Weber's law and why big business believes you won't notice a price increase under 10%
WebersLawandWhyBigBusinessBelievesYouWontNoticeaPriceIncreaseUnder10%Ever wonder how companies come to the decision to increase prices on their products? It is just acomplicated algorithmic system based on cost versus profit margin? Does supply and demand enter intothe equation? Is the increase in price the same across the entire catalog of products that the companymakes? Would it surprise to you know that there is a law of marketing science that claims that a companycan get away with raising the price on its merchandise without the public noticing as long as the increaseremains under a certain percentage? The law in question here is Webers Law and marketers swear by it.The Weber of Webers Law was a German physiologist who in the 1800s determined a link betweenstimulus and response and what is necessary for that initial stimulus to be noticed as having significantlychanged. Webers conclusion was that the more powerful that first stimulus was, the more impressive thechange would be required for the public to notice any enhancement to it. What exactly does this mean tothe modern day consumer and the change in the prices of his favorite products? Quite a bit, actually.The funny thing about Webers Law is that it remains constant regardless of the type of productbeing sold. In the case of consumer goods the stimulus is price. Therefore, Webers Law posits that for anychange in that stimulus to be recognized by the publlic the price would have to rise by a uniform percentage.Consumers have been conditioned to the point where that uniform percentage is always 10%, regardless ofthe item. Lets say that Nike decided to raise its prices on all its sneakers, from the lowest-priced to thepremium shoes. And lets say just for the sake of simplification-this example in no way reflects the actualprice range of Nike shoes, as far as I know-that the lowest priced sneaker was $50 and the absolute RollsRoyce of athletic footwear that Nike made was a whopping $300.Since the stimulus for any consumer good is always price-for the simple reason that regardless ofwhether the item also carries such stimuli as necessity or status-the bottom line is that nobody buysanything they cant afford to put on credit. According to Webers Law it will take a price increase of 10%before a consumer will actually actually notice that the price had gone up. The result? As long as Nike raisethe prices to only $54 and $329 respectively, most customers wont notice. At least in theory.There are two significant aspects to applying Webers Law to consumer price increases. The firsthas to do with how Webers Law relates to supply and demand and cost. Big business-especially the oilindustry in the past year-is fond of explaining away any price increase as simply a matter of the laws ofsupply and demand. When demand goes up and supply does down, prices increase. But take a moment tothink about Webers Law: If it is a given that manufacturers believe in Webers Law and have evidence thatconsumers wont notice prices unless they go up by 10%, why not slowly add 2% or 5% or 7.5% to the priceof your products even though the cost of making the product hasnt gone up at all? If consumers have ahistory of not noticing when prices only creep up, but only recognize a difference when prices jump, whywouldnt a company do this?The other important element of Webers Law is that it works both ways. For a drop in the price ofan item to be noticed it must also meet the same law; those sneakers must go down to $45 and $270. Thisis a nice deal for the consumer for obvious reasons. But it also raises an important question.Have you ever stopped to wonder how a manufacturer arrives at a retail dollar figure for its merchandise?Obviously they dont just pick a number out of the air that they think is the highest possible price they canget away with. And clearly there are elements of cost and profit in the equation, as well as the premium thatcan be applied to those things that only the rich can afford. But what about that $50 shoe? We all know itwas made with cheap overseas labor and we all know that it doesnt cost nearly $50 to make. So why is itbeing sold at $50? Well, there are many reasons, of course, including a no-doubt complicated cost and profitanalysis, but if Webers Law really does come into play heres how it would affect the original price of anobject.Anybody who has ever shopped at an outlet store knows that a lot of shoes-and everything else-arenever bought for the original price. Therefore the price must be cut, while still being enough to produce a
profit. Since manufacturers know theres a good chance they will never unload their entire inventory, it onlymakes sense to set the MSRP at a level at which they can apply Webers Law to it and still make a profit.Profit is everything. And Webers Law and supply and demand and cost of manufacturing are all taken intoconsideration when setting a price at which a profit is still possible even if the price must be reduced. Thatis why a sneaker that costs $10 to make first appears on store shelves for $50. Thats a pretty hefty profit,but even if the company has to cut prices twice according to Webers Law and sell the shoe for $40 it stillaint hay.Published by Timothy SextonTimothy Sexton was honored by being named the very first Writer of the Year of Associated Content, now known as Yahoo!Contributor Network.