The same, cheap head-ache tablet is actually less effective than the same expensively priced option.
Read that again slowly because it is really powerful. In a study by Shiv, Carmon and Ariely (2005), they have established that discounted products are not only perceived less favourably by customers, but discounting actually detrimentally affects performance.
In one example, respondents who drank a discounted energy drink actually performed worse at solving puzzles because they believed the product did not help us much with concentration, causing them to physically perform worse than the control group.
Similarly, cheaper headache tablets actually take longer to work and were less successful at reducing headaches.
Discounting has the following – now scientifically proven- consequences:
- Perceptions of poorer quality,
- Belief that product tastes differently (inferiority)
- Belief that a product does not work as it should (efficacy)
- And...this is the killer: not only are discounted products perceived to be less effective, they ARE less effective. Through the so-called placebo effect, these beliefs and perceptions are transformed into less effective performance - a classic case of perception becoming reality.
What this means that discounting reduces the ability of a product to perform. (Of course there are products that may not be affected by this phenomenon, but not as many as you may think at first.)
The solution is very simple, but the difficulty is coming up with an alternative to the pricing tactic of first resort - discounting.
The solution to this can be found in understanding and de-constructing the value proposition. More about that in a future post.