Column: Why Shoppers Like Yourself Keep Prices High

Brands may set high prices, but the shoppers in Singapore ultimately keep the costs of goods up.

Funny Money is a column by Alevin Chan that examines our irrational relationship with money. Why do we rather splurge on a holiday than pay off debt? Why do sales cause us to buy things we don’t need? Why is it ok to drop S$1,000 on a new watch, but not to upgrade our Medishield plan? Join us as we take an up-close look at how funny money can be.

The story goes that an owner of a jewelry shop in Arizona was having trouble selling turquoise jewelry. Trying all the standard sales tricks, such as displaying them more prominently and pushing the jewelry hard onto customers - didn’t work.

The clientele, mostly well-to-do vacationeers passing through on holiday, were by no means cheapskates. However, they had very little knowledge of turquoise on the whole.

Exasperated, the owner scrawled a note to her staff to halve the price of the turquoise set and left town for a buying trip. However, misinterpreting the hastily written note, the staff doubled the price instead.

The turquoise collection sold out by the time the owner returned.

This curious story, observed by Professor of Psychology and Marketing Robert Cialdini, is just one example of how consumers keep prices of goods and services high.

We Know Only The Relative Value Of Things

Frankly, consumers are at an inherent disadvantage simply because we have no way of knowing the true value of anything we purchase and consume. What we do know is the value of something relative to its alternative. But, this perceived value is made up.

For example, we happily plonk down S$15 for a bowl of ramen, reasoning that the novelty of the experience and the unique taste of the meal justifies paying 5 times more than for a bowl of bak chor mee at the hawker centre.

However, nutritionally speaking, there is no difference between the two. In both cases, you’re consuming wheat noodles, some meat, fat, salt and possibly a bit more collagen in the case of ramen.

Stripping away subjective factors like ambience and setting, what makes one meal more valuable than the other? Why would you not pay S$15 for a bowl of bak chor mee served in a posh, cosy, air-conditioned restaurant?

We Rely On Mental Short-Cuts

By default, human beings rely on mental shortcuts called heuristics to help us make decisions. This holds true whether we’re navigating the shopping mall, or the world at large.

In the case of our Arizona travellers above, Cialdini theorised that having been brought up believing “you get what you pay for”, doubling the price of the turquoise jewellery made them pay attention. The shortcut driving their behaviour was “expensive equals good”.

A few more highly visible examples are the Apple fanboy, the Starbucks addict, and the CrossFit worshipper. Try to engage any of them in an objective discussion on why exactly these products and services are worth the premium prices they command, and you’ll find yourself drowning in knee-jerk responses and circular reasoning.

But before you write these people off as lost causes, try to understand that it is their mental shortcuts that are driving them. If anything, it’s admirable how Apple, Starbucks and CrossFit skillfully hit all the right heuristics in their supporters.

Why We Keep Prices High

Merchants and vendors may set high prices, but it is consumers who keep prices high.

This is because a) not knowing the value of things, we take our lead from the number on the price tag and b) because we rely on mental shortcuts, we shape our buying decisions according to marketing and advertising that speaks to us.

This can be seen in the recent controversy regarding the high price of infant formula in Singapore. The cost of infant formula has grown by nearly 250% in the past nine years, said a CNA report.

In the report, the Competition Commission of Singapore (CCS) was cited as saying that infant formula makers invest heavily in research and development and marketing to make their product appear premium.

In other words, manufacturers are inflating the perceived value of infant formula. They then turn around and charge high prices.

Parents (the target consumers of infant formula) are faced with a double bind. They have no way of knowing the real value of infant formula, hence they follow market prices.

And since they tend to respond to marketing that promises the best for their children, it is not surprising that they will put up with the pinch of high prices.

Providing your children with the best doesn’t mean you have to pay top prices every time. Don’t miss the chance to save money with credit card rebates you can use on groceries, whether at the neighbourhood supermarket or on your favourite online shopping site. You can quickly find the best shopping credit cards on SingSaver.com.sg - for free!

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By Alevin Chan

A Certified Financial Planner with a curiosity about what makes people tick, Alevin's mission is to help readers understand the psychology of money. He's also on an ongoing quest to optimise happiness and enjoyment in his life.