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.
Original post by Aaron Wall