Why Underpricing Your Product Tells Customers Not to Buy It

In 2008, researchers at Stanford University and the California Institute of Technology placed 20 volunteers inside fMRI scanners and fed them wine through tubes attached to their mouths. The volunteers were told they were tasting five different Cabernet Sauvignons, priced at $5, $10, $35, $45, and $90 per bottle. They consistently rated the $90 bottle as the most pleasant and the $5 bottle as the least. There was a catch. They had actually tasted only three wines. Two of them were served twice, each time labelled with a different price. The wine they loved at $90 was the same wine they dismissed at $10. Price had not just shaped their opinion. It had changed what they physically experienced. This is price as a quality signal, one of the most exploited mechanisms in consumer psychology, and most founders have never been taught to use it deliberately.

The study, published in the Proceedings of the National Academy of Sciences and led by Hilke Plassmann, then a postdoctoral researcher at Stanford, measured blood flow in a region of the brain called the medial orbitofrontal cortex. This is the area widely understood to encode experienced pleasantness during sensory tasks. When the volunteers drank the wine they believed cost more, that region showed measurably higher activity. They were not rationalising. They were not pretending to enjoy it more because they felt obligated. A part of the brain that processes genuine pleasure was working harder.

“What we document is that price is not just about inferences of quality, but it can actually affect real quality,” said Baba Shiv, Sanwa Bank Professor of Marketing at Stanford Graduate School of Business and co-author of the paper. “In essence, price is changing people’s experiences with a product and, therefore, the outcomes from consuming this product.”

The Brain Treats Price as Evidence

The mechanism is not vanity or naivety. It is the brain doing exactly what it was built to do.

Human brains are built for efficiency, not accuracy. They do not evaluate products from first principles each time. Instead, they use available signals to form expectations, and those expectations shape the experience itself. Price is one of the most legible signals available. Across almost every product category, higher prices correlate with higher quality often enough that the brain has learned to treat them as evidence. When the correlation is sufficiently established, the brain starts using price not just to predict quality, but to construct the experience of it.

Shiv demonstrated this further in a separate study involving energy drinks. Participants who paid full price for a drink solved more puzzles than those who received the same drink at a discount. The drink was identical. The only variable was what they paid, and what they paid changed what the drink did.

Why Founders Get This Backwards

Most early-stage founders price their products defensively. They worry that a high price will put buyers off, so they set it low, expecting the product to prove itself on merit. The logic feels sound. It is also, in many categories, counterproductive.

When a product is priced below what buyers expect for that category, price as a quality signal works against it. The low number does not communicate value or accessibility. It communicates doubt. Buyers who might have purchased at a higher price hesitate at a lower one, because the price itself has told them something is missing.

This plays out in categories where the buyer cannot easily assess quality before purchasing: professional services, software, supplements, education, and anything experiential. A marketing consultant charging $200 per hour is, to most buyers, more credible than one charging $50. A skincare product at $85 carries implicit evidence of efficacy that one at $12 cannot. The price is not incidental to the perception of the product. In many cases, it is the perception.

What The Economist Got Right and Veblen Got There First

The price-quality relationship was formally theorised by economist Thorstein Veblen in 1899, who argued in The Theory of the Leisure Class that certain goods derive their utility partly from their expensiveness. A cheaper version of the same good would, paradoxically, be less desirable. Economists later formalised this as the Veblen good: a product for which demand increases as price rises, because price as a quality signal is the primary utility on offer.

But the Stanford and Caltech research from 2008 moved the conversation substantially further. Veblen described behaviour. Plassmann, Shiv, and their colleagues described neuroscience. The question was no longer whether people behaved as if expensive things were better. It was whether their brains actually made them better, at least in the domain of experienced pleasantness.

The answer, for hedonic products where quality is difficult to measure objectively, appears to be yes.

The Economist’s subscription model made use of this dynamic in a different register. By placing a print-only option at $125 alongside a combined print-and-digital option at the same price, the magazine gave the combined option an implicit quality signal through comparison. The higher-value option appeared premium not because of its price but because of its obvious superiority to a same-priced alternative. The mechanism differs from the wine experiment, but the underlying principle is identical: context manufactures perception of value.

The Discount Trap

The inverse problem is equally significant for founders, and arguably more common.

Price as a quality signal degrades when discounts are applied carelessly. A product that is routinely discounted trains buyers to wait for the sale, but it also signals that the original price was not real, which raises questions about whether the quality was real either. Research on ethical products by marketing scholars published in Psychological Science in the Public Interest in 2024 found that consumers who saw ethical products offered at discount prices perceived them as less genuinely ethical, because the lower price contradicted the signal the premium communicated.

The same logic applies broadly. Founders who discount heavily to drive early adoption often find that they have simultaneously told buyers the product is worth less than they thought. Revenue increases, perceived value does not.

Three Places Founders Can Apply This Now

Pricing a new product requires deciding what signal the number sends before deciding what the number should be. That calculation involves understanding the category expectation, the buyer’s ability to assess quality independently, and the competitive context.

In categories where quality is hard to assess before purchase, which is most digital and service categories, a higher price functions as a credibility deposit. It tells the buyer that the seller is confident enough in the product to ask for more. That confidence is itself a form of information.

In categories where buyers compare multiple options simultaneously, the relative price matters as much as the absolute figure. A product priced in the middle of a category may signal average quality regardless of what it actually delivers. A product priced at the top of a category signals premium, even before the buyer has experienced it.

When a founder discovers they are undercharging, the correction should be gradual and framed around added value rather than announced bluntly. A sudden price increase without context removes the implicit justification that accompanied the original price. The new number needs to arrive with enough signal, whether through packaging, positioning, endorsement, or framing, to make it feel self-evidently correct rather than arbitrary.

The brain, as Baba Shiv put it, is super-efficient. It builds a GPS from available data and uses it to navigate future choices. For founders who understand that price as a quality signal is one of the most powerful inputs into that system, the number on the page is not an afterthought. It is the first thing the product says.

Sources:

1. Proceedings of the National Academy of Sciences: Marketing Actions Can Modulate Neural Representations of Experienced Pleasantness
2. Stanford Graduate School of Business: Baba Shiv: How a Wine’s Price Tag Affects Its Taste
3. California Institute of Technology: Wine Study Shows Price Influences Perception
4. Psychological Science in the Public Interest: How Discount Prices Undermine Ethical Product Perceptions
5. Thorstein Veblen:The Theory of the Leisure Class

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