The Warc Blog

The Warc Blog

Price is in the eye of the beholder
Richard Shotton, Head of Insight, ZenithOptimedia
Richard Shotton

Recent work by psychologists such as Daniel Kahneman has revealed many insights into how our minds work. Kahneman has popularised the idea that rather than being rational calculating machines we respond to the dizzying amount of information around us by relying on a series of mental short-cuts, or in his terms heuristics. Many of these short-cuts are prone to biases.

One of the most interesting biases is that we struggle to judge scale in an absolute sense. Instead we make relative judgements: we term an item as large or small by comparing it to other items around us.

The fact that this approach is hard-wired into us is shown by the prevalence of visual tricks relying on relativity. Take a look at the circles below…

Which orange dot is bigger? Our eyes tell us the dot on the right is larger but actually they're the same size. The dot on the right just looks bigger as it's surrounded by smaller dots. We can't help but judge things relatively. Intriguingly, even when we know that the dots are the same size our eyes still fool us.

Most importantly for marketers we make relative judgements about price as well as size. Consumers have limited absolute conception of what is good or poor value. Instead, they make a judgement about whether something is good or bad value by comparing it to what they have paid in the past or what they know about competitors. The opportunity comes from the fact that the competitive set is not fixed – consumers give undue importance to the facts they have at the point of decision making.

At ZenithOptimedia we've asked over 1,000 consumers whether they consider brands to be good value or not. We ask the question in two scenarios – once comparing the brand to a cheaper competitor and once to a more expensive one.

So for example we told one group of consumers that a Bentley Flying Spur cost £118,651 and a BMW Series 5 cost £30,265. In this scenario 47% audience think the BMW is good or very good value. We then asked another similar group of consumers the same question but with one small change. We swapped the Bentley for a Ford Mondeo priced at £20,495. In this scenario only 33% of people think the BMW represents good value. This result holds true on every car we have tested. When compared to a higher priced brand a car looks better value.

So how can brands apply this? The first, and most dramatic approach, is to change the mental competitive set. The rewards from this can be phenomenal. Nespresso is a great example of a brand successfully doing this. By selling espresso pods in cup servings they managed to change their competitive set from packets of roast and ground coffee to providers such as Starbucks or Caffe Nero. By creating a comparison with a more expensive option Nespresso has created a perception of good value and significantly boosted sales.

The second application is to alter the purchase context. Rolls-Royce have cleverly applied this approach by selling their expensive Phantom cars at yacht shows. In this situation they are not compared with cheaper cars, as they might at car shows, but with more expensive boats.

The final application is to control the internal comparisons consumers make when they are customising a car. Learnings from the bias of relativity would suggest there are benefits to be had by offering consumers expensive trade up options whether it be paint types or wheels. Whilst very high end offerings might not generate revenues in and of themselves they might make the other options on offer more palatable.

These applications show that marketers need to create not just compelling messages about the absolute value of his brand but consider the relative ways in which consumers make judgements. For marketers who do this successfully the rewards could be huge.

Subjects: Consumers, Marketing

18 November 2014 17:22

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