Experience Matters!

3 minute read

Why do some industries get away with price hikes while some bear a disproportional share of the negative impact? Price hikes are never welcomed by customers, however, a set of studies has recently discovered that some industries are more immune to price hikes than others due to the consumer cognitive evaluation of these industries.

Researchers observed a phenomenon where they found that their peers, although always complaining about the pricy hotel rates in the Alps, never failed to take their annual 3-week summer breaks in the cradle of Mont Blanc. These very same people wouldn’t blink an eyelid before putting off purchasing a shoe to replace their worn-down hushpuppies after visiting the mall and seeing the exorbitant prices. They often brought out the idiom – “back in the day this used to cost (pick your number)”.

What could explain this phenomenon? Why were these professors so inelastic to price increases for their holidays but super elastic to price hikes for clothes and shoes

One theory was that people are less sensitive to price increases when it comes to experiences and significantly more sensitive to price increases for things (or products).

To test this our set of researchers conducted a study where a group of people were asked to take part in an experiment. Although the construct and conduct of the experiment was slightly complicated it boiled down to the participants being asked to take part in a hypothetical raffle which would give them a chance to win 2 vouchers (One for an experience of their choice and the other for a product of their choice) worth $20 each by paying $5 for each ($40 worth of value by paying $10). They were also given the option of forfeiting the vouchers in return for $10 in cash. After this information was communicated to them, they were later informed that because of expenses related to mailing and voucher shortages the price of each voucher had increased from $5 to $9. This meant they would have to forego one voucher in favour of the other due to the price rise. The participants still had the choice to take the $10 cash payout in the new scenario.

The choices of the participants validated the researcher’s hypothesis, with 54% choosing the experience voucher, 19% choosing the $10 cash option and only 36% opting for the product voucher. Hence the results of this study proved that when people are faced with the decision of paying a higher price to acquire a voucher for either an experience or an object, they more often decide for the experience.

The researchers tried to test whether this finding could have an impact on product marketers when they framed their communication in terms of an experience or a core product. They tried this by designing an ad for a grill. In one ad they showed and framed the messaging on the experience of hosting barbeques in the backyard and in the second ad they focused on the core product features. The results of this study too validated that when prices were increased over time, participants were more likely to purchase the grill when exposed to the ad which stressed on the product experience rather than the product features.

So all you budding pricing managers and marketers can lean on this study the next time you are trying to increase prices of your products and are afraid of the impact it would have on sales.

Original research by Wilson Bastos

https://myscp.onlinelibrary.wiley.com/doi/full/10.1002/jcpy.1099