How Can Increasing Prices Boost Demand?

Market dynamics often follow a predictable pattern where increasing prices lead to a decrease in demand. However, there are exceptional cases where a rise in prices results in an unexpected increase in demand. This phenomenon is particularly intriguing, especially when it comes to high-end products like luxury cars. This article explores the reasons behind this phenomenon, focusing on the concept of Veblen goods and the influence of prestige pricing.

Introduction to Veblen Goods

Veblen Goods refer to luxury products or services for which demand increases as the price rises. The term was coined by economist Thorstein Veblen in his book The Theory of the Leisure Class. These goods are often associated with high society or a desire to display wealth and status. While the concept is not universally accepted, there is substantial evidence supporting its validity in certain sectors, such as luxury automobiles and premium brands.

The Case of BMW and Veblen Effect

Bernd Pischetsrieder, the former CEO of BMW, implemented a significant price increase starting in the 1980s. The goal was to reposition the brand as more desirable and aspirational. The results were remarkable. As the prices of BMW cars rose, the appeal of the brand also increased. This shift in demand was fueled by consumers who perceived BMW as a premium brand, enhancing their social status and prestige.

It is crucial to understand that this effect is not limited to BMW alone. The desire for higher-priced items is often driven by the perception of quality and exclusivity. For instance, when a brand raises its prices, it can become a signal of high quality. The increased price reflects not just the intrinsic value of the product but also its desirability as a status symbol. This phenomenon can be particularly noticeable in niche markets where the product is already high-end and perceived as a luxury item.

Price as a Feature: Prestige Pricing

Prestige Pricing is a marketing strategy used by companies to create an aura of exclusivity and high quality. By setting higher prices, a brand can attract customers who are willing to pay a premium for perceived prestige and status. This approach is based on the idea that high prices are inversely proportional to perceived quality, which is known as the Snob Effect (or Veblen Effect).

One of the key examples of prestige pricing is seen in technical markets where a company was initially unrecognized and undersold. By increasing the price, the company managed to boost market success. The addition of add-on software, which was not essential but added to the perceived value, further enhanced the product’s appeal. This strategy worked because the increased price conveyed prestige and quality, making the product more attractive to a target demographic that valued these attributes.

Effectiveness of Prestige Pricing

The effectiveness of prestige pricing is not immediately apparent. It requires time and iterative consumer behavior change to see results. The increase in demand is often limited to a specific brand within a category, rather than across the entire market. This limited effect is a testament to the fact that the market is highly segmented and consumer preferences play a crucial role.

It is important to note that while increased prices can boost demand, the effect is not universal. The relationship between price and demand is complex and depends on numerous factors, including consumer perception, brand positioning, and market dynamics. Successful implementation of prestige pricing requires a thorough understanding of the target market and the willingness of consumers to value the product based on perceived quality and status.

Conclusion

Increasing prices can indeed lead to an increase in demand, particularly in the realm of luxury goods. This phenomenon, known as the Veblen Effect, is a powerful marketing tool when used strategically. Companies can leverage prestige pricing to enhance the perceived value of their products, attract a target demographic, and increase market share. However, it is crucial to recognize that this approach has limitations and must be carefully tailored to the specific market and consumer base.

For marketers looking to implement prestige pricing, it is essential to focus on building strong brand loyalty, maintaining high-quality standards, and understanding consumer preferences. By doing so, companies can effectively use price not just as a cost factor but as a strategic lever to drive demand and achieve business goals.