In March last year I had written a post on “Pain & Gain” . At that point in time I had written it more from an experiential perspective of what I had experienced in the market and how the messaging should revolve. It was more about people giving attention to fear/loss based messaging compared to positive/gain messaging.
I was recently reading a book on pricing – “Confessions of the pricing man” by Hermann Simon. Herman Simon is considered to be the “guru” on how companies should do the pricing of their products/services. Its a fascinating book on the kind of mistakes that people do when they do the pricing and how a small change in pricing – negative or positive – can have a major impact on the volumes that the company has to sell and the profitability the company. He has shown various examples of low cost leaders who make a lot of money (Ikea as an example) and how luxury brands can mess up their brand if they try to go mass market. Its a book worth reading especially if you are involved with doing pricing for your products or services.
Now coming back to the pain & gain story with which I started this post. In the book Hermann show cases the prospect theory work done by M/s Kahneman & Tversky. This is the first time I have come across the utility curve for both positive and negative utility.
In our economics class I did study the concept of marginal utility and how it decreases as the amount of the product or service that you use goes up. So the first time you travel economy class in an aircraft, you will feel “awed” by the sheer experience. If you travel regularly, you will slowly start losing the “awe” feeling and after sometime you will find the experience just “okay”. Then its human nature that people will start ten wanting to move to the next higher level. That’s how people move to the business class and some even to the First Class. This how also premium and luxury product companies keep selling even more expensive things.
Human beings are always craving for the next bigger/more luxurious/more exciting thing. Not all may be able to afford it and move higher up the ladder, but there are enough people who do. That’s why companies who want to grow their profit, keep trying to come out with more and more premium brands.
As per Herman if you use the prospect theory, the “Marginal Harm” gets smaller as the overall size of the loss increases. However the bigger issue as per this theory is that compared to the pleasure we feel from the same quantum of “gain” the amount of pain we feel is much much higher. So in absolute terms if there is a $100 gain then the Pleasure is (1.5), but for the same $100 loss the Pain is (-3). This is the theoretical explanation of what we notice in the market on a regular basis. Until I read this book, I did not have a clue behind the phenomenon.
It gives immense pleasure when you find that what you see/experience in the market, also has a theoretical background. It then proves that the experience you have not seen is not limited to only your environment/geography or industry. It is a phenomenon which is observed globally and people have gone through the process multiple times to check its validity, before it is written out in books and presented in conferences.
While Herman has explained the how pricing can get impacted because of this prospect theory, would think it has a role to play even when you are trying to get the attention of the prospect. They will respond more to the possibility of avoiding the loss than to the possibility of gain that you can show them.
If you have also experienced this phenomenon, pls put it in the comments below. Would love to hear from you.
Till next time then.