Premium wine tastes great…………… as long as you know the price!!

expensive-wine-468x323

Source: LUXUO

Last Saturday afternoon I visited my local bottle shop on a mission to purchase a bottle of red wine to impress some old school friends who I had invited for dinner.

There were two immediate issues I faced: (1) I was more a VB beer drinker than a Pinot Noir connoisseur; and (2) I was already running late for my son’s basketball game.

With no expert knowledge and limited time on my hands, how could I make a decision regarding which bottle of wine would best meet my needs?

The bottle shop had kindly provided me with multiple cues to help influence my choice, such as: impressively designed bottle labels (complete with gold stars), 2 for 1 deals, 20% off when you buy six, everyday low price guarantee and wine of the month recommendations.

A rational approach would be to ask the store attendant for advice, however with limited time available I was ‘predictably irrational’ as described by Dan Ariely in his 2008 book of the same title. I went ahead and selected a $74.95 bottle of wine (with an RRP of $129.99). I reasoned, at that price it had to be of good quality. In addition I was getting a significant discount and therefore felt positive about the purchase.

Ariely describes how high and low purchase expectations are influenced by high and low pricing strategies.

Source: YouTube – Duke University

The concept whereby consumers experience a higher level of satisfaction for premium priced products or conversely a lower level of satisfaction for discounted products is also supported by Kotler (2002, p.225) who states ‘Many consumers use price as an indicator of quality’.

The next day, after my friends and I had thoroughly enjoyed my expensive bottle of wine (of course I did, after all I knew how much it cost!), I got to thinking about my previous day’s purchase and the many so called psychological pricing tactics which had been implemented by the store.

Prices that end in an odd number

‘Whatever pricing methods retailers use, there is a definite bias in favour of odd price endings’ (Holdershaw, Gendall & Garland 1997, p.53). A look through my local bottle shop’s latest catalogue supports this observation.

Many explanations are expressed in marketing theory suggesting why odd numbers are used so widely in pricing. Reasoning from Holdershaw, Gendall and Garland (1997, pp. 53 – 54) suggests if I was considering purchasing a bottle of Wirra Wirra Church Block at $23.99, I will recall that the price is $23, then maybe that it is $23.90, rarely that it is exactly $23.99. They argue I would not round from $23.99 to $24.00 based on memory processing time. In other words it is easier on my cognitive capacity to simply recall the first two digits rather than rounding up to $24.00.

The advantage for retailers has been described by many (Alpert 1971; Brenner and Brenner 1982; Georgoff 1972; Lambert 1975; Nagle and Holden 1995; Schindler and Wiman 1989 & Simon 1989) as the underestimation mechanism (cited in Schindler & Kibarian 1996, p. 188). Ignoring the rightmost digits could lead consumers to underestimate a 99-ending price because the rightmost digits may represent a relatively considerable amount of money (Schindler & Kibarian 1996, p. 188).

The purchase environment

Ordinarily I consider myself somewhat risk averse. However on this occasion I devoted minimal time in the purchase process and at $74.95 it was a substantial financial investment that came with some risk. I drew confidence from the ‘lowest liquor price guarantee’ store promise as well as from the RRP of $129.99. Taking the price guarantee and RRP as a reference price point, I was content I had minimised my risk.

The presence of such a ‘reference price increases consumers’ deal valuations and purchase intentions and can lower their search intentions as compared to the case where a reference price is absent’ (Ahmetoglu, Furnham & Fagan 2014, p. 699).

After all I had purchased frequently from this outlet, been satisfied with those purchases and observed the advertising of their price guarantee promise on numerous occasions via multiple channels.

Furthermore, I was exhibiting reduced price sensitivity based on:

  • the celebratory nature of the purchase stimuli (ie. dinner party with friends);
  • the overall store environment; and
  • previous positive purchasing experiences created by the store via their marketing mix.

As described by Vohra and Krishnamurthi (2012, p. 31) ‘a seller can reduce price sensitivity by inspiring greater confidence in the purchase decision’.

When a good deal becomes a great deal!

I forgot to mention that not only did I buy the bottle of wine for dinner with my friends, I bought six altogether, giving me a ‘20% purchase six or more’ discount – who wouldn’t take advantage of such a great deal?

In hindsight, given I ended up spending more than $300 on wine, perhaps I got a little carried away with the feeling of satisfaction induced by this bargain, although something tells me that’s the objective of their 20% off quantity discount strategy.

Author: Shannon Anderson ID94406163

References:

Ahmetoglo G, Furnham A & Fagan P 2014, ‘Pricing practices: A critical review of their effects on consumer perceptions and behaviour’, Journal of Retailing and Consumer Services, vol 21, no. 5, pp. 696 – 707, retrieved 28 August 2016, ScienceDirect.

Ariely D 2009, Predictably irrational: the hidden forces that shape our decisions, HaperCollins, New York, USA.

Frost S 2016, What is Psychological Pricing?, Chron, retrieved 28 August 2016, <http://smallbusiness.chron.com/psychological-pricing-11862.html >.

Holdershaw J, Gendall P & Garland R 1997, ‘The widespread use of odd pricing in the retail sector’, Marketing Bulletin, vol. 8, no. 1, pp. 53 – 58, retrieved 26 August 2016, EBSCOhost.

Kotler P 2002, Marketing Management, Millenium Edition, Custom Edition for University of Phoenix, Pearson Custom Publishing, retrieved 28 August 2016, <http://www.perspectiva.md/ro/files/biblioteca/Kotler-Marketing%20Management%20Millenium%20Edition.pdf>.

Schindler R & Kibarian T 1996, ‘Increased Consumer Sales Response Through Use of 99-Ending Prices’, Journal of Retailing, vol 72, no. 2, pp. 187 – 199, retrieved 28 August 2016, ScienceDirect.

Vohra R & Krishnamurthi L 2012, Principles of pricing: an analytical approach, Cambridge University Press, New York, USA.

Dan Murphy’s Lowest Price Guarantee website banner image, Dan Murphy’s, retrieved 30 August 2016, < https://www.danmurphys.com.au/help/price-guarantee-content>.

Investopedia, 2016, What is a ‘Quantity Discount’, Investopedia, retrieved 28 August 2016, < http://www.investopedia.com/terms/q/quantity-discount.asp>.

Luxuo, 2009, ‘$1 Million wine book‘, photograph, retrieved 30 August 2016, <http://www.luxuo.com/most-expensive/wine-book.html>.

The Power of Price 2009, YouTube, Duke University – The Fuqua School of Business, 9 March, retrieved 28 August 2016, <https://www.youtube.com/watch?v=nm5GB7Wu26Q>.

9/11 Bottleshop website everyday low prices advertisement image, 9/11 Bottleshop, retrieved 30 August 2016 <http://www.nineelevenbottleshop.com.au/content/22-wine>.

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