Understanding the Irrationality of Customer-Perceived Value

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This week in my evening MBA marketing course, we discussed the idea of customer-perceived value. I always start this discussion by suggesting that people are value maximizers - that is, when they make a choice, it’s the one they think will maximize the value of what they are spending. I say this knowing that someone in the class will object (because someone always does, and they should). After all, there is an entire field of study called behavioral economics based on the premise that people are inherently irrational actors – click here to see some of their findings. Still, I remind them that we are talking about customer-perceived value. This is not an objective exercise. Instead, our job in data-driven marketing is to figure out why they perceive the choice to be value maximizing. If Value = Benefits/Costs, that means we have to understand all the benefits vs. all of the costs that they see. Here are a couple of examples I’ve seen lately that have me scratching my head:

  • AdAge.com suggested that parents are saving $ by changing disposable diapers less frequently, only to spend more on diaper rash cream. Disposable diaper sales have decreased 9% and cream sales are up 2.8%, despite a reduction in the number of babies by 3%. Others have been quick to point out that this conclusion makes no sense – surely the reduction in cost from fewer diaper changes isn’t worth the increased cost of unhappy babies. Instead, Brad Tuttle at Time suggests there are other reasons that fit better with a value maximizing perspective – Diaper rash cream manufacturers may have better products they’ve been more aggressively promoting thus improving benefit perceptions. Or, parents are increasingly finding that non-disposable diapers offer them a better value and are switching.
  • We recently went to a mini-family reunion at Disney World. I was amazed at the sheer volume of families with strollers. Honestly, I kept asking myself, “how can the benefits of a family vacation at the Magic Kingdom be worth the cost of loading and unloading the stroller, negotiating it around lots of obstructions, parking, finding it in the sea of parked strollers, and repeating at the next attraction?” I was only thinking about the costs. Then, I looked around and felt the magic. Sharing magic with your whole family is a pretty compelling benefit. Not to mention the lifetime of memories the photos will capture.
  • Still at Disney World, I also noticed how many people in these typical families had visible tattoos. Now, I have to admit I have a tattoo. I had a medical problem a few years ago and getting a tattoo allowed me to manage some debilitating pain. Even so, throughout the 20-minute tattoo process I rethought the value proposition – it was really that painful. So, I was amazed at how many adults felt the benefit of expressing their uniqueness was worth the pain of the process.

So, the next time you see someone making a choice that makes no sense to you, dig deeper – what do they perceive the benefits to be vs. the costs? Looking at choices through this lens can lead to some surprises. Remember - it's good to balance quantitative marketing with qualitative insights.