For a number of years, I had been puzzled by the widespread use of the price-leadership strategy, wherein the marketer focuses on lowering prices to create a super customer value proposition. Given that price affects quality perceptions, I was puzzled with the ubiquity of the use of this strategy across different categories. When I would with marketers who use this strategy,
I would ask them if this price-quality relationship is something that concerns that concerns them. The common response was that indeed lower prices affect perceptions of quality, but then these perceptions would be corrected by the marketplace; once consumers use the product, they would realize that the product is of good quality, and the word will then spread. In other words, what these marketers were assuming was that predicted utility (predictions of the utility one would derive from a product) has no impact on experience utility (the actual utility one derives from a product). I embarked on this research topic essentially to question the valid-ity of this assumption-that price affects not merely perceptions and thus predicted utility, but can shape experience as well.
One of the studies I conducted on this topic was with Hilke Plassmann, John O’Doherty, and Antonio Rangel. Test subjects were told that they would be consuming five different wines ranging in price from $5 to $90. The wines were delivered in random order through a mouthpiece while test subjects were in an fMRI scanner. A trial would begin with the price of the wine being flashed on a monitor. The wine was then delivered and test subject was told to swirl the wine in the mouth for five seconds and then swallow the wine when prompted. Water was then delivered through the mouthpiece to rinse the mouth, following which the next trial began. The activity in the entire brain was recorded across trials across various phases within each trial. We then compared the brain activation across trials (different price levels). and what we found was that the activation of an area of the brain called the medial orbitofrontal cortex (mOFC) was greater when the wine was at a higher price than a lower price (the mOFC is the area of the brain that measures experi-enced pleasure). Now, here is the twist in the story: unbeknown to the test subjects, the same wine was delivered across trials
The accumulated evidence across different studies suggests that the core assumption behind the price-leadership strategy-that predicted utility does not influence experience utility is invalid. In reality, from the consumer’s point of view, Pro tali numismate tales merces [One gets what one pays for].