16 June, 2021

Don’t discount yourself!

2 minute read

Can pricing affect the performance of a product? Researchers at MIT and Stanford performed a series of experiments to answer this question. For the experiment, they picked a health drink which made claims to “Elevate your Game” and offer “Superior Functionality”.

They started out by asking groups of students to solve complex word puzzles, to test the claim that the drink improved mental agility. They established a baseline by asking one group to solve the puzzle without drinking the energy drink. This group was able to solve an average of 9 out of 15 questions.

With the baseline in place, the researchers then tested two groups of students. The first group was asked to pay full price for the drink – the students were actually charged this money from their college account – and the second group was asked to pay a heavily discounted price for the drink. Both groups were subsequently asked to solve the word puzzle.

The results were fascinating. The group that paid full price for the drink answered 9 out of 15 questions correctly on an average – the same average as the baseline group that didn’t drink the health drink. While this result established that the health drink had limited to no effect on mental cognition (at least as it relates to solving puzzles), the results from the other group were even more insightful. The group that purchased the health drink at a heavily discounted price answered an average of 6.5 out of 15 questions correctly. So not only did the health drink not improve cognition, the low value that the discount group attached to the product due to the pricing was actually detrimental to cognitive performance (as compared to the baseline group).

What we may infer from these results is that price of a product does make a difference in performance in certain categories where the value is derived more intrinsically by the user. Real-world applications could relate to the healthcare industry and professionals operating in the human physiology and psychology domain. For example, if a psychologist reduces their hourly pricing significantly below market rates in the hope of attracting more clients, they may be compromising on the perceived efficacy of the treatment in the eyes of their clients.

Original research by Baba Shiv, Ziv Carmon and Dan Ariely

http://people.duke.edu/~dandan/webfiles/PapersPI/Placebo%20Marketing%20Actions.pdf