This blog entry is not about the impact of manipulation (see the post about milk product manipulation for that!). Rather, it is manipulation of prices that I wanted to touch upon today.

Price is a strange thing to drive manipulation, because it is frequently the most well-known and understood thing about an object or a service. You may not know much about perfume or electric components or televisions, but you will know (or can find out pretty easily) the price of these things. And unlike traffic light durations, which is hard to focus on, people are usually quite focused on the price of something. So how can someone manipulate others through price?

Fairly easily, it turns out. Let’s take some examples:

Let’s start with some power cables. A power cable usually connects a stereo or a television to the power plug in the wall. It is usually bundled in with the appliance that you buy, or you can get one at your favorite electronic retailer for $5-10 or so. What you cannot easily get at your neighborhood retailer are these:

Price Manipulation of Power Cables

These are Furutech's Powerflux Power Cords, and they retail for $1,800.

Why? Well, according to Furutech, they contain, in very specific quantities, “nano-sized ceramic particles”, “insulating acetal copolymer”, “Alpha pure Copper conductors”, and “powdered carbon”.  All of these ingredients presumably help do something to the power before it’s fed into your high-end audio gear, and that something should be worth $1,800 to its buyers.

Does it work? Well, it is a power plug, so it does transmit power. Power is power. Beyond that… Well, consider the fact that the wire behind the plug in the wall is usually the standard $10 8-gage wire from Home Depot, and you have your answer without having to worry much about understanding Furutech’s patent-pending designs.

Or consider this:

HDMI Cable Pricing Manipulation

This is a HDMI cable. Those cables transmit high-definition audio and video from things like Blu-Ray players to televisions.  Once again, you can buy them for $40 or so at your favorite retailer. Or you could purchase these Wireworld ones, for  $500.

Now, HDMI is a digital signal – 0s and 1s. As a result, the quality of the cable is entire binary – it either transmits the 0s and 1s or it does not. That’s it. A cable works or it does not. As a result, there is functionally no difference between the $25 cable and the $500 one. None.

It doesn’t have to be complicated, of course. Consider water.

Bling Water

Bling water, for example, sells for $50 a bottle. This is water – pretty much tastes like water, and people can’t tell it from regular water without seeing the bottle. Why would anyone pay 5,000 times the prevailing cost for water that is identical to tap water??

Whether people consciously accept it or not, price is usually linked to quality in people’s mind. When people are confronted with two functionally identical items, one of which costs a LOT more than the other, they tend to put a higher value on the expensive good. This is the driver behind a Veblen good – a good where demand increases as the price rises. Many luxury goods behave like Veblen goods – think of wine, for example: people who drink a wine they think is expensive will actually experience more pleasure than if they drink the exact same wine at a lower price.

This, then, is the challenge of folks selling Veblen goods – they have to convince the consumer that their high prices reflect a special something. This is hard, but the rewards are great: if you succeed, then people will buy your goods because they are expensive.

So manufacturers try a number of tricks – many of which straddle the zone between marketing and manipulation. They have pretty packaging (marketing). They spend an inordinate proportion of their revenues on marketing and advertising (around 25% or more). But much of what they do is also manipulation.

For example, at Best Buy, there are many displays that showcase the different brands of HDMI wires as a pyramid, like so:

Price Manipulation - Specs Ranking

Essentially, retailers try to suggest that higher-priced cables are more capable by ‘ranking’ them, sometimes using bandwidth or, in the case of Best Buy, refresh rates. Of course, the rankings are meaningless – since all HDMI cables conform to the HDMI spec, there is essentially no difference between cables. But to the retailer, selling a $25 cable means a LOT less margin than selling a $300 cable, hence these rather desperate displays and upsells.

The high-end audio market has many, many products that essentially depend on manipulation for their existence. Be it $32,000 speaker cables or a “minus Ion generator” for $900 that “improves disc sound and picture quality and room acoustic by generating pure natural minus ion and far infrared rays!”, the category is rife with techno-babble items priced at ludicrous levels. There is a simple reason for this, to some extent. Remember the wine experiment? The buyers of these systems really do hear a difference when they place these systems in their homes – not because ion generators or a $200 mat that you are supposed to place on a CD actually do anything to sound quality, but because the buyers feel, at some level, that because these products are expensive they have to be good, and convince themselves that they can hear a major upgrade when they color the side of a CD with a pen.  The more outrageous the price, the more technical-sounding terms invented, the better.

But you don’t have to limit these kind of price manipulations goods to luxury markets. Consider your friendly supermarket selling cheese. If your supermarket is of any size, you will be able to find cheese in two separate areas. One will be in the dairy aisle, where you can find standard cheeses like Cheddar and Brick:

Cheddar and Brick Cheese Corner - Pricing Manipulation

But you will also have a ‘cheese lover’ section, for cheese aficionados:

Cheese Lover Section - Price Manipulation

Now, some of these cheeses will be different, but if you spend any time examining them, you should notice that the ‘special’ cheese section has many, many cheeses that are identical to the ones in the dairy aisle: same cheese, same manufacturer, same taste – just slightly different packaging and maybe different brand names. The other difference? The cheese in the special section will have a price of 2-3 times the ‘standard’ cheese.

There are thousands of examples of price manipulation, but one final one for now should be sufficient. Sport shoes. Sport shoes are an interesting business (a $20B business!), which largely depends on convincing people that a $200 shoe is more effective than a $40 shoe. The problem, of course, is that they are not. Study after study has shown that more expensive running shoes are no better (and in fact probably worse) than cheap alternatives. But as competition heated up, manufacturers needed to find a way to increase margins, and they found two ways – technology, and endorsements.

On the technology side, manufacturers began to roll out new ‘technologies’ like roll cylinders, gelled insoles, “asymmetric lacing”, or “Spring bars” every year. Do these technologies actually change performance or comfort? Largely, no. But it doesn’t matter because manufacturers discovered that many buyers would simply buy the most expensive shoes, assuming that they were the most ‘technological’. So shoe prices began to climb as each manufacturer sought to introduce new expensive shoes that they could then get athletes to endorse.

Expensive Shoes Price Manipulation

The Ecco $220 running shoe. Choke full of technology and lime green.

Price manipulation is interesting because all the hard work has to go before the buyer sees the price. You can’t just slap a high price on something and hope that buyers flock to it – you have to convince them that the price is warranted in some ways. If you do so honestly, it’s marketing. If you do so using less honest means (using techno-babble, or special sections, or fake guides), then it’s retail manipulation.