Tuesday, August 14, 2012

Relativity is not only for Einsteins!

Relativity may sound like a daunting idea when you first think of it. Memories of your highschool physics class may come to mind leaving you in a state of utter confusion. However, when one begins to look at relativity in a business sense it is much easier to understand. Unlike Einstein's theory of relativity that deals with velocity, spacetime, and the speed of light the average person understands how relativity works when making a purchase decision...even if they are not aware that they understand this relativity.

Relativity helps customers make purchase decisions when they are looking to buy a product. Marketers often place emphasis on relativity. They know that making relative judgments is part of the decision making process of customers.

Say a customer is faced with these three choices:
1. A fully equipped Ford truck (has all possible accessories)
2. A Ford truck that is not fully equipped (is lacking some possible accessories)
3. A Dodge truck (can be either fully equipped or not)

The decision the customer is most likely to make is to purchase the fully equipped Ford truck. Why you ask? Because the customer had something relative to compare it to. Though trucks may not be the best example, the principle is the same regardless of the product. Since a customer has something relative to compare the product to they see the product that is not lacking anything as being the best choice.

Relativity is the reason that businesses tend to overprice some products, but not necessarily others. If you've been to a nice restaurant and noticed that one bottle of wine is 600$ and the closest bottle of wine to it is only 62$ you are not alone. Who would ever spend 600$ on a bottle of wine that is likely not much different from the 62$ bottle you ask? Not many people in their right mind, and the restaurant does not intend people to. They have set this bottle at a ridiculous 600$ because they are trying to get you to purchase the 62$ bottle of wine (which may or may not be worth the price). They know that you will see both prices of the bottles and make a relative comparison. After knowing that you could pay 600$ for a bottle of wine at this restaurant, the 62$ bottle all of a sudden seems a lot more realistic in your eyes so you decide to get that one instead. Marketers generally place the item they want to sell somewhere in the middle of the price range. The 600$ bottle of wine is just too much money, but the 12$ bottle then begins to sound like Boones Farm. And damnit I didn't come to this restaurant to drink bad wine. Thus, you end up with the 62$ bottle of wine on your table without even realizing that you have been cleverly manipulated into doing exactly what they wanted you to do.

You can also see relativity occur in the business world in a different light. You may be at a store about to purchase a 25$ belt when a friendly shopper tells you that the SAME belt is only 15$ at another store that is 15 minutes away. You think to yourself "Hell yea I'm going to save me 10 bucks", and you put down the belt and  happily drive 15 minutes to do so. But what happens when it is not a 25$ belt you are buying? What if you are buying a 600$ suit and a shopper comes up to you and tells you that the same suit is being sold for 590$ at a store 15 minutes away? You would likely not waste 15 minutes driving to another store to save 10$ on a 600$ suit. But why not? People tend to do this because of relativity. Saving 10$ on a 25$ purchase seems like a great deal, but saving 10$ on a 600$ purchase doesn't seem that important. The thing is though 10$ is 10$ and your bank account will not recognize what you saved 10$ on.

All of this is the problem with relativity. We tend to make our purchase decisions in relative ways by comparing them to available alternatives. If people are aware that they are making the decisions from relative comparisons will they be more likely to change their decisions? Maybe, but the fact of the matter is that relative comparisons is how we as human beings make decisions.So, though we may be aware that we are being manipulated by marketers it does not mean it will change the decisions we make.

Wednesday, August 8, 2012

How Does a Customer Attribute Value?

A customer determines value by comparing one thing to another. There is more than one type of comparison a customer can make in any given instance. Customers may value something more highly when they make one kind of comparison than when they make a different kind of comparison. Making a comparison is key for a customer to determine the attributed value the customer gives to a product.

When faced with side by side comparisons people begin to place importance on attributes that do not really matter when it comes to the real value of a product. Often these attributes would not play a role in customer decision making, but faced with side by side comparisons these attributes suddenly seem important to the customer. Thus a customer may end up purchasing a product based on attributes they deem "better" even if they didn't know what the additional benefits offer. Often it is highly likely that before the customer was confronted with side by side comparisons most of these benefits did not matter and would not have played a role in the end purchase of the product.

You may notice that retailers put out large displays of similar products so that people will begin to compare the attributes of these products. People will begin to consider the possible attributes rather than considering whether the product is really better than the similar product. Likewise they will consider these possible attributes when comparing them to the similar product that they ALREADY own. Most of the attributes don't vary drastically, but from a customer who is intent on buying a new product all that is seen is that this product has this attribute and the other product does not have this attribute.

People focus on the attributes that the marketer put in front of them without considering whether this product is really that much better than the one they already own. Thus, if a marketer can place a certain emphasis on attributes that seem important (even though they may not be) they will more likely than not entice the customer into buying a produce even if they may not need or want it.

More often than not a customer will spend more money on attributes that really don't matter (they may not even know the benefits of these attributes). But hey, at least he will be able to brag to his neighbor that his camera has a better flash output than theirs!