What Matters Is the Perception of Value, Not So Much the Product

A lot has been written recently on how the perception of value rather than a formularized multiple of “cost” can help guide your pricing decisions. If you can honestly get the customer to perceive a higher value for your product than a simple markup on cost, it permits you a higher ROMI and a greater ACPO.

A lot has been written recently on how the perception of value rather than a formularized multiple of “cost” can help guide your pricing decisions.

In a previous blog post, I recounted the story of the “thank you” gift given to the U.S. Ambassador to Brazil by the chairman of the American Chamber of Commerce. He presented Madame Ambassador with a small blue Tiffany box and said:

“Here is a small gift to show our appreciation for your support.”

Her answer should be writ large on Tiffany’s advertising.

“There is no such thing as a small gift from Tiffany.”

That says it all. Imagine that whatever was in the Tiffany blue box had actually been purchased less expensively from some other source. Would anyone question that the gift’s perceived value grew exponentially when it appeared to be from Tiffany? I remember a humorous ad in the university newspaper offering Brooks Brothers, Paul Stuart, and J. Crew labels to sew into your discount purchased garments to upgrade them by endowing them with the right Ivy League cachet. Somebody understood the magic of perception.

If you haven’t watched Flint McGlaughlin’s excellent presentation from MECLABS Institute you should. His insights make a very strong case for his pricing methodology, which is really worth studying.

Pricing of products or services is one of the key strategic aspects of all businesses. It is fairly easy to look at what your competitor is doing and use that as a benchmark. But “me-too” market pricing is seldom enough and certainly not the way to have a big success. If you can honestly get the customer to perceive a higher value for your product than a simple markup on cost, it permits you not only a higher ROMI (Return on Marketing Investment) but it also often provides a greater allowable cost per order (ACPO) — more money with which to promote, more customers and, hopefully, greater profits.

The profusion of “subscription” offers in the marketplace is testament to the simple economic truth that if you can engage or enroll someone in a program of purchases, the likelihood of being able to transform a “product” into a “service” is greatly enhanced. And services tend to have higher margins. You may remember the story of the 40 or so Microsoft executives in Brazil who, when asked how many had subscriptions, very few hands went up. But when asked how many had Netflix, virtually all of the hands went up. Netflix had managed to eliminate the negative perception some people have to a “subscription” simply by not using the dreaded “S” word.

What has been surprising is that Netflix competition’s pricing appears to have been forced down to undercut Netflix. Looking at all of the streamers, there appears to be much too little effort to segment customers, to determine their individual perceptions of the value of the services (other than to see how many people subscribe and at what cost) and to reengineer the offerings to cater to perceived values. As Rafi Mohammed, the founder of “Culture of Profit,” wrote in the Harvard Business Review:

A one-price-fits-all strategy fails to acknowledge the simple fact that for any product or service, customers have unique needs and a different willingness to pay. With few rivals, mandating all-you-can-watch pricing was once tolerable. But to win in today’s competitive market, streaming companies need to step up their pricing strategies by offering choices to better accommodate the needs of their customers.

He hits the jackpot when he observes, “ … customers have unique needs and a different willingness to pay” and these needs and this willingness are driven, to a significant degree, by how much each customer perceives the services to be worth. That perception reflects the subscriber’s assessment of the channel’s content. For certain affluent customers, the more content that is unique and the subscriber “believes” will meet his/her tastes, the more likely to purchase a premium package, especially if it has “exclusive” content. The couch potato who is less choosy and has a tighter budget will probably go for the cheapest option.

As we can see in this example, the pricing has little to do with the product and service “costs,” which are probably similar for both the premium and economy versions. What matters is the perception of value.

If you don’t embrace the reality that perception may matter more than some other criterion for pricing and how your prospect looks at your offering, you may never have given anyone a little blue box from Tiffany.

From ACA to Medicare: 5 Answers to Healthcare Marketers’ Legal Questions About Insurance

As healthcare marketers and communications professionals, this swirl of forces hits close to home. Are you able to describe the various paths of reform to internal or external audiences?

In the spring of 2010, healthcare marketers saw the Patient Protection and Affordable Care Act (ACA), nicknamed ObamaCare, become law. It was the largest expansion of health insurance coverage since the establishment of Medicare and Medicaid in 1965. More than 50 years have passed since healthcare became more accessible, yet it remains a fiercely debated topic among politicians and is now the No. 1 concern among voters, according to a new poll from RealClear Opinion Research.

The tug-of-war between those who view healthcare as a guaranteed right and those who believe the government should have a minimal role is shaping up to be a driving force in the 2020 election. The processes used to “right-size” the government’s role shows we remain deeply conflicted. Court cases in different jurisdictions return victories and defeats to both sides. Voters generally approve Medicaid expansion when it’s on a state ballot, but elect federal representatives with divergent views. Why is this still so complicated?

The U.S., which has the world’s most powerful armed forces, spends 3.6% of its gross domestic product (GDP) on the military. Contrast that with the 18% of GDP spent on healthcare, and you start to get a sense of the scale of the industry and the Rubik’s Cube nature of how its pieces depend on each other. Those who view healthcare as a matter of seeing the doctor when you are sick tend to see the upside in expanding coverage. Those who think of it in economic terms tend to worry about potential disruption to jobs, given that healthcare is the largest source of employment in many towns. And those who view it as a commodity tend to think the marketplace should be left alone to sort it out.

As healthcare marketers and communications professionals, this swirl of forces hits close to home. Are you able to describe the various paths of reform to internal or external audiences?

  • The ACA (today’s status quo): For Americans who do not receive health insurance through their employer, the ACA removed restrictions on individual policies, such as exclusions for pre-existing conditions, lifetime limitations on benefits, and widely divergent premiums based on your health. Of course, the ACA also set up online exchanges where you could see if you qualify for certain subsidies to help you purchase different levels of gold, silver, or bronze coverage. Some people objected to the “individual mandate” that penalized taxpayers as a means of encouraging them to get coverage. Since its passage, the penalty for the mandate has been reduced to $0.
  • Single-Payer: Single-payer refers to the federal government reimbursing physicians and hospitals for services provided to patients, but doesn’t explicitly tie the reimbursement amounts to those of an existing program, such as Medicare or Medicaid. The uncertainty creates financial uncertainty for providers. Single-payer would, for the most part, eliminate the role of health insurance companies, which advocates believe would save money on administrative “waste” and opponents see as removing choice from the marketplace. Consumers who have “skimpy” health coverage might have more services covered under single payer, while those with richer benefits through commercial insurance might have fewer services covered.
  • Medicare-for-All (multiple flavors): Medicare-for-All is an expansion of an existing federal program accepted by almost all providers. Several proposals generally fall under the “Medicare for All” moniker, making it more complex to sort out. The name gives the impression the covered benefits would be similar to original Medicare parts A&B, but most proposals envision benefits like those available through Medicare Advantage, with benefits for vision, dental, and prescription drugs. Some proposals use traditional Medicare as a starting point for calculating reimbursements, while others use a more ambitious “global payments” approach for hospitals and standard rates for other types of providers. Consumers could purchase supplemental insurance to access services that are not covered. There would be no monthly premiums because tax revenues would cover costs. Medicare, Medicaid, and CHIP would be discontinued in favor of Medicare-for-All.
  • Medicare Buy-in: Medicare Buy-in is a smaller expansion of Medicare than envisioned under Medicare-for-All. This proposal would allow people 50 years old and over to pay a premium for the coverage provided under traditional Medicare or Medicare Advantage. The buy-in premium would be expected to cover 100% of administrative and benefit costs, although the enrollee may qualify for subsidies that bring down monthly premiums. Consumers could also purchase supplemental coverage, preserving a role for commercial insurance companies for that segment, as well as for younger consumers. Reimbursement rates for providers would mimic Medicare payment rates.
  • Universal Coverage: This is a goal rather than a pre-defined approach. As the name implies, Universal Coverage means everyone has access to healthcare, but it does not necessarily mean all services would be covered and it does not specify which of the above methods would be used to achieve it. In some countries, Universal Coverage also means that the government would control pricing, which critics say leads to an overall decline in the quality of care and advocates view as being more socially equitable.

As the debate over healthcare heats up — yet again — it may produce confusion and fear among people who have come to depend on specific programs, even if those programs have well-known flaws. Real change isn’t likely until after the 2020 elections, and the direction of that change will depend on who voters send to D.C. to represent them. In the meantime, be prepared to answer a lot of questions from worried patients.

Swimming in Amazon Shopping — for the Exotic and Different

Amazon shopping is its own beast. When I moved to Brazil, any mention of “Amazon” immediately conjured up visions of this great river teeming with hungry piranhas, surrounded by nearly impenetrable jungle; one of the last truly wild places on Earth, a great place to visit. But, as the expression goes, you wouldn’t want to live there. That was 19 years ago.

Walking in the Amazon
Credit: Peter J. Rosenwald

Amazon shopping is its own beast. When I moved to Brazil, any mention of “Amazon” immediately conjured up visions of this great river teeming with hungry piranhas, surrounded by nearly impenetrable jungle; one of the last truly wild places on Earth, a great place to visit. But, as the expression goes, you wouldn’t want to live there. That was 19 years ago.

Say “Amazon” today and the 24-year-old behemoth that comes to mind is the largest online retailer in the world, a direct seller and digital marketplace with a piranha’s aggressive appetite. It is said to have chosen its name because the Amazon was “exotic” and “different.” It is both. This year, Jeff Bezos, Amazon’s founder and boss, reported that the company had achieved 100 million Amazon Prime subscribers, or 64% of households in the U.S. If any company can be said to have disrupted the retail landscape, Amazon is the one.

Swimming in Amazon
Credit: Peter J. Rosenwald

The unbroken growth of Amazon shopping worldwide demands the answer to the difficult question: which came first, a consumer desire to be able to conveniently purchase a wide range of goods with the convenience, price and choice offered online by Amazon and its principal competitors? Or Amazon’s brilliant marketing, which seduced the consumer away from brick-and-mortar retailers — even shopping malls — to the computer screen and convenient home delivery?

Amazon River
Credit: Peter J. Rosenwald

There is no doubt that sophisticated online shopping appeared at just the right moment in the digital revolution. Whether it will doom retail shopping is an open question.

A recent article in eMarketer Retail provides some clues to the direction where consumers are driving the online business model.

“According to ‘eMarketer’ forecasts, the gap between U.S. first-party sales on Amazon and third-party sales is widening. In 2017, direct sales grew 20.9% to reach $70.40 billion. By 2019, that total will climb to $95.08 billion. By comparison, marketplace sales jumped 41.4% to $129.45 billion last year. And marketplace sales are expected to log growth topping 30% this year and next. “

What is the “marketplace,” other than a digital shopping mall in your home or in your pocket? Why endure the traffic, parking problems, store clerks who frequently know less about the merchandise than you do and all of the bother that comes with it?

The answer would seem to be that consumers still find “shopping” fun, and welcome the live interaction with like humanoids. (What was that great one-liner? Christmas is the time people stop shopping and start buying things.) Last weekend, a visit to a nearby shopping mall found it teeming with happy families, kids and canines in tow, enjoying the experience.

But shouldn’t the generous loyalty programs offered by some online marketers overcome the temptation to go out and shop? It appears not always. Another recent article, also from eMarketer, said:

“Loyalty programs have a serious retention problem. Consumers are quick to sign up, but quick to forget about a loyalty program once they get their initial discount. Members, overloaded with points, miles and free shipping offers, are not necessarily consolidating purchases with one brand in order to accrue rewards.”

There is no simple answer, which is good news for resilient retailers. The many benefits of the Amazon marketplace model appear not to always outweigh the entertainment value of physical retail shopping. Social media is not really very social and you can’t buy the kids ice cream cones on your iPhone.

The piranhas may have to go hungry for a while longer.

humanoids on the Amazon
Credit: Peter J. Rosenwald