🧠 How psychology saved Chivas Regal scotch

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Hi there - Jen here :)

In the 1940s, premium scotch brand Chivas Regal was in big financial trouble.

They had gone from being one of the world’s bestselling spirts brands to almost losing it all.

Chivas Regal was created by two brothers - James and John Chivas - who started out as owners of a small grocery store in Scotland.

Chivas Regal eventually grew to be the fourth biggest brand of scotch in the world.

But after World War 2, their brand was struggling for sales.

Instead of cutting their prices, they doubled them.

Did it kill the company?

No, it actually saved them.

Today you’ll learn:

• The psychological effect that made Chivas Regal more appealing - not less - as its price went higher

• How Apple, Equinox Gyms, and Chanel used Chivas Regal’s strategy to grow their sales

• How to figure out if this effect can help grow your brand, or if raising your prices is a really bad idea

Why did higher prices grow Chivas Regal’s sales?

Contrary to popular belief, pricing is about 90% psychology and 10% math.

We don’t really know what something is supposed to cost - instead, we pick up psychological clues from the product and its context.

And when something’s expensive, we think it must be high quality because it costs so much.

So when Chivas Regal doubled its prices, people started seeing it as higher quality, and sales exploded.

It was so successful that people started calling this strategy the Chivas Regal Effect (also known as the Price-Quality Effect).

But there’s a reason why this price increase saved Chivas, while it would’ve killed another brand.

🧠 It’s because Chivas Regal is what’s called a Veblen Good.

American economist Thorstein Veblen discovered that for certain types of products - usually luxury items like Birkin bags, watches, or hypercars - the more expensive something is, the more we want it.

It’s because we have a mental shortcut (also called a heuristic) that says:

Higher quality = higher price

and therefore,

Higher price = higher quality

And most of the time, that mental shortcut is correct - when something costs more, it’s made from better materials with better craftsmanship and care.

Studies have found that this lust for expensive products can also be attributed to our desire to signal status to those around us.

Brands like Apple, Equinox Gyms, and Chanel are all status brands that carefully manage themselves to allow them to apply the Chivas Regal Effect.

Here’s how:

How Apple, Equinox Gyms, and Chanel Leverage the Chivas Regal Effect 

🧠 Apple

Apple is a quintessential example of the Chivas Regal Effect in tech.

The brand consistently prices its products higher than its competitors, even when the functionality of the product is nearly identical (as it is between iPhone and the Google Pixel below):

This pricing strategy helps Apple maintain its status brand image and reputation for quality and innovation in the minds of customers.

🧠 Equinox

Equinox is a high-end gym that looks more like a first class airline lounge than a place to sweat on the treadmill while you watch Love Island.

Its high price gives it an air of quality and exclusivity - even Equinox’s ads look more like a high-fashion photoshoot than a place to pump iron.

Products that can apply the Chivas Regal Effect aren’t just high priced - they’re also exclusive, since exclusivity is a natural extension of quality (you can’t manufacture a million of something if it’s made by one master craftsperson from rare, hard to find materials).

Equinox’s famous “We don’t speak January” ad campaign actually banned new members from joining during the first month of the year - the most popular month for new gym memberships.

By making it impossible to join Equinox during the time when everyone is looking to join a new gym, its exclusivity drove its reputation as a status brand.

🧠 Chanel

Chanel - the luxury fashion house best known for its suits, perfumes, and bags - is no stranger to high prices.

But in 2023, it shocked customers when it raised the price of their Classic Flap bag (see below) to $10,000 - a 200% increase in less than 10 years.

But why did they raise the price so much, so fast?

Because Chanel’s Veblen Goods status was under threat.

Driven by social media, the Chanel Classic Flap had become a wildly popular “starter” bag for luxury collectors and handbag investors - a stepping stone to a “real” luxury bag like an Hermes Birkin.

This online reputation as “attainable luxury” started to erode Chanel’s position as a status brand. Too many people were able to buy it, so it started to become too “common” as collectors would say.

In order to slow down how many people got their hands on a new Chanel Classic Flap bag, the brand raised the price of its bags to compete with the uber-desirable Hermes Birkin and Kelly bags (which also start at $10,000).

Making a Chanel Classic Flap more expensive also made it more rare, and rareness drives the exclusivity and status perceptions that Chanel wants its brand to stand for.

It’s likely not a coincidence that the price of the Chanel Classic Flap started to rise dramatically around the same time that TikTok (and its #bagtok subculture) began to catch on in 2019.

🧠 Can the Chivas Regal Effect Grow Your Brand (or is it a really bad idea)?

If you think raising your prices could be a good move, start by asking yourself a few questions:

• Does our customer buy our product to signal status? If the answer is yes, raising your prices could help drive demand. If you think that customers mainly buy your product for its utility and not it’s prestige, then raising your prices probably won’t increase demand.

• Is our brand viewed as exclusive and/or aspirational? Raising prices alone won’t drive demand if your brand doesn’t have the other markers of a luxury product - exclusivity (scarcity), a rich history, and a reputation for craftsmanship.

• Have we tested price elasticity in the past? Price elasticity is a way of measuring how much demand for your product changes when the price changes. If you’ve raised prices in the past and demand went up, not down, that’s an indicator that your product is a good fit for the Chivas Regal Effect.

Read, Watch, Listen (and Download)

• What is the Concorde Fallacy? The High Cost of Big Investments [Read]

• Live YouTube Workshop | How to design an eCommerce site that converts like crazy [Watch]

• Check out this week’s brand new episode of the Choice Hacking podcast [Listen]

• [Free Download] Get 45 templates for psychology-driven headlines for free here.

Until next time,
Jen

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