What we purchase and what we pay for it can be a deeply psychological process.
The cost is one element, the value or utility delivered is often an entirely different matter.
The vast majority of purchases of a car represent a mix of the rational with the irrational, heavily weighted to the rational. Reliable transport to get to work, meet the specific needs of the individual and family, and take the kids to soccer safely. Some cars absolutely defy this rational logic. Why would you need to pay a million dollars for an Aston Martin, or $23 million for a Rolls Royce boat-tail, with plenty of options between these two if the rational was to prevail?
Economists who work with mathematical models have trouble reconciling the irrationality of behaviour with their rational models. This is why the seminal work by Daniel Kahneman, published for public consumption in ‘Thinking fast and Slow’ is so important. Important enough to win him the Nobel prize in Economics when he is a psychologist.
It is also why your value proposition and the definition of your ideal customer are so intimately entwined.
Your ideal customer will find some mix of objective and subjective utility in your product not available elsewhere, and be prepared to pay for it.
The cost in dollars is the same for everyone, and everyone understands it. The utility derived from ownership is entirely personal.
Peter Drucker said many things, amongst which was ‘The only purpose of a business is to create a customer’
And he was right.
To create a customer, you must offer them value they cannot get anywhere else.
To create value, you must understand ‘Utility’: the physical and psychological benefit customers receive from owning and using your product.
Utility is highly personal and context sensitive, driven by psychology.
Germans are stereotypically rational, process oriented people. It seems unlikely that they would be as susceptible to emotional purchases as say, Italians, who have the opposite stereotype.
Not so. Two classic examples from Frederick the Great of Prussia, and his great great grandson, also Frederick.
The first Fred, king of Prussia from 1740 until 1786, saw the potato’s potential to help feed his nation, and lower the price of bread. In 1774, he had issued an order for his subjects to grow potatoes as protection against famine. The refusal was absolute. Nobody wanted potatoes, nobody liked them, even the dogs would not eat them, so why should they? Faced by this general refusal Fred had to use psychology.
Trying a less direct approach to encourage his subjects to begin planting potatoes, Frederick got creative. He planted a royal field of potato plants and stationed a heavy guard to protect this field from thieves.
Nearby peasants naturally assumed that anything worth guarding was worth stealing, and so snuck into the field and snatched the plants for their home gardens. Of course, this was entirely in line with Frederick’s wishes.
Fred number two needed to fund the war against Napoleon. In 1813 he urged all families to donate their gold and silver jewellery to the cause, and replicas were given to them made from caste iron, by a specific iron foundry in Berlin. The wearing of caste iron items became the symbol of the sacrifices the family had made to the war, and was highly valued.
When you can articulate and reflect the utility your ideal customer will receive from you in terms unmatched by competitors, where else would they go?
Is the price simply a reflection of the exchange of value made up of both rational and non-rational componets?
