Intrinsic Value, we are willing to pay for . . . . .

In general, people rely on a simple heuristic, or mental short-cut, when trying to evaluate the quality of a product: we assume that more expensive things are of higher quality. In other words, you get what you pay for. As a result, we automatically suspect products on sale of being faulty, or inferior. And because our expectations profoundly influence our experience, an olive oil that we expect to be lower in quality will actually taste lower in quality.

Look, for example, at this witty little experiment, which Jonah Lehrer describes in his book, “How We Decide.”,  Baba Shiv, a neuroeconomist at Stanford, supplied a group of people with Sobe Adrenaline Rush, an “energy” drink that was supposed to make them feel more alert and energetic. (The drink contained a potent brew of sugar and caffeine which, the bottle promised, would impart “superior functionality”). Some participants paid full price for the drinks, while others were offered a discount. The participants were then asked to solve a series of word puzzles. Shiv found that people who paid discounted prices consistently solved about thirty percent fewer puzzles than the people who paid full price for the drinks. The subjects were convinced that the stuff on sale was much less potent, even though all the drinks were identical.

Why did the cheaper energy drink prove less effective? According to Shiv, consumers typically suffer from a version of the placebo effect. Since we expect cheaper goods to be less effective, they generally are less effective, even if they are identical to more expensive products. This is why brand-name aspirin works better than generic aspirin, or why Coke tastes better than cheaper colas, even if most consumers can’t tell the difference in blind taste tests. “We have these general beliefs about the world⎯for example, that cheaper products are of lower quality⎯and they translate into specific expectations about specific products,” said Shiv. “Then, once these expectations are activated, they start to really impact our behavior.

Over time, the presence of sales can really diminish a brand.

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