In the 1950s, Pepsi competed with Coca-Cola by selling its soda at half the price of Coke and spending twice as much on advertising. Yet after Pepsi raised its prices, its sales rose, contrary to what its marketing experts expected.
How can we explain such seemingly nonsensical behavior? After all, our decision to purchase a product should depend on how much we think we'll like it. And the amount of pleasure we experience when drinking a soda should depend only on its chemical composition and our level of thirst. Or, as economists would say, the utility of any consumption experience, such as enjoying a glass of wine or using our latest technological gadget, should depend on the product's intrinsic properties and our mental and physical state at the time of consumption.
Yet the Pepsi story and evidence from various consumption scenarios suggests that our purchasing decisions and enjoyment of products are influenced by other factors -- including price.
"You get what you pay for," folk wisdom tells us. Yet this is not always true, as suggested by the carefully designed tests that Consumer Reports magazine conducts on all sorts of products, ranging from cars and vacuum cleaners to TVs and kitchen gadgets. The data from these tests often illustrate that lower-priced goods are of higher quality than those that cost much more. For example, the July issue of the magazine examined 12 mass-market sunscreen brands and discovered that when it comes to SPF (a measure of protection against UVB rays), price doesn't always equal quality. Sunscreens with an SPF greater than 50, the test found, aren't significantly more effective than those with lower SPFs, but they are usually more expensive.
This evidence conflicts with a hardwired belief that most of us have: price equals quality. We tend to assume that higher-priced goods are of better quality than lower-priced ones. A simple price tag affects our perception of the quality of a product or service, leads us to expect higher quality and, in the end, causes us to actually experience higher quality during consumption.
Let's consider the case of wine. Even experts have difficulty discriminating among wines of varying quality and are affected by simple labels. For instance, in one study, wine experts who tasted a white wine infused with a red food dye described the wine using terminology appropriate to red wine: "plum" and "spicy," "thin" and "hollow."
In another study, when describing a middle-of-the-road wine bearing the false label grand-cru classe (which suggested it was an expensive wine), wine experts used elaborate and flattering adjectives such as "complex" or "balanced" to describe it. By contrast, when the exact same wine was labeled with the generic name vin de table, experts characterized it using pedestrian terms such as "simple" and "flat." In fact, the higher the tag price, the better people rate the taste of wines and other types of drinks, another study finds.
A Penny for your Wisdom
The same is true for paid services, such as expert recommendations. Whether it is financial advisers or health gurus, there seems no shortage of people seeking to charge others good money for the benefit of their wisdom. Regardless of the quality of this advice, one thing is for sure: the fact that we paid to acquire advice makes it more likely we'll follow it. In a series of laboratory studies, I found that people are more likely to listen and use advice they had paid for than advice they received for free, even though it had been made clear to them that the advice did not differ in quality. In fact, people give even more stock to advice if it is made more expensive.
These results can be explained by a human tendency that decision-making scholars call the sunk cost fallacy: Most of us tend to justify our past investments through our present and future behavior. This is why we may keep investing energy and effort in a course of action that is not paying back. And it is also why those expensive dresses or suits that you never wear are still taking up space in your closet. In the case of advice, it seems we feel compelled to use recommendations we've paid for so that we can justify the expense to ourselves. This could explain why we often take so much pride in the expensive products and services we buy, taking the number on the price tag as a signal of quality.
Francesca Gino is an associate professor of Business Administration at Harvard Business School and the author of "Sidetracked: Why Our Decisions Get Derailed, and How We Can Stick to the Plan."