---
title: "How Should You Price? Defying Common Sense: The Higher the Price, the Better It Sells"
description: "This article explores counterintuitive economic principles, such as the snob effect, Veblen effect, paradox of thrift, and freeconomics, explaining why higher prices can boost sales and why waste may stimulate the economy. It also categorizes five types of Chinese consumers based on their purchasing motivations."
author: "New Distribution"
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published: "2014-06-19"
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# How Should You Price? Defying Common Sense: The Higher the Price, the Better It Sells

> This article explores counterintuitive economic principles, such as the snob effect, Veblen effect, paradox of thrift, and freeconomics, explaining why higher prices can boost sales and why waste may stimulate the economy. It also categorizes five types of Chinese consumers based on their purchasing motivations.

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[Sun Wei: Five Types of People in Marketing China]
1. The ordinary person who cares about money: doesn't want anything too expensive, prefers to feel they got a bargain, loves freebies and discounts.
2. The nouveau riche who cares about money: doesn't want anything too cheap, prefers to show off wealth.
3. The gift-giver: likes to give health, class, and face.
4. The one who spends public funds: likes others to pay, likes gift cards, and asks for full-price invoices.
5. The face-conscious follower.

**Introduction: Why do lower prices not sell well, but higher prices sell better? Why can extravagant waste save the economy?**

Why is free not necessarily the best? What logic supports these economic principles? Let's explore these fun economics concepts.

**001 Higher Prices Sell Better – The Snob Effect**
The rich generally dislike the masses imitating their consumption behavior. This is called the snob effect. Specifically, it refers to the phenomenon of pursuing uniqueness and individuality when purchasing goods. In Korea, it's also called the egret effect. For some people, even if they have used a product for a long time, once it becomes popular, they will switch to a new, less-known product, just as egrets leave when crows flock in.

In 1950, American economist Harvey Leibenstein introduced both the bandwagon effect (increased purchase intention with others' usage) and the snob effect (decreased purchase intention with others' usage). If a product becomes widely known and popular, everyone wants to buy it – that's the bandwagon effect. In English, "bandwagon" refers to the leading bandwagon in a parade; people see it and follow without thinking. The bandwagon effect describes such unthinking consumer behavior. The snob effect is the opposite.

However, the snob effect is not just about not buying mass-market products; it can also be interpreted as a demand for non-mainstream goods. Simply put, it's a tendency to pursue individuality through high-end products.

The snob effect manifests in two main ways:
First, buying high-end products as soon as they launch, because at that moment, not everyone can enjoy the prestige of consuming them.
Second, once a product's market share reaches a level where the general public can afford it, consumers stop buying it, even if they previously praised it. This is because products that everyone can buy no longer confer prestige or a sense of luxury.

However, the snob effect does not apply to all products.
The more high-end and personally consumed the product, the more pronounced the snob effect. If the purchase is not for personal consumption but for external display, even at high prices, demand may increase – the bandwagon effect.

If you believe there's a high likelihood of the snob effect in your target market, consider these three points when building your marketing plan:
First, value lifetime value over market share. Focus on retaining existing customers rather than expanding the customer base, because if you neglect existing customers for short-term gains, they will eventually leave. Moreover, at some point, marketing strategy must shift from acquiring new users to demarketing – preventing new users from entering.
Second, absolutely avoid price competition. Lowering prices triggers two problems: price-sensitive consumers will buy the discounted product, reducing its scarcity and driving away existing customers. Also, price often serves as an indicator of quality, so lowering prices can easily be perceived as a decline in quality.
Third, as a market latecomer, avoid "me too" business approaches. Markets with snob effects may seem profitable with few competitors, but new entrants can cause the market to collapse. New competition increases consumption, but due to the snob effect, original customers may leave. Incumbents have already enjoyed high returns and can recoup investments, but new entrants may suffer huge losses.

Thorstein Bunde Veblen, an American institutional economist active in the late 19th and early 20th centuries, noted in his work "The Theory of the Leisure Class" that while generally price increases lead to lower demand, for certain goods, price increases actually boost demand. This phenomenon, typically seen in expensive luxury brands, is called the Veblen effect, and such goods are Veblen goods.

Conversely, goods whose demand falls when prices fall are called Giffen goods. Normally, price drops increase demand, but if the income effect of a price drop is larger, demand for the good may decrease. This is rare and only occurs when spending on the good constitutes a large portion of income.

The phenomenon where less developed countries imitate developed countries' consumption patterns, or low-income individuals imitate high-income individuals' behavior, is called the demonstration effect by economist Dusenberry. Consumer behavior is not determined by absolute income but by relative income compared to others. This is the relative income hypothesis. The core of the demonstration effect: when society offers a range of goods from low to high quality, it's human nature to desire higher-quality goods, and those with more exposure to higher social status individuals have stronger such desires.

After purchasing a product, consumption demand extends to related products. This extension effect is the Diderot effect. Diderot was an 18th-century French Enlightenment philosopher and encyclopedist. One day, Diderot bought a new dressing gown, then felt his furniture looked old, so he replaced his desk, wall hangings, and eventually all his furniture to match the gown. This is the Diderot effect, which interior decorators would welcome.

**002 Extravagant Waste Can Save the Economy – The Paradox of Thrift**
We all know that if consumption exceeds income, there's no money to save, and eventually you'll live in poverty. So, to become rich, we work hard, sometimes become stingy, and strive to save more.

This principle applies to individuals, but does it apply to the national economy? If all citizens become stingy, will the country become richer? The answer is no, especially during economic downturns. Let's see why.

When the economy enters a recession, people save more and consume less due to future uncertainty. But if everyone reduces consumption, companies' sales drop, inventories rise. Consequently, companies cut production and employment, reducing workers' incomes. This strengthens future concerns, leading to even more saving and less consumption, creating a vicious cycle of deeper recession.

This creates a paradox: saving is rational for individuals but irrational for the economy as a whole. This is the paradox of thrift. In logic, a phenomenon that applies to individuals but not to the whole is called the fallacy of composition, and the paradox of thrift is an example.

In the 1930s, during the Great Depression, this paradox appeared. Facing recession, businesses cut consumption, deepening the downturn. British economist John Maynard Keynes, who understood this paradox, prescribed that if households couldn't increase consumption, the government should run fiscal deficits and increase spending. Only then would aggregate demand expand, companies' sales increase, and production and employment improve, ultimately boosting household income and consumption. Keynes' solution came from his deep understanding of the difference between individual and aggregate saving. In his book "The General Theory of Employment, Interest, and Money," he argued that during recessions, consumption is a virtue and saving is a vice.

However, Keynes was not the first to recognize this. More than 200 years earlier, in the early 18th century, Bernard Mandeville had seen it. Let's look at the satirical poem "The Grumbling Hive" from Mandeville's 1714 work "The Fable of the Bees," written by the Dutch-born doctor and English liberal thinker to satirize English society. The poem's subtitle is "Private Vices, Public Benefits."

Once upon a time, there was a prosperous bee kingdom. The king and nobles, despite huge debts, built luxurious palaces and villas, wore splendid clothes, and held lavish parties with delicacies.

The kingdom used its powerful army to invade neighboring countries and expand colonies. While many soldiers died on battlefields, most generals hid in bunkers. Yet at every triumph, they stood at the front like heroes and received all the medals.

Judgments in courts depended not on right or wrong but on bribes to judges and lawyers. Orders for goods flowed continuously, keeping the entire supply chain busy, and everyone enjoyed a luxurious life.

One day, a high monk appeared in the vice-ridden bee kingdom, urging everyone to repent and chanting spells. The bees recognized their faults and vowed to live honest, upright lives. The queen and nobles sold their palaces and fine clothes to pay debts, began wearing simple clothes all year round, disbanded the army, and closed theaters. Since everyone upheld integrity, courts became unnecessary.

Consequently, parties and performances vanished; tailors, chefs, carpenters, masons, sculptors, actors, and others lost their jobs. The bees even considered living in buildings a luxury and moved into tree hollows.

Later, foreign bees from former colonies attacked the kingdom, enslaved all the good bees, and the good bees lived in constant fear and misery.

What message did Mandeville convey? He argued that mere virtue cannot ensure a good life for citizens, and while saving and thrift can increase individual wealth, this logic fails at the national level. He challenged Christian ethics by claiming that abstinence and altruism are hypocritical, and that vices commonly considered evil are the driving force of economic development. His critics called him "Man-Devil" as a pun for his public defense of vice.

Two hundred years later, Keynes loved Mandeville's poem and cited "The Fable of the Bees" in his magnum opus to emphasize that the 1930s recession was due to insufficient effective demand.

In 1666, the Great Fire of London plunged England into crisis. But Mandeville optimistically noted that although the fire was a disaster, the increased effective demand during reconstruction would stimulate the British economy.

Today, TV and newspapers often report on ordinary people tightening belts during recessions while the rich splurge on luxury goods, criticizing their consumption. However, from the paradox of thrift perspective, such consumption increases aggregate demand and actually helps the economy recover faster.

If businesses cannot expand consumption, the government should step in to increase spending, offer investment incentives, and attract foreign investors and tourists to boost investment and consumption. Only then can a virtuous cycle form and revive the economy.

**003 Free Is Not Necessarily Good – Freeconomics**
"There's no such thing as a free lunch" was a favorite saying of Milton Friedman, the Nobel Prize-winning economist in 1976.

Some information seems free at first glance, but upon closer inspection, it's not; or it can be interpreted as a bait hidden behind "free," or as not expecting something for nothing. Like the Russian proverb "Free cheese is only in a mousetrap," being wary of free things is an eternal truth.

However, the claim that some things are truly free has gained ground. Like bad money driving out good, the trend of free driving out paid has strengthened. The Economist magazine coined the term "freeconomics" in its 2008 outlook, combining "free" and "economics."

In 2007, the music industry saw a major event. Popular singer Prince gave away 3 million CDs of his new album "Planet Earth" for free via the UK's Mail on Sunday. People who heard the album might be more likely to attend concerts, but there was no guarantee. Of course, he might have done it because he anticipated illegal copying and distribution anyway. In any case, it was a shocking move.

Korea had a similar case. In 2007, LG Electronics released a high-end music phone with enhanced MP3 features. World-class sound expert Mark Levinson installed control keys that ensured acoustic quality and allowed flexible finger control, and used premium earpieces to guarantee MP3 performance. The phone included albums by seven top singers like Sung Si-kyung and Son Ho-young.

Before phone companies adopted such free strategies, Google had long offered Gmail with large free storage, YouTube provided free video hosting, and Skype offered free long-distance and international calls.

Bars have long offered free snacks. Why does this strategy work? Because when peanuts and other snacks are provided, people are more likely to drink. Furthermore, in American bars, water is charged, simply because drinking water reduces alcohol consumption. In short, snacks complement alcohol, while water competes with it. Bar owners have used this sales strategy based on extensive experience.

Look around; you'll find many free marketing examples, like free newspapers at subway stations. These free papers, which once threatened dailies and sports papers, attract many readers and thus high advertising revenue. Unpopular free papers fail due to insufficient ad revenue, leaving survivors to strengthen their positions. Companies with stronger financial resources are more likely to survive such free competition, potentially leading to consumer losses from monopolies.

Another drawback of the free economy is resource waste. For example, free newspapers waste large amounts of newsprint. Mass production and mass consumption lead to excessive energy use, accelerating global warming.

Almost no business expert doesn't know Tom Peters, famous for co-authoring "In Search of Excellence" with Robert Waterman in 1982. Interestingly, before publication, they produced 15,000 advance copies and gave them away free to interested readers. This shocked the publisher, which expected low sales and thought giving away so many copies was wasteful. However, the book became a bestseller thanks to those free copies. Readers who enjoyed the advance copies rushed to buy the published book, boosting sales. Thanks to the free distribution strategy, Tom Peters became a bestselling author, top speaker, and top consultant.

In Korea, civil servants and businesspeople are often criticized for corruption, so common practices like treating others to meals are now mostly banned, as such hospitality usually comes with strings attached. 3M, famous for Post-it notes and transparent tape, has a thorough ethics policy. Under gifts to business partners, it states: "Gifts to business partners must not exceed $50 per year, excluding coffee and donuts." So, you can enjoy free coffee and donuts without guilt. Thus, we can conclude: "There's no free lunch, but there is free coffee."

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