Weber's Law and Why Big Business Believes You Won't Notice

a Price Increase Under 10% Ever wonder how companies come to the decision to increase prices on their products? It is just a

complicated algorithmic system based on cost versus profit margin? Does supply and demand enter into the equation? Is the increase in price the same across the entire catalog of products that the company makes? Would it surprise to you know that there is a law of marketing science that claims that a company can get away with raising the price on its merchandise without the public noticing as long as the increase remains under a certain percentage? The law in question here is Weber's Law and marketers swear by it.

The Weber of Weber's Law was a German physiologist who in the 1800s determined a link between

stimulus and response and what is necessary for that initial stimulus to be noticed as having significantly changed. Weber's conclusion was that the more powerful that first stimulus was, the more impressive the change would be required for the public to notice any enhancement to it. What exactly does this mean to the modern day consumer and the change in the prices of his favorite products? Quite a bit, actually.

The funny thing about Weber's Law is that it remains constant regardless of the type of product

being sold. In the case of consumer goods the stimulus is price. Therefore, Weber's Law posits that for any change 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 of the item. Let's say that Nike decided to raise its prices on all its sneakers, from the lowest-priced to the premium shoes. And let's say just for the sake of simplification-this example in no way reflects the actual price range of Nike shoes, as far as I know-that the lowest priced sneaker was $50 and the absolute Rolls Royce 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 of

whether the item also carries such stimuli as necessity or status-the bottom line is that nobody buys anything they can't afford to put on credit. According to Weber's 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 raise the prices to only $54 and $329 respectively, most customers won't notice. At least in theory.

There are two significant aspects to applying Weber's Law to consumer price increases. The first

has to do with how Weber's Law relates to supply and demand and cost. Big business-especially the oil industry in the past year-is fond of explaining away any price increase as simply a matter of the laws of supply and demand. When demand goes up and supply does down, prices increase. But take a moment to think about Weber's Law: If it is a given that manufacturers believe in Weber's Law and have evidence that consumers won't notice prices unless they go up by 10%, why not slowly add 2% or 5% or 7.5% to the price of your products even though the cost of making the product hasn't gone up at all? If consumers have a history of not noticing when prices only creep up, but only recognize a difference when prices jump, why wouldn't a company do this?

The other important element of Weber's Law is that it works both ways. For a drop in the price of an item to be noticed it must also meet the same law; those sneakers must go down to $45 and $270. This is 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 don't just pick a number out of the air that they think is the highest possible price they can get away with. And clearly there are elements of cost and profit in the equation, as well as the premium that can be applied to those things that only the rich can afford. But what about that $50 shoe? We all know it was made with cheap overseas labor and we all know that it doesn't cost nearly $50 to make. So why is it being sold at $50? Well, there are many reasons, of course, including a no-doubt complicated cost and profit analysis, but if Weber's Law really does come into play here's how it would affect the original price of an object.

Anybody who has ever shopped at an outlet store knows that a lot of shoes-and everything else-are never bought for the original price. Therefore the price must be cut, while still being enough to produce a

profit. Since manufacturers know there's a good chance they will never unload their entire inventory, it only makes sense to set the MSRP at a level at which they can apply Weber's Law to it and still make a profit. Profit is everything. And Weber's Law and supply and demand and cost of manufacturing are all taken into consideration when setting a price at which a profit is still possible even if the price must be reduced. That is why a sneaker that costs $10 to make first appears on store shelves for $50. That's a pretty hefty profit, but even if the company has to cut prices twice according to Weber's Law and sell the shoe for $40 it still ain't hay. Published by Timothy Sexton Timothy Sexton was honored by being named the very first Writer of the Year of Associated Content, now known as Yahoo! Contributor Network.