The SignPost Item Pricing Strategy

Here is some good stuff on pricing from Harvard Business School.

For most items, customers do not have accurate price points they can recall at a moment's notice. But each of us probably knows some benchmark prices, typically on items we buy frequently. Many customers, for instance, know the price of a twelve-ounce can of Coke or the cost of admission to a movie, so they can distinguish expensive and inexpensive price levels for such "signpost" items without the help of pricing cues.

Research suggests that customers use the prices of signpost items to form an overall impression of a store's prices. That impression then guides their purchase of other items for which they have less price knowledge. While very few customers know the price of baking soda (around 70 cents for sixteen ounces), they do realize that if a store charges more than $1 for a can of Coke it is probably also charging a premium on its baking soda. Similarly, a customer looking to purchase a new tennis racket might first check the store's price on a can of tennis balls. If the balls are less than $2, the customer will assume the tennis rackets will also be low priced. If the balls are closer to $4, the customer will walk out of the store without any tennis gear-and the message that the bargains are elsewhere.

Interesting stuff. There is also the opposite view that high prices are sometimes perceived as high quality. The key is to know your target customer and figure out what they want – cheap prices or social status.