The Value of Perception (and the Perception of Value)
Rich Schefren recently interviewed Dan Ariely. The recording is freely available online here. In the call Dan highlights how companies can increase perceived value and get their customers to spend more by creating a decoy offer, which is discussed in the first chapter of his Predictibly Irrational book.
The decoy marketing offer introduces false choices to make another choice look more appealing. We have a hard time valuing offers, but are relatively good at valuing relative deals. The example Dan uses to discuss the decoy is the pricing of The Economist.
Lets say the pricing is
- web $60
- print $120
- both $120
Given the above virtually nobody will order print, but adding the false choice of print only will make many people buy the both option, whereas if the print option were priced lower or the print option were not there more people would be inclined to opt for online only instead of the web +print combination.
Non-commodity based value is largely a game of perception. You can build perceived value by
- building exposure and trust in the marketplace by giving something of value away for free (people will think "if this is free imagine how good the stuff they are selling is")
- minimizing downside risk (through the use of payment plans, refund guarantees, etc.)
- comparing yourself to higher priced offerings (the words SEO training are considered far more valuable than the words SEO Book - something I wish I would have considered in 2003!)
- expanding your target market and resonating with niche brands (what is the difference between Prozac and Sarafem?)
- breaking the language of a commodity product and reshaping it to associate it with higher value fields or fields with less competition (Starbucks language sounds more like fancy tea than a I need caffeine cup of coffee)
- using scarcity (how much did Beanie Babies, Pet Rocks, and Tickle Me Elmo dolls sell for?)
- requiring prompt action (when we ran a discount during the launch of our membership site people joined at a much faster rate before the price increased because the price increase was a real tangible cost of not acting quickly)
- adding bonuses and benefits that are unique to your offering
Everything around us is a collage of overlapping value systems competing for attention and resources. What backs the value of the U.S. Dollar? Why has it fallen 20% in the last couple years? Housing prices went up for a long time, and then they stopped. Last year Indymac bank was a top 10 mortgage lender and now they are bankrupt.
Many investors shorted Fannie Mae and Freddie Mac. In response to deteriorating business conditions the U.S. federal government offered to allow the companies to borrow directly from the Federal Reserve and increase their borrowing limits. That help stabilize their stock prices a bit.
What really scared investors away from shorting the stocks further? A proposal from the White House to Congress would give the U.S. Treasury authority to buy the stocks to provide needed liquidity. Imagine betting on a company failing when your government says that they are interested in buying stock in the company if the company gets in a pinch. That is the sort of news that can send a stock price up 40% before the market opens.
Why would the government care about the stock prices if they have little to do with the functionality of the businesses? It all comes down to perception. A healthy stock price gives the perception that all is well and helps keep the housing market as fluid as possible, whereas low stock prices erode confidence and evoke a sense of fear, which adds a lot of risk to an already unstable housing market. Perception becomes reality.
Comments
The Economist pricing example: did they really do that? If so, was it ethical? It borders on the deceptive, for me. May be I am just not getting the point.
Yes they did something like that with their pricing.
Now I saw that pricing example completely differently.. I see it as placing absolutely no value on the web, a long and continuing problem in the industry.. $60 for web, or if you spend $120 for print we'll give you the web for free..
A better pricing solution would be to set the web at $60, print at $120 and both for $150.00, or some such combination..
While the example has merit, if we take it literally the perception is that the web stuff is free..
In a controlled study the false offer pricing increased the number of people who spent more. Setting different pricing schemes would not make the both option the obvious choice that it was with the pricing example I gave.
Getting something free makes it appear like something is the no-brainer obvious best choice, and so many people select it.
Once an expectation is set by either the industry or a particular company, the perceived value of that product is only tarnished if that expectation is not met. Scarcity and branding increases the perceived value, especially in fashion and trendiness as Mr. Godin writes. So we have two perceived company values, the raw cost value of a product and the customer perceived value. My question, and I apologize for my ignorance, is why are companies always over shooting their product's perceived expectations? I'm not suggesting always sandbagging promises or product outcomes, but wouldn't it lessen the chances of undercutting the expectations?
For example, I set my customers' expectations at 5 days delivery time, and it's there in 3. Customer is happy. (This might be great for short term or one time use customers, but you could argue the expectation would then be harder to beat the next time around since it has been established at 3 days delivery time.) If your company's policy is 5 days and it takes 5 days, isn't that customer's brief dissatisfaction (because they were expecting 3 days again) better than shooting for 3 days and disappointing with 5?
A competitor could find a better way to bring you the same product and services in 3 days, which is then perceived as more valuable. So instead of trying to beat your competitors with things that are often reliant upon external unpredictable factors (such as distribution, gas, and weather) why don't companies try and enhance their perceived value by things they can control? (Such as making their product or service easier to use)
I know there are so many circumstantial factors unaccounted for on a case by case level, but it just seems like many organizations and businesses irrationally set themselves up to not meet expectations they set in accordance to their industry.
I think 2 parts of efficient market theory that is always under-estimated are short term opportunism and fraud. Looking for opportunity is much easier than it is to deliver on promises and keep refining our own flaws. What is interesting is that big businesses, in spite of all their advantages, actually are opposed to free markets, as noted in this review of changes in laws during the 1918 to 1938 timeframe:
Hey, Aaron.
Thanks for the great blog post on perceived value. I am goign to go back to my website and start implementing at least 5 principles you listed above.
Sincerely,
Daniel Tetreault.
Glad you found the post helpful Daniel. :)
I agree with Feydakin, i have read the book, and incidently already had products that i could test his theory of marketing on. SO i tried out with my products: ebook, audio book, plus audio book+e book together ( http://www.parkbenchdating.com ) following Dan Ariely logic.
I found that , sales became more flat for the combination, and e book alone sold better, since then i have switched it back and sales went back to normal. Which also could mean that, people find it fishy that ebook is free for 2 different packages. And as was stated before by Feydakin, it implies that information value is free. Now i am pricing a bit different (10$ more for audio + ebook), and it works much better
I guess if there is some added price it feels like a deal but not a steal. And that exact match pricing probably works best for well established familiar trusted brands, and not so much for media that customers are newly exposed to.
The WSJ offers its print and online together for $99 from time to time, making the cost of the combo the same as the cost of the online, and far less than the cost of print alone.
They aren't devaluing the web version in this deal as much as they are devaluing the print product.
It's fairly obvious why they are doing this - it's to prop up the print circulation.
Your pricing strategy is impacted by many things, the perceptual value model, good/better/best product quality pricing tiers, bulk purchase pricing, retail holiday pricing, any excuse for a sale, artificially high pricing to create a perception of exclusivity, the list goes on and on.
Rick Shefren is smart, but I suggest to you that you might want to beware of and tune into the NLP at work in his language (and mine).
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