Perceived Value

By Tom McDermott

Why are willing to pay $150 for a meal at Ruth’s Chris Steakhouse but not at Denny’s? Because of perceived value. Consumers are constantly evaluating cost vs perceived value using an undefined formula to arrive at a justifiable price. One could attach a formula to that process to better understand why we choose what we choose.

There are many factors that influence perceived value; location, ambience, staff, quality of goods or services, reputation, perception, status, customer service and so on. These factors are work like a team, all supporting one another to achieve a higher perceived value. The higher the score on each factor, the higher the perceived value thus the more a business can charge for goods or services.

Clothing companies are masterful at creating perceived value. Why are some people willing to pay $1500 or more for a pair of Louboutin shoes and only $75 for a pair of Nike shoes? They both provide protection for your feet and most likely the Nike shoes are more comfortable. It’s all related to perceived value. In the case of designer shoes, status plays a huge part. Wearing expensive shoes is about projecting success and glamor thus creating a higher perceived value. If Louboutin had horrible customer service and the buying experience was horrible, the perceived value would go down and consumers wouldn’t’ be willing to pay the high prices they command. A drop in perceived value is directly related to a drop in revenue.

There are limits to what a company can charge for a particular product or service. For example, let’s say that there are two foods trucks selling steak sandwiches side by side. Truck A has an accomplished chef that makes one of the best steak sandwiches ever made. The service is fantastic and the food in consistently amazing. Truck B makes an ok steak sandwich, the service and quality is marginal and the chef is grumpy. If both sandwiches cost the same, the truck A will sell far more sandwiches than truck B because truck A has a higher perceived value.

If the owner of truck A raises the price by 10%, if the perceived value remains, the volume should stay the same. If the owner continues to raise the prices, it will cause consumers to evaluate the cost vs. the benefit. At some point, truck A will experience a loss of perceived value and business will wane. Truck B will see an increase in business because consumers are willing to eat a lesser quality sandwich because truck A is now overpriced and has lost value.

A new wine bar opened up in our neighborhood and a group of my friends were excited to give it a try. One of my friends and I were at the bar when eager to look at the selection of wine. Both of us are wine snobs and have great collections of good wine in our cellars. After reading the menu several times and not recognizing most of the selection, the waiter suggested a cabernet so we ordered a bottle. I asked him to decant the wine, we were told they didn’t have a decanter. I asked him to run it thru a strainer and he said they didn’t have a strainer. Our perceived value was dropping.

As we tasted the cab, it was not great but it was red and we drank it. My friend and I discussed how the owners are making a mistake by not having great recognizable wines on the menu. We both thought that the business wouldn’t last more than 6 months.

I asked to speak to the owner hoping to better understand what their strategy was. To me, it appeared they were trying to appeal to a wine drinker that didn’t know the difference between a cab and a pinot. The owner came by and I introduced myself and my friend. I asked her why she didn’t have any high end wines on her menu, she told us that the consultant that helped them said they didn’t need them. I asked about the decanter and strainer and she gave me the same answer. Our perceived value was falling rapidly. I was determined to make a point with her, all 12 of us, that were there together, really wanted a place like this to succeed and we were all wine drinkers.

What I did next really upset the owner, I poured the last drops of my wine on a bar rag to show her why she needed a strainer. I did it politely and from past my experience, I knew the bar rag could be laundered, so out came the last few drops of my wine onto the rag. The rag was full of nasty sediment that most wine drinkers would not want in their glass. She didn’t care about the sediment, actually I don’t think she even knew what it was, she was upset because she thought I ruined her bar rag. At this point, our perceived value was zero.

In this case, the consultant ruined her dream by giving her bad advice. A high perceived value could have been so easy to obtain by listening to the customers, which she needed to be successful. We left and the consensus of the group was that they would be out of business in 6 months. It took only 5 and they were gone. They ignored the basic principles of perceived value and ignored what the customers wanted. They lost their dream in 5 short months.

LCP has a team of experts that can assist you in building a high perceived value in your company.

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