Tuesday, March 27, 2012

Be Careful With Perceived Value

A very interesting study has come out showing that consumers are more likely to pay more for particular products when those products are separate, and thus considered separately, then when they are packaged as though they were a deal.

The study used multiple examples, but the one mentioned was a TV and a cable. When separate, customers were willing to pay $2000 for the TV and $10 for the cable. But when put into a "package deal," customer willingness dropped to $1950.

The researchers found similar effects for all types of products: toys, clothing, sports gear, food, etc. They explain this as a category error, where consumers combine a cheap good and an expensive good into a perceived mid-price good, while forgetting that they are actually buying multiple products in the deal.

I think that is wrong. It brings me back to an earlier study from last year about gift giving (I can't find the link). In it, the researchers found that buying a single gift instead of multiple gifts increased the perceived value of the gift.

So, for example, I buy someone a sweater for Christmas. If I then also include a cheap little wallet or bag, that seems like it should increase the overall value of the gift... only it doesn't. It decreases it. The cheap gift actually acts as a psychological boat anchor around the neck of the more expensive gift. It's better to buy someone a single gift.

To put it another way, the presence of the second gift makes the person receiving it feel that it was necessary to bring the total value of the gifts up to an expected threshold. So if I am expecting to receive twenty units of "gift," or g-units, --what, you think you have a better term?-- and I get a sweater, that sweater is determined to be worth those twenty g-units. But if I get TWO gifts, I split the expected g-unit total between the two gifts, making each seem less valuable.

In this situation, I might think "wow, this is a nice sweater, but my friend also got me this bag. That means that sweater was on sale or something, so it's not actually as good a gift as it first appears."

Basically, this illustrates the problem of perceived value. Real value is something that marketing rarely deals with. As I have discussed time and time again, real value is almost exclusively associated with price. That is why the #1 determinant of whether someone will buy something is how much it costs in comparison to the competition. As Wal-Mart has shown, the cheapest guy wins.

But that is a terrible place to be for the company. It is the long-feared race to the bottom. The point of perceived value is an aspect of brand. You want your product to be unique, making comparison to competitors difficult, thus allowing you charge more.

The problem with perceived value is how easily it is corrupted. The high-end fashion brands know this very well. Remember the "chav problem" that Burberry was having in Britain? If a lot of your value is associated with perception and not real value, the market can get away from you, as it were.

High-end audio companies likewise play this game. That is why you cannot buy audio hardware from, say, Denon via an unauthorized reseller and expect to get a warranty. Denon only works with their reseller network to keep tight control over the entire process and keeps that relationship under strict contract. These contracts prevent advertising below a set price, keeping perceived value high. That is why you will frequently run into a "Click Here to See Price" thing on Amazon or other online retailers.

Ideally, Denon wouldn't work with anyone as liberal and low-price as Amazon, but only a psychotic company won't deal with Amazon, these days. And importantly, their "halo" products are never available through these channels.

You can see how perceived value control is a problem since it can be, and usually is, seen as anti-consumer. This is because, in many ways, it is. Consumers want low price. Manufacturers want high price. The happy medium is the "fair" price.

But Denon does it wrong. They offer less than the competition at any price point, and instead of outperforming the competition, they simply charge more based on their name. That is the reason why Denon's practices are anti-consumer and why Denon has become the prisoner of online retailers who don't give a shit about perceived value.

Apple is an example of doing it right. Apple has an immense amount of perceived value. Truly, I can't think of any company on Earth with more. But instead of relying on that, their products are all wildly different from anything the competition makes. The value equation is so different, comparing a Dell to an Apple is almost pointless. And even then, Apple's products do not cost significantly more

So where the study believes this to be a category error, I see it as a value error. People believe that value stands alone. It doesn't need to be paired with anything. And if it is paired with something, that means that its value is low enough to require it.

This connects tightly with branding. I said that brands must appeal to other brands. The sea of images in which your marketing must swim inculcates an automatic interpretation to whatever you promulgate. For example, imagine two product advertisements. You don't know what these products are. The first ad is a brightly colored slab of ink. Lots of gradients, flowers, explosions of color, etc.

Now imagine an ad for another product. This ad is austere, with simple text set in bold, modern type, with nothing more than a black & white photo of a woman staring emotionless at the camera.

Which product is the high-end product?

The answer is easy. The second, austere ad is obviously the ad for the expensive product. Why is that? Because of course it is. It is obvious and anyone who was raised in Western society knows that. The aesthetic that communicates exclusivity and expense is part of the zeitgeist.

But as with so many things, the logic behind this aesthetic is long since lost to time. As when chairs that are austere slabs of furniture are seen as "modern," while the philosophy of attempting to create a pure chair is forgotten, the populous has no idea why they see these images as communicating wealth and desire.

This little-known "philosophy of wealth" applies well to the subject at hand. Ads for expensive things are austere and dramatic because the creators of the ad know, or at least knew at one point, that the product stands by itself. It doesn't need marketing wrapped around it. People want it. They know they want it. And that's that.

Again, that's why Apple's ads have been masterpieces while Dell has produced such piles of awful as the "Dude, You're Getting A Dell" kid. Compare these two commercials...

They are both high quality commercials, with solid production values, but look at the glaringly different philosophies and texture to them. The Apple is product focused, it has a single logo instance, it has no spoken words. It is absolutely austere compared to the in-your-face friendliness of the Dell ad. Why? Because the Apple is singular. It stands alone. The ad is saying "Here's the new iMac. You know you want it. I know you want it. So let's dispense with the pleasantries. This is what it looks like. Go buy it."

The Dell commercial does almost everything it can to convince you that Dell is a low-end discount product. It's cute. It's not product-focused. It's branded all to hell (not only do we see Dell logos everywhere and the name Dell spoken, we also get a Best Buy logo and the full-blown Intel thing at the end). Dell would have been better off with a straight-forward, cheap ad that simply shows computers and prices.

All of this should not be taken to argue that every company should try to be Apple or Burberry. That is, of course, silly. We need products on all levels of the price spectrum. What this does say is that no matter where you exist on the spectrum, you should know what practical value you provide, know what your ideal price is, and maximize perceived value vis-a-vis that price.

By that, I mean that the price must match the brand. You can't have a classy, high-end brand and discount prices. This makes your product seem like a "poser" product and will actually lower its value. Likewise, you can't have high-end prices and crappy, low-end marketing... unless you're selling to hipsters, who just love to be oh-so-ironic.

Selling something that is low-priced? Make people feel responsible and intelligent for buying it. Selling a product that everyone needs? Stress the elegance of your product over another, making people feel like the meat-and-potatoes elements of their life are a well-oiled machine. It doesn't matter what you make or what your price is, you can brand your product to take advantage of the inherent aspects of that market position.

Remember how I said that price is the #1 determinant of whether a customer will buy a product? Well, the #2 reason is the design of the package. Real value is paramount, but the fact that the package is #2 reveals how powerful the framing of your product vis-a-vis price and competitors can be. When the two concepts are combined in perfect synergy, your product becomes a brand as opposed to just some product on the shelf. You can buy a wrench, or you can buy Craftsman. You can buy shoes, or you can buy Nike. You can buy a product, or you can buy an emotion.

Sell an emotion for the same price as a competitor's product, and you can't lose.

UPDATE: I forgot to add in my recommendation for the Dell ad. I think that the "lollipop" concept was solid, but they should have simply had colored Dell laptops, upright, twirling on sticks from one side to another, and as they go they become wrapped in plastic. The commercial would end with a single Dell being unwrapped and placed into a lipsticked, female mouth à la Lolita, she smiles, the song ends with a pop and the Dell logo appears. I know that it's hard for these companies, but there should be nothing more after that.