Wednesday, August 22, 2007

AaP: Consumer Placebo Effect

This is the very first Ask A Professor (AaP) post. In it, we’ll review some important (or at least interesting) academic work in the fields of consumer psychology, behavioral economics, sociology, and history. The idea is to connect the excellent research that our universities are pumping out with the consumer questions that many business-types encounter everyday. I also have a long-term goal of academics and businesspeople liking each other more, but hey, poco a poco.

In the casual game world, people talk a lot about “perceived value”. Sometimes this term is tossed around with a kind of hard-nosed tack on price elasticity: “If we raise prices, will the greater ARPU offset less user purchases? How many fewer users will convert?” But I’ve heard this more intriguing argument made: “If we raise the price of our games from $20 to $30, consumers will assume that the higher-priced games are premium, better games and purchase them at higher rates.”

Classical price theory (and “common sense”) would disagree; it holds that as prices go up, demand goes down. It’s sort of Pricing 101. Of course, this kind of economics did not exactly anticipate the modern entertainment/media markets. With a commodity, it’s basically all the same stuff. With electronics, games, movies, and music, no two products are exactly alike (although casual games come close).

Into this debate, we insert a November 2005 paper in the Journal of Marketing Research by Baba Shiv, Ziv Carmon, and Dan Ariely of Stanford, INSEAD, and MIT, respectively. The title? Placebo Effects of Marketing Actions: Consumers May Get What They Pay For.

We’re all familiar with the placebo effect where people get better by taking the sugar pills, not the actual medicine. What the authors of this paper did was A) lead people to believe that the SoBe Adrenaline Rush drink they’d just had would increase their Brain Age type skills and B) tell them whether or not the drink they’d received was purchased at a discount or full price. Then they gave them puzzles to solve and measured how many they got finished.

There’s all sorts of academic boilerplate about the various study designs, which you can read for yourselves, but the basic results are all graspable via one chart on the last experiment, where the researchers really laid it on thick:

The high-expectancy people were given the hardsell (“Drinks such as SoBe have been shown to improve mental functioning, resulting in improved performance on tasks such as solving puzzles.”) about how sweet the drink would be for their minds. The low-expectancy people were told less about the SoBe, etc.

The first thing that stands out is that people who paid the full price and had the full expectation more than doubled up the performance of the discounted drink, low-expectation people. There’s no doubt that the full price people got more “value” out of the drink than the other people. That’s remarkable in a world where many people think of the “value” of a product a fixed unit. But what’s really incredible to me is that the price discount actually impacted both the low and high expectancy testees. It’s basically jumping higher when you are wearing your $200 Nikes than when you are wearing your $60 Nike Outlet Nikes, even though it’s the same shoes! And all because someone told you, “Maybe it’s the shoes” and someone else told you, “Money means performance.”

Returning to the casual games debate, we can say that, given the right set of expectations, the perceived (and actual) value of a product can be increased. Whether a price increase alone is enough to set the expectations bar higher will have to be another post. In the meantime, we can all ponder how small casual game companies can, at the etail point-of-sale, convince consumers that what they are about to purchase is actually more fun/relaxing/etc, than a competing product. Perhaps they could just lie to them, as the authors of the studies ponder:

“This study suggests the possibility that placebo effects of marketing actions could create ethical dilemmas. For example, a marketer may falsely claim that a product offers a particular benefit, or similarly, a marketer could repackage a product and significantly increase its price, suggesting (explicitly or implicitly) that the higher cost of the cosmetically different product is justified by its greater efficacy. Because of placebo effects of marketing actions, consumers’ misplaced beliefs in such seemingly baseless claims may paradoxically make those claims partly true; indeed, given that unlike false statements, puffery is often considered acceptable, even modest placebo effects may make false claims legitimate.”

Of course, the try-before-you-buy model makes the lying a little more difficult, but hey, if consumers actually do have more fun paying more money, where’s the harm in that? (Just kidding. Sort of.)

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