In the last Pricing Nugget, we learned that gift buyers become more loyal to the brand they present as a gift.
But how much are gift buyers willing to pay for the same product compared to buying it for personal use?
We will find out today.
Imagine you are buying a gift for your friend - let us say, new headphones.
You are not sure what your friend wants and what her preferences are. You enter a retail store, and you find five product options at different price points: $13.00, $15.50, $18.00, $20.50, and $23.00 (this scenario is drawn from an actual experiment as cited below: participants were students with student budgets. Bear with me and remember the good-old-days in university).
You have no information about your friend's preferences. How much would you spend on the headphones?
Now, imagine you know for sure your friend has expressed a preference for the '$18.00' option. How much would you spend in this case?
Lastly, imagine you are buying headphones for personal use. What price are you willing to pay?
Researchers found that customers have a lower price sensitivity (i.e., are willing to pay higher prices) when buying gifts for others instead of buying the same product themselves.
The reasons are two-fold.
First, gifts entail a signaling value. This signaling value reflects how much you value the relationship when you present a gift.
Second, gift purchasers rely on price-quality inferences that serve as "insurance": If you are uncertain about your gift receivers' preferences, you are more likely to spend a bit more on the gift.
An experiment with pairs of friends showed that the gift giver would pay, on average, 5.8% more when purchasing the very same product as a gift, and this difference would depend on the level of uncertainty of the friend's preferences.
What does this mean for you as a retailer? Frame your products as gifts or solicit information about your customers who identify as gift buyers to help them find gifts that do not make them look cheap.
What does this mean for you as a gift receiver? Leave some uncertainty on the side of your friends when they ask you what you wish for yourself. This might result in a more expensive gift.
What does this mean for you as a gift buyer? Ask your friend what she wishes or check her online wishlists – ideally, it is something with limited degrees of freedom.
References
Wang, Sherry Shi, and Ralf van der Lans (2018), "Modeling gift choice: the effect of uncertainty on price sensitivity," Journal of Marketing Research, 55 (August 2018), 524-540.