The standard economic model treats price as a demand constraint: higher prices reduce quantity demanded. This model is accurate for commodities where quality is visible and homogeneous. For most entrepreneurial products — where quality is uncertain before purchase, brand recognition is limited, and the customer cannot easily assess what they are getting before committing — the relationship between price and demand is not simple, and the standard model is an incomplete account of what pricing actually does.

When price becomes the primary quality signal

Rao and Monroe’s (1989) meta-analysis confirmed the conditions under which the price-quality heuristic is most powerful: when quality is difficult to assess before purchase, when the customer has limited expertise in the product category, and when other quality cues — established brand, deep review history, physical inspection — are absent or ambiguous.

These are precisely the conditions that characterise most entrepreneurial products and most early-stage companies. The new company with a genuinely high-quality product cannot rely on brand reputation because the brand has not been built. It cannot rely on review depth because the customer base is too small. The physical or functional quality signals may be invisible to a customer who has never used the product. Under these conditions — which are the normal conditions for entrepreneurial product positioning — price becomes the primary available signal about quality.

The implication that follows directly from the meta-analysis is that underpricing a high-quality product in an early-stage market communicates low quality to exactly the customers who most rely on price as a quality signal. The customer who knows the category well has alternative quality signals available. The customer who does not know the category well — who is evaluating an unfamiliar product from an unfamiliar vendor — has primarily the price. Underpricing in this context is not a customer acquisition strategy; it is a quality misrepresentation.

The Plassmann finding and what it means for experience goods

The most commercially radical implication of the pricing psychology research is not that price signals quality — it is that price changes the actual experienced quality of the product.

Plassmann, O’Doherty, Shiv and Rangel’s (2008) PNAS study gave participants identical wine and told them it was priced differently. Participants reported that the higher-priced wine tasted better. The fMRI scans confirmed that this was not a social desirability effect — the medial orbitofrontal cortex, which encodes subjective pleasantness rather than explicit evaluation, showed stronger activation for the higher-priced wine. The price change produced a neurologically measurable improvement in the quality of the consumption experience.

For experience goods and services — products whose quality is consumed rather than observed — this finding is commercially direct. A price increase can improve the customer’s actual experience of the product without any change to the product itself, through the expectation it sets and the pleasantness encoding it produces. The higher price is not merely a signal about quality; in experience categories, it is a component of quality.

The practical scope of this finding is the category of experience goods: food and beverage, personal services, professional consulting, software that is experienced rather than specified, training and education programmes. In all of these, the customer’s expectation of quality — activated by the price before the experience begins — shapes the quality of the experience itself through the somatic marker mechanism. The premium price produces a premium experience from the same product.

The Veblen mechanism: when higher prices increase quantity demanded

Veblen’s (1899) analysis introduced the category of goods whose demand curve is positively sloped — where raising price increases quantity demanded — because the high price is itself the source of the product’s utility. Bagwell and Bernheim’s (1996) American Economic Review formalisation established the economics precisely: in categories where consumption signals wealth, taste, or status, consumers pay a price premium specifically to signal their willingness and ability to pay the premium.

The signal requires that the premium be visible, unambiguous, and genuinely costly. This is why luxury goods maintain high prices and resist discounting even when inventory accumulates: discounting would destroy the signal that constitutes the product’s primary value. A discounted Hermès bag does not become a bargain; it becomes a product that no longer serves its primary function, which is social signalling rather than functional utility.

The Veblen mechanism operates across a wider range of products than the luxury category suggests. Any product in which the price itself communicates membership, sophistication, or commitment — a premium business software subscription, a high-status professional certification, an elite consultancy engagement — benefits from Veblen-adjacent pricing dynamics. The higher price is not merely what the market will bear; it is part of the product’s value proposition.

The practical framework: three conditions where higher prices sell more

The research produces three specific conditions under which raising prices increases rather than reduces commercial outcomes.

The first is the experience good condition: when the product’s quality is consumed rather than specified, and when the price-activated expectation shapes the consumption experience, a price increase improves the delivered experience without changing the product. This applies across food, beverage, personal services, and professional consulting.

The second is the quality uncertainty condition: when quality is difficult to assess before purchase and the customer lacks alternative quality signals, price becomes the primary quality signal, and underpricing communicates lower quality than the product delivers. This applies most strongly to early-stage entrepreneurial products in unfamiliar categories.

The third is the social signalling condition: when the purchase communicates something about the buyer — their taste, status, or commitment — and when the price is visible to the relevant social audience, the higher price is part of the product’s utility. Discounting in this condition destroys value rather than adding it.

The entrepreneur’s underpricing problem

The money avoidance scripts that the Klontz research documented — the belief that charging for value is in some way inappropriate — produce underpricing that operates as a quality misrepresentation across all three conditions. The entrepreneur who underprices in an experience good category is delivering a worse customer experience than they would deliver at a higher price. The entrepreneur who underprices in a quality-uncertain early market is communicating doubt about their own product. The entrepreneur who underprices in a social signalling category is removing the social signal value that the price was providing.

The customer who would be best served by the product at its appropriate price is being poorly served at the underprice — not despite the lower cost, but partly because of what the lower cost communicates about what they are receiving.

Books worth reading on this

Blue Ocean Strategy by W. Chan Kim and Renée Mauborgne. Kim and Mauborgne’s account of how companies create new market space by competing on dimensions other than price — and specifically how the premium pricing that characterises blue ocean positioning communicates differentiation rather than extraction — is the most widely read available treatment of the strategic context in which premium pricing works most reliably. Their specific account of the value-price relationship in new market spaces maps directly onto the quality uncertainty condition this article describes. $100M Offers by Alex Hormozi. Hormozi’s account of how to construct product offers that justify premium pricing — through the specific combination of value framing, guarantee structures, and positioning that makes premium prices feel appropriate rather than arbitrary — is the most practically actionable available complement to the pricing psychology this article establishes. His specific account of why underpricing undermines rather than assists conversion is the most direct available popular treatment of the entrepreneur’s underpricing problem.

If the dynamics described here are significantly affecting your wellbeing, speaking with a psychologist is the right next step. UK: Samaritans (116 123, free, 24/7). Mind (0300 123 3393). BACP: bacp.co.uk/search/Therapists. Crisis Text Line — text HOME to 741741 (US, UK, Canada, Ireland). International: internationaltherapistdirectory.com.

This article is for educational and informational purposes only. Sources: Rao, A.R. & Monroe, K.B. (1989), The Effect of Price, Brand Name, and Store Name on Buyers’ Perceptions of Product Quality: An Integrative Review, Journal of Marketing Research, 26(3), 351–357. Plassmann, H., O’Doherty, J., Shiv, B. & Rangel, A. (2008), Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness, PNAS, 105(3), 1050–1054. Veblen, T. (1899), The Theory of the Leisure Class, Macmillan. Bagwell, L.S. & Bernheim, B.D. (1996), Veblen Effects in a Theory of Conspicuous Consumption, American Economic Review, 86(3), 349–373. Klontz, B., Britt, S.L., Mentzer, J. & Klontz, T. (2011), Money Beliefs and Financial Behaviors: Development of the Klontz Money Script Inventory, Journal of Financial Therapy, 2(1), 1–22. Kapferer, J.N. & Bastien, V. (2012), The Luxury Strategy, Kogan Page. Kim, W.C. & Mauborgne, R. (2005), Blue Ocean Strategy, Harvard Business Review Press. Hormozi, A. (2021), $100M Offers, Acquisition.com.