Consumers perceive prices in different ways, using objective and subjective judgments to make buying decisions. This can make product pricing difficult, as you can choose from many different strategies to position your products. One of these is the "price equals quality" approach. Marketers often call this the Chivas Regal effect.
Overview of the Chivas Regal Effect
According to marketing folklore, the Chivas Regal brand of scotch whisky was struggling to gain market share and its sales were low. Its owners doubled its price -- without changing the whisky -- and saw unit sales double. Consumers saw the increased price as evidence that this must be a quality brand. In the 1980s, some U.S. universities adopted the same kind of policy, and the Chivas Regal effect became more associated with tuition costs than whisky. Colleges started to raise tuition fees to bring in more money and typically saw a significant increase in enrollment. At the time, parents equated higher tuition costs with a better standard of education.
You Get What You Pay for
The Chivas Regal effect works on the premise that some consumers use price as a cue to quality. All things being equal, a consumer may assume that a high price equals high quality even if there is no objective reason to believe this. A study by the "Journal of Consumer Research" in 2012 showed that consumers make some value judgments based on price. Researchers showed participants one advertisement for an expensive bottle of wine and one for a cheap one. When given a cue on quality, they gave the expensive wine a better rating. This is not an exact science, however, and this study also showed that the Chivas Regal effect may not always work. When given a cue on value for money, participants rated the cheaper bottle higher.
When the Chivas Regal Effect Works
The Chivas Regal strategy works on consumers who already believe that price equals quality or those who have no other value cue or little knowledge of a product. It is often successful in commodity products when consumers understand that quality differs but they are unable to identify the difference objectively. Wine is a good example of this. A consumer who wants to buy a bottle of wine, but who doesn't know much about wine itself, may choose a more expensive one from a range of options. He understands that some wines are of better quality than others and may use higher prices as a measure of that higher quality.
When the Chivas Regal Effect Doesn't Work
The Chivas Regal effect does not work on all consumers or for all products. If consumers have a different perception of value, they may not associate price with quality, for example. Low cost and value for money may equally trigger consumers to buy. It is also harder to implement this strategy if other cues affect purchase decisions, such as brand awareness or knowledge of product features. The price that consumers are willing to pay also matters; if a product exceeds that limit, they may not make a purchase.