay that extra $500 dollar for a trip in Singapore Airlines, you know that you are paying extra for the legendary “Singapore Girl” service, the exemplary attention to details of the food and the comfort of the chair that is designed in collaboration with BMW.

Not every pricing-quality paradigm is as straight forward though. The price of a luxury car maybe 10 times more than a Mini van for soccer moms, but maybe costs only two times more to make. In that case, the illusive “Quality” gain that the buyer is getting by paying higher is not as great as the clearly significant profit that the seller is getting.

Liquor is a category which is notorious for over pricing by using clever marketing gimmicks, even when the cost increase and quality/value addition is not all that high. Thanks to the rich demand from the rich people, particularly in China and Russia, a Bordeux vineyard wine can charge exorbitantly higher price simply because it has high demand. Then comes the me-too brands. They charge high not because their cost base is high or their product is superior or they have brought innovation. They do it because someone established that high price already and by copying that price, they just want to signal the consumers that this product is worth the same high value. Cloudy Bay, a straightforward New Zealand Sauvignon Blanc whose price; without any apparent change in the production method; rose from about $15 per bottle to about $30 per bottle after LVMH acquired the brand in 2003 and began marketing Cloudy Bay as a luxury product.

And then there is the effect of marketing cost. The world’s biggest Luxury house LVMH has a cluster of super premium brands like TAG Heuer watches, De Beers diamonds, Guerlain perfume, Louis Vuitton handbags, Chateau d’Yquem, Krug, and Dom Pérignon. All of these brand are over priced because such a large portion of their cost base is spent on marketing, not to increase their quality.

Please keep in mind in all of these cases, price doesn’t reflect the quality. It reflects irrational buying behavior. That’s why when a products high price is not because of its high production cost; but mainly due to marketing gimmick, marketing cost, shortage of demand or any sort of irrational buying behavior; that’s when it can safely be said…… you are paying too much.

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