Skip to main content

Price Vs Quality

We all have probably seen on the Web pictures which may look like the following:

It implies that if someone quotes to a customer low (or lower than average, I presume) price for the services or products it necessary means low/lower quality of the services or products provided.

This is very interesting assumption and I had a short conversation a while ago on Twitter with another SharePoint specialist about it:

Original Bjørn's article should be here

A study in Journal of Consumer Research in regards to the subject clearly shows:

'"Consumers rarely have complete information and use various strategies to fill the gaps in their knowledge as they consider and choose products. One of these strategies involves using naive theories: informal, common sense, explanations that consumers use to make sense of their environment. For example, consumers may believe that popular products are high in quality while also believing that scarce products are high in quality," write authors Hélène Deval (Dalhousie University), Susan P. Mantel (Ball State University), Frank R. Kardes (University of Cincinnati), and Steven S. Posavac (Vanderbilt University).'

If we use popular market theory logic we may say that 'popular products' and 'scarce products' from the passage above should be of higher price.

I have been in the industry of selling and delivering IT services of various kinds to companies and government organisations since 2000. I have been on the other side of the fence as well representing customers. Also as we all are I am a customer of various products and services that doesn't include IT. That allows me to have an informed opinion on the subject.

There is no guarantee that price reflects quality of the product/service. Especially in situations when services/products are supplied to organisations or by organisations and not individuals.
When we deal with individuals it should have been simpler, however as one of my indirect mentors said: "we won’t pay you for your past performance". This is true and unfortunately only spoken out by not many people. Therefore how come reflection of the past expectations (price) should reflect the existing quality of the product/service? But many of us do think about and take to account past performance of people, products and services of others (see 'using naive theories' above).

For example, my business provides highest quality services to customers, but it doesn't mean our prices are highest in the industry at the same time. On the other hand I bet majority of us were in situations when some company may charge top price for not-so-top quality service.

Adam Smith in his well-known book "The Wealth of Nations" provided the following example: 'Grain, the food of the common people, is dearer in Scotland than in England... The quality of grain depends chiefly upon the quantity of flour or meal which it yields at the mill; and, in this respect, English grain is so much superior to the Scotch, that though often dearer in appearance, or in proportion to the measure of its bulk, it is generally cheaper in reality, or in proportion to its quality, or even to the measure of its weight.' – this is to the point of 'someone who says they can do cheaper.

However later in the book he provides another interesting thought: 'Quality, however, is so very disputable a matter, that I look upon all information of this kind as somewhat uncertain.'

So even from 17th century (though I'd say much earlier) people have had the knowledge that price doesn't necessarily correlate with quality.

In addition to that if in general the focus is on quantity more than quality – why bother about it? Also, how do we measure quality?

It would be interesting to research.

Read other posts I published on the subject:

Soaring childcare prices in Australia

Supply and Demand Pricing Rules for Property Market

Economic Lessons - Consumer Influence on Price


Popular posts from this blog

Energy Business Case - Coal Mine in West Virginia

Situation Coal in Africa: An opportunity is available to invest in a coal mine in West Virginia. The mine’s value is less than in past years because of actual and anticipated restrictions on coal-fired power generation in the United States. However, the mine has a chance to sell its coal on contract to a public utility in West Africa. The utility is working through the World Bank for financing to build a number of coal-fired power plants. If they obtain World Bank financing, then a customer for the coal mine is assured, at least for the duration of the contracts. The power plants will employ the best current technology for burning coal, which exceeds all current air quality standards for the region. However, the power plants will not be designed to attempt carbon capture. The area of Africa the plants will serve suffers from extreme energy poverty, with some of the lowest per capita energy consumption in the world.

Overview of the Region West Africa is the westernmost region …

Energy Market Analysis - Coal Reserves for Decade Ending 2012 and Price Forecast

According to the British Petroleum Statistical Review of World Energy, 2013, global coal reserves declined in the decade ending 2012:

Figure 1. Proved coal reserves.

Proved reserves of coal are generally taken to be those quantities that geological and engineering information indicates with reasonable certainly can be recovered in the future from known deposits under existing economic and operating conditions.

If we look at supply and demand factors in the decline, we can see that:

a) Coal price has grown significantly in the decade ending 20121:

  Figure 2. Prices in US Dollars per tonne.

b) Coal consumption has also grown significantly worldwide2:

Figure 3. Coal consumption by region.

c) The price of substitutes (i.e. Natural Gas) has also grown. Not so in North America though, but if we look at the world trend it is growing3:

Figure 4. Natural gas prices.

Therefore if the rule of supply and demand worked we would see increase in proved reserves for coal, because increase in dem…

Construction issues resolution in Sydney - part 17

It's been a while since the last post In January 2016 the owner lodged an application to NCAT against owners corporation to fix three major defects: - waterproofing of large windows in the living room and bedroom which led to windows full replacement - bathroom drain fix - planterbox fix The owners corporation didn't come to mediation and tribunal ordered to fix all defects within 2 months (the deadline was 8th July 2016). The owners corporation as usual didn't rush to comply with the order regarding two items: bathroom and planterbox. The windows works started end of April 2016. At the same time owners corporation decided to check whether it's a warranty and original builder should fix the issues. That was also related to the fact that the variation was submitted by the current contractor who started fixing the defect. So the owners corporation stopped all works in the middle and went off for a month to "make decision". The decision was made at the end of J…