Perception isn’t always the same thing as reality, even when it comes to something as supposedly objective as your product’s value.
In fact, the perceived value of your product is fairly malleable. There are countless studies as well as anecdotes that support the notion that you can tweak small things to increase your product’s value perception.
First, what is perceived value? According to BusinessDictionary.com:
“A customer’s opinion of a product’s value to him or her. It may have little or nothing to do with the product’s market price, and depends on the product’s ability to satisfy his or her needs or requirements.”
Perceived value also has some interesting interactions with perceived risks, price plasticity, long term satisfaction and loyalty, all of which we’ll explore here.
(By the way, much of this is inspired by Rory Sutherland’s Ted Talk. If you haven’t already, watch it.)
Reality vs Perception
According to Rory Sutherland, one of the great mistakes of economics is that it fails to understand that “what something is, whether it’s retirement, unemployment, cost, is a function, not only of its amount, but also its meaning.”
The same product can mean different things to different people, and there is no such thing as objective product value, at least when it comes to actually selling products (there are objective costs associated with making the product, of course).
Therefore, we have this huge opportunity to influence how people feel – how they perceive our product’s value – as well as the opportunity to optimize the customer experience in such a way that the customer is delighted and we maximize our revenue.
One common problem, though, at least in academic research, is the relatively ambiguous terms. What’s the difference between price, quality, and value?
Let’s say that perceived value is the consumer’s overall assessment of the utility of a product based on what is received and what is given. This embodies more than just quality, which tends to be more product focuses.
Perceived value, at least for the purposes of this article, includes concrete product attributes as well as other high level abstractions like convenience, perceptions of security, service, and more.
The Plasticity of Perception (and Price)
You can increase your product’s perceived value without actually increasing its objective value (costs included in making it). You just have to change people’s perceptions, and as Rory Sutherland says, “our perception is leaky.”
There are many examples of this in the real world. Just to name a few:
- Research shows that branded painkillers are actually more effective at reducing pain. They’re the same ‘objective quality’ pills, but we perceived one to be better and so it is.
- People think washing their car makes it drive better.
- We irrationally value ‘free’ things. Waiting in line for hours for a free donut ($3 value) doesn’t make any rational sense – but people do it.
- Too many choices can actually reduce sales.
“The valuation of good or service according to how much consumers are willing to pay for it, rather than upon its production and delivery costs. Using a perceived value pricing technique might be somewhat arbitrary, but it can greatly assist in the effective marketing of a product since it sets product pricing in line with its perceived value by potential buyers.”
Put simply, you’re pricing a product at what your customers will pay for it. It uses perceived value as a proxy for actual cost, which tends to be an efficient way to build a brand because of the elasticity. There are many ways to calculate optimal pricing, and of course A/B testing is one of them.
One of the most common (and effective) ways of increasing perceived value is advertising. That’s largely the point of brand advertising. Similarly, public relations sets to attain some degree of control and influence over the public’s perception of a product/brand.
You can do it online, too. There are some pretty common and established ways of increasing your product’s perceived value (and in term, increase the amount you can charge for it).
The Power of Reframing
Indeed, reframing price is an excellent way to change the perceived value in a product. This has been done effectively in ads before, where the quality perception wasn’t necessarily changed, but reframing the cost attempted to decrease the perceived costs.
Here’s an example of cost reframing:
Two lattes a day seems doable (if you’ve got a caffeine habit like me). And a more humorous example:
Large amounts of money are especially conducive to reframing exercises. Copywriting is a great realm to try reframing things:
- Is it a ‘bargain’ or is it ‘cheap’?
- Is it ‘exclusive’ or is it ‘expensive’?
- Is it ‘comfortable’ or is it ‘tacky’?
You’ll have to bring out your inner spin doctor, because there are endless ways to execute the power of reframing.
Why Pricier Wines (Might) Taste Better
People are largely irrational in their judgement of wine.
First, as studies have shown, even experts can’t tell apart cheap and expensive wines in blind taste studies. So there’s that.
Second, and more pertinent to our ‘increased value perception’ question, is that the price actually affects the taste of the wine.
As Freakonomics put it, “When you take a sip of Cabernet, what are you tasting? The grape? The tannins? The oak barrel? Or the price? Believe it or not, the most dominant flavor may be the dollars.”
Researchers at Stanford GSB and the California Institute of Technology found that if a person is told they are tasting two different wines — one costs $5 and the other $45 (but they’re actually the same wine) — the part of the brain that experiences pleasure will become more active when the drinker thinks they are having the expensive wine.
In addition, they did a study where the participants said they could taste five different wines (when there were only three) and that the wines that were more expensive tasted better (even though they were the same wines).
While they didn’t test this on wine connoisseurs, the researchers expect they’d have similar findings. As they said, “We don’t know, but my speculation is that, yes, they will. I expect that the enophiles will show more of these effects, because they really care about it.”
Why People Love Exclusivity
Again with a wine study – This one had subjects read about a white wine that was described as either scarce or widely available. Subjects were also either informed or were not informed of the wine cost. Then they had subjects evaluate the wine based on expensiveness, desirability, etc.
When the subjects weren’t told how much the wine cost, the researchers found that scarcity enhanced perceptions of expensiveness and the desirability of the wine.
Makes sense. Scarcity is one of the pillars of modern persuasion.
You can base scarcity on quantity or stock, but you can also have a time constraint. Otherwise, why would people like Shamrock Shakes or McRibs so much?
The strategy of scarcity works even better when coupled with premium pricing, say in the case of luxury goods (or wine, per our study above). As Seth Godin wrote, “social proof among the wealthy is based on beauty plus scarcity plus expense.”
And then there’s the simple case of people wanting something simply because they can’t have it.
This was most famously exemplified by Frederick the Great, when he rebranded potatoes as a royal vegetable. They made it exclusive to the royal family and hired guards to protect the potatoes.
Eventually, people started growing potatoes in secret and they became higher value in people’s minds.
People want what they can’t have.
Introduce an Element of Altruism
Even though it’s more expensive than Trader Joe’s, I never feel bad about shopping at Whole Foods.
In a normal grocery store, there are so many decisions to make regarding quality and value, not to mention feeling good about the source of the food. Whole Foods makes it simple, and there’s value in that (reflected in the price, too).
Another company that does well with this model: Crate and Barrel. They spend some of their advertising budget on gift certificates for its customers to finance projects on DonorsChoose.
The gift certificates of course have a big impact on the charities funded (347,000 students have benefitted from 14,500 funded projects) and on consumers. But people who use gift certificates to fund projects were also found to be more likely to shop at Crate and Barrel for future purchases than a control that didn’t receive certificates (82% versus 76% in a 2006 study).
They give two people water for life when you buy an engagement ring, so you can feel even more awesome about an already special occasion.
Research largely supports that we appreciate products more with a hint of altruism. A survey found:
- 94 percent of consumers report that they would switch to a brand that supports a cause.
- 20 percent would buy a more expensive product if it supported a cause.
Corporate altruism creates a halo effect for the company, increasing the perceived value of its products.
Another study found that participants who were told of a winery’s socially responsible choice rated the wine as better tasting than those who were not. While this effect was “was more pronounced for respondents reporting lower levels of wine expertise,” it can’t be understated.
The researchers also found similar results in hair-loss and teeth-whitening treatments. They wrote that the effect seems to be strongest “in cases where product quality is not readily observable, and/or consumers do not have clearly articulated preferences.”
Reduce Perceived Risk
The other side of the coin here is the perceived sacrifices the customer will have to make, including time, costs, risk, or security.
These embody a concept known as ‘perceived risk,’ or a “consumer’s level of uncertainty regarding the outcome of a purchase decision, especially in case of high priced item such as a car, or a complex item like a computer.”
When there is high perceived risk, consumers will try to reduce their fear by gathering more information and looking for social proof. Anything that quells their doubts reduces their perceived fear. And research suggests that when perceived fear is lower, perceived value is higher
Bolster Up Security and Credibility
There are so many ways to increase credibility (or accidentally kill credibility). Just a few ideas to boost credibility:
- Money back guarantees.
- Free and easy return policy.
- Trust/security symbols.
- Clear contact information.
Seriously, there are so many ways to bolster credibility and perceived security. Start with this credibility checklist.
If you’ve got proof that people love your product, show it. This could be through customer testimonials, a famous spokesperson or social media feedback. This could also be through product demos, case studies, explainer videos or whitepapers.
Point is, show your product works and that people love it. Our conference has some rave reviews, so we show them (in addition to last year’s video, etc):
Improve Different Parts of the Customer Experience
Sure, you can reframe your price, make it higher, or make your product more exclusive. But you could also focus on providing delightful experiences surrounding your product.
Yes, you could look at this as improving user experience and usability in the traditional sense (and that’s a huge opportunity in optimization). But I’m speaking more broadly. What can you do to improve packaging, service, design or convenience?
In addition, free shipping (or fast shipping) is highly effective in increasing conversions (though make no mistake, this is an operations decision that you need to weigh with total effect on profit margins).
Rory Sutherland used the example of a restaurant to convey how other details can matter more than the sole product:
The Curious Case of Product Bundling
Product bundles are a ‘tried and true’ marketing strategy. You’d think that bundling products together would create the perception of a higher value – after all, you’re objectively increasing the value of your offer simply based on quantity. But it’s not always that simple.
Sure, bundling has a multitude of use cases. HBR gives the example of an expensive hotel room ($750). Even though consumers are forking out a lot of money for the room, they’d still be upset at paying for a $10 bottle of water. That is, unless you just made the room $760. It’s opaque and makes you more money while the consumer stays satisfied.
In that sense, bundling serves the seller. It’s simple (only one product to market), it’s opaque, and the basic users subsidize the long-tail features used by a smaller amount of advanced users (think Microsoft products).
But there is one glaring exclusion to product bundling: when you try to bundle an expensive product with an inexpensive one, it can actually lower the perceived value.
According to a study cited by HBR, people were willing to pay less for the bundle than for the more expensive product alone. They also found that people were more likely to purchase a $2,299 home gym when it was offered alone than when it was combined with a fitness DVD.
Most surprisingly, they found that, while people were willing to pay $225 on one piece of luggage and $54 for another when purchased separately, they’d only pay $165 for the items as a bundle ($60 less than the expensive one alone).
As HBR wrote, “this suggests that the popular strategy of adding premiums to products can sometimes hurt, rather than increase, sales.”
Product bundling, then, is not a silver bullet. There are ways to do it right, though. Here’s Roger Dooley on how to do bundling correctly:
Add a Button That Makes Noise
Neuroscientists did a study and found out that you can increase perceived value without adding anything to the product – except a button that makes noise.
They had participants look at images of food, but before doing so, they asked each person to state how much they’d be willing to pay for general food items. Then they were presented pictures of food, some with a button that, when pressed, made an related noise.
Afterwards, the participants were asked to chose between two food items that they had selected, prior to the study, as equal value. Oddly enough, they chose the item associated with the button and noise 60-65% of the time. When asked, most participants also said they’d pay more for the item, too.
Not sure if there’s an application here for SaaS or eCommerce (there are purported use cases for dietitians and those designing vending machines), but let me know if you test it.
So there it is – you can increase the perceived value of your product without increasing your own objective costs. This has the clear benefit of allowing you to make more money, but it’s not all self-serving; customers want to feel good about their purchases, too (and they tend to be more loyal when they perceive the value to be high).
Of course, these aren’t all the ways you could increase product value. That list would be never ending (or at least a book’s length). But the ideas listed above are commonly used and have some empirical support for their effectiveness.
Have you had any experience with the tactics above? Any creative ideas I didn’t list here? Let me know!