Veblen Goods: How to increase demand by raising prices

Veblen Goods: How to increase demand by raising prices

02/08/2022 - Pricing strategy

The relationship between exclusivity and price is the strategy for success in many online and offline businesses. You can take advantage of it to benefit your business with the Veblen good concept. How many products do you know which have improved sales by increasing the price? We tell you more about this phenomenon that you can incorporate in your business to optimise your pricing strategy and increase your profit margin.

What is the Veblen good theory?

A Veblen good is a product whose demand increases when its price rises. This theory applies most of all to goods designed as luxury products, since the exclusivity factor is pivotal for the purchase.

This pricing strategy has a very close relationship with psychological pricing strategies, since it plays with the potential buyer’s perception as a trigger for the purchase. In this case, we are not talking about consumer staples, far from it. It is entirely impulsive decision-making that seeks only the pleasure of a product which is available to only a small group of consumers with specific financial means.

How do you bring this theory to your brand or e-commerce business, even if you don't sell products that belong to the luxury sector? The first thing to remember is that the price increase will not be continuous and infinite related to demand. Demand will not continue to grow with each price rise. It will only work if the product’s price makes sense in the market, and meets users’ value expectations. On the other hand, if the price were excessive, demand would not be increased as it would only be accessible to a tiny group.

Veblen good theory

3 Examples of Veblen good products

We find countless examples of products that exhibit this attractive psychological exclusivity-price relationship in the luxury sector. But there are also examples that are closer to home and more accessible.

The most frequent example of a Veblen good product is found in the technology departments. The Apple brand has made this theory the leitmotif of its pricing strategies. Each year, the launch of a raft of new products with updates and new features is a highly anticipated event. The latest iPhone model is the one that creates the most expectation. We are talking about a product that already costs over £800 on average, and it is more expensive every year, yet it is still one of the most desired and purchased devices.

In the gastronomy and food sector, over the last 10 years, we have also seen an explosion of gourmet spaces, giving rise to specialised brand and range areas in superstores. The creation of these spaces is undoubtedly driven by increased demand for exclusive experiences, such as savouring a product that few can access either due to a limited production run or because the cost is not within reach of all budgets.

At the same time, access to exclusive products has become available for everyone, with exceptions within the mainstream. It is possible to find exclusive products in perfumery or in fast fashion brands through premium collections, at a much higher price point. In doing so, they seek to draw the attention of those consumers who have a predilection for Veblen good-type products.
 

What pricing strategies do you apply to raise prices?

When increasing your product prices, you should consider the context framing your online store by asking the following questions:

  1. Is the product you sell genuinely unique in the market?
  2. What is your brand's baggage on the market in regard to the product? Is it a new release, is it a new brand?
  3. Is this a new product for which you will fix the price, or do you intend to raise the price to turn it into a Veblen good?

If you're new to a market and arrive with a unique product, you can implement a price skimming strategy to get the most out of every purchase. Take the view that, in some way, your products will be perceived as a Veblen good because of the lack of competition, and you will get a high price while increasing the expected sales.

In the case of a high pricing strategy, it is also recommended that you test the price sensitivity of your potential buyers with the help of a collective study. This will allow you to know the maximum price they are willing to pay, and you can then work with that scale.

The most exclusive products in your catalogue can earn you even more by setting the right price for each one. Opt for exclusivity and optimise your sales!

Category: Pricing strategy

Tags: competition, demand curve

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