People want to pay more. Not less.

Alright, I could have titled this article “Sometimes people want to pay more…” or “in certain circumstances people like to pay more…” but titles must catch the eye.

And I bet you wouldn’t be here if I didn’t add a little spice.. :)

Not that the title is inaccurate because there are several circumstances in which people not only will pay a higher price for a good or a service, but they actually prefer it.

In this article, we will review some of those circumstances, and we will analyze the underlying psychological reasons that push people to pay more, perhaps happily.

Some of these reasons will appear obvious, others will be a revelation to you, and they may represent an opportunity.

An opportunity to work with healthier margins, to uplift your perceived value, to get free press, to build a loyal community, and to de-commoditize your business.

“Will the simple act of charging more give me all those benefits?” you may ask, to which the answer would be “It is not that simple, but it may and it will, if done accurately”

CONVENIENCE

The first objection, when discussing high prices, is that we live in the age of convenience.

Amazon and Alibaba alone are worth more than the GDP of most mid-size countries, and it didn’t happen by chance.

Jeff Bezos once said: “I make business decisions not necessarily to anticipate changes, which may be unpredictable, but trying to meet the needs I believe will never change. And people will always want to pay less and get their stuff delivered quickly”.

Never in history have consumers had as many choices as today, along with the possibility of comparing prices in real time.

Ironically, this unprecedented convenience has posed a threat to companies and brands positioned in the middle-low segment of their markets, rather than the ones with a (much) higher price point.

While Bezos became America’s richest man, Bernard Arnault, CEO of LVMH became Europe’s richest man. And above them all sits Tesla’s Elon Musk. And Tesla is anything but cheap.

Paradoxically, the abundance of cheap goods makes the expensive ones stand out, and convey a message of quality very few other marketing strategies would convey.

The most expensive items are often the benchmark that enables consumers to make choices in an otherwise too crowded market.

When buying a new PC, for example, people often look at the most expensive one.

They break down all its features, and buy the one with the closest features, on the price point they can afford (and with consumer credit, buy now and pay later etc., they often buy something more expensive than they could afford).

While in this case the computer sold is not the most expensive one, the brand producing it will still benefit from a few outcomes, such as:

1. They gained authority, which contributes to the overall brand equity.
2. Thanks to the newly gained authority, they may sell another model with fewer features, at a lower price.
3. They have created a desire, otherwise called “future need” for the customer may very well buy the most expensive item in the future.

SHOW OFF or SOCIAL APPROVAL

We live in the age of convenience; I said earlier, and we also live in the age of image of which Instagram is the epitome.

Clothes, cars, watches, bags, fine wines, luxury destinations, fit bodies.

Hundreds of millions of people compete every day, trying to grab followers’ attention and a few “likes”, on these meat markets called social media.

And they do it showing off their possessions, but they can’t simply show an expensive car, watch, or bag. To stand out, they must show off the most expensive car, watch or bag. And now, the most expensive NFT too.

We must reckon, though, that this phenomenon, and the psychology behind it, is not new and not caused by social media, of which it is only an amplifier.

The desire to impress the surrounding people is embedded in the human brain, for humans are social animals.

In 20 years in Dubai, I’ve seen my fair share of gold plated Rolls-Royce, diamond watches and pharaonic restrooms and I am hardly impressed by anything I see on Instagram.

And while many people fake a luxury life style online (it doesn’t cost much to rent a Ferrari for one day), it takes nothing away from the social phenomenon: people define themselves by the things they own. Which makes the case for our article.

EXPENSIVE = BETTER

Quality comes at a price. This is out of question. Expect nothing of high quality, including people, to be cheap.

Yet, not everything that is expensive is necessarily the best choice, both in absolute and relative terms.

Over two decades in the luxury industry, I’ve seen countless people ordering their wine at a restaurant looking at the right column of the wine list, the only one they could make sense of.

And this is where you see Masseto being paired with a pizza, or an aged Romanée Conti being served along a pot of moules mariniere.

You may argue pairing a wine it’s a matter of taste, and I certainly agree.

The most skilled sommeliers, like my good friend Sergio Nodone and the most sophisticated wine lovers, preach open-mindeness and they pair their favorite wines with their favorite dishes.

Yet, you can easily notice when someone with limited knowledge orders the most expensive food along with the most expensive wine just because….well, if they’re the most expensive, they must be the best.

As explained by psychologist and best-selling author of “Why we do what we do” Dr. Helena Boschi on the latest episode of Lux and Friends Podcast our brain always seeks shortcuts.

It does it because it takes enormous brain power to process new information, and brainpower is limited.

Just like prejudice is a way for the brain to jump to a conclusion without having to process new information, a high price gives it the possibility to conclude that the most expensive item must also be the best choice. Another form of prejudice.

“What if, before buying, a customer would come across additional information that contradicts the allegedly higher quality of that item?”, you may ask.

It can certainly happen, and technology makes it easy.

Yet, we must consider two factors:

` 1. Many purchases still happen in “the heat of the moment” (example, the wine ordered at the restaurant, or a dress bought in a boutique)

2. The confirmation bias. People see (and look for) only the pieces of information that support their beliefs.

SCARCITY AND FOMO

Recently, a collection of sneakers by Louis Vuitton and Nike, Airforce 1, designed by the late Virgil Abloh, made the headlines for their exorbitant price.

A lot of 200 pairs auctioned by Sotheby’s raised over $25 million, with the most expensive pair being sold for a staggering $350.000.

The fact Abloh, the legendary designer who elevated street fashion to luxury, passed away last year at 41 makes this collection unique and unrepeatable, and extremely desirable.

To understand the dynamics that make someone spend so much on a pair of sneakers, we must observe gold, diamonds and all the precious materials that have been store of value for thousand of years.

While the use case for gold and diamonds, for example, is much less versatile and interesting than the use case of other commodities, it is their limited supply that makes them so desirable.

The luxury industry has always leveraged scarcity and exclusivity; sometimes in practice, other times mainly in its narrative.

Most luxury brands develop limited editions of a collection, or one of a kind pieces (also called “conversational piece”). They are always sold out, and contribute to the storytelling made of extreme quality and exclusivity.

Scarcity appeals to the brain not only because it provides social status, but because it triggers the Fear Of Missing Out (FOMO).

When the first Covid19 lockdown was announced, every supermarket on earth run out of toilet paper. People bought every piece on the shelf, fearing companies would stop operating and delivering. Something that didn’t happen. Yet, every time governments announce a restrictive measure the first thing to happen is a sold out of rice, pasta, oil and …toilet paper.

Bitcoin, the cryptocurrency making over 40% of the entire, multitrillion dollar crypto market owes much of its popularity and high price to scarcity, since the protocol is designed to make only 21 million units ever available, of which 4 million are forever lost, and only two millions are left to be created (mined).

At the moment of writing this article, one Bitcoin trades for US$42.000 while the second largest cryptocurrency, Eth, trades for (only) US$2.900.

COMMUNITY:

Not everyone can stay at The Ritz Carlton, dine at Enoteca Pinchiorri, travel first class with Emirates, and shop at Hermès.

Yet, those who can, appreciate, besides the product and services they buy, the fact they are part of a group of (select) people.

In the most exclusive travel destinations, for example, prices are high also for accomodations and other services of average when not poor quality. The price barrier, in this case, exists to keep a majority of people out, so as to give exclusive access to the select few.

The latest, bold case, is the one of Bored Ape, or CryptoPunk NFTs. These digital images were sold for thousands of Eth, or hundreds of thousand of US$, to people who embraced the community they’d access to with the purchase of thos Jpegs (and the relative smart contracts).

CONCLUSIONS

High prices are not to be feared, but they must be deserved.

Many companies leave value on the table because, while focusing on volumes, they forget to investigate the psychology of pricing so to understand that for many people:

• High price = quality
• Expensive = an opportunity to show off their wealth
• Exclusive = access to a community. Select few.
• Scarcity = FOMO

In the luxury industry, price is rarely the outcome of cost + markup (or at least, it shouldn’t) for brands should embed an item’s price into its narrative.

Other industries may not be able to detach price from cost as much as the luxury industry does.

Yet long lines of (middle when not working class) enthusiasts waiting to buy the latest iPhone for $1000+ should teach everyone the ultimate pricing lesson:

The optimal price, is the price customers are willing to pay.

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