What are you willing to accept for your $20 @Target gift card?

Say you are in possession of a $20 Target gift card. It is likely someone gave this as a gift to you as it is farfetched that one would buy oneself a gift card.

I offer to take that gift card from your hand for cold hard cash – cash that is lot more flexible than the Target gift card which has the limitation that it can only be spent at Target.

As a Homo Economicus you should be willing to accept any reasonable offer that is just about less than $20

As you can see Eric above was willing to accept even $19. There is likely a distribution of offers. But if  offered  exactly $20 in cash in exchange for the gift card of same value anyone should willingly accept the offer. In fact the added benefit of complete flexibility is the consumer surplus that makes this a high value transaction.

However there exist a set of people who would firmly hold on to the gift card despite an even offer.

I polled a non-scientific sample of 15  third graders on this even transfer –

You got a $20 Target gift card for your birthday. Would you trade that with me for $20 bill?

The answer from all was a resounding no.

The reason? If I have the gift card then I know I have to spend it and I can only spend it. No doubts and no pain. But if I have that as $20 bill then another option opens up. I could save some of it another day. And I don’t want that painful choice.

Cash adds more choices – the money can be spent on other utilitarian needs or even saved. Keeping it as gift card seem to provide the justification that they have to spend it all with no other option. So the easy way to avoid the hedonistic conflict is to reject the offer to exchange gift card (hedonistic) for $20 bill (utilitarian). (See here)

 

 

Do we know value when we see it?

In past few articles I wrote about the price consumers pay and the price marketers get to charge. Those explanations depended on the value consumers get from buying the product. In B2B segments and in some  utilitarian product categories (like a light bulb) it is fairly easy to calculate economic value to the consumers.  But how can a marketer find the value added for the rest of the products? Do the consumers even know the value they get? I would like to remind you here that there is no magic value reader that is available.

I was looking at a JCPenney survey that asked, “Did you get value from your purchase?”. If customers do not know the value how can they answer this? Even if they did, this question does not help find what that value was.

There is one advanced analytical method, it is called by an esoteric and not so relevant name – conjoint analysis. Stated in simple terms the method is about

  1. Consumers do not know the absolute value of products they buy but we can deduce that from their preferences and likelihood of purchase. Instead of asking  consumes for how much they value ask them about how likely are they to purchase a given product on a scale of 1 to 100. This is called “Utility” in conjoint analysis. Note that the use of the term Utility does not imply that the product is  utilitarian.
  2. Any product can be modeled as a sum of its components, not just utilitarian features (like price and screen size of a TV) but hedonistic features like 1080 dpi and conspicuous features like diamond studded TV. The price should always be a component in your modeling.
  3. Show consumes a series of products with different feature set and ask for their rating. From these ratings we can deduce not only the  utility values  of different products but also the relative weights they assign to the components.

This explanation barely scratches the surface, you can find more information on this in a SlideShare presentation I published.  The net is that there are analytical methods that can be employed to get consumers to reveal the values and what components go into that value equation.

With this setup and my previous classification of consumption I will try to model consumer behavior with respect to  utilitarian, hedonistic and conspicuous consumptions and the shift in consumer buying patterns from luxury product categories to “premium” or  utilitarian categories.

Spectrum Of Consumption

As part of my series on consumption and consumer behavior, here is a classification of our consumptions.

  1. Utilitarian –  Consumption that is all about serving a purpose
  2. Hedonistic – Consumption that has a pleasure component.
  3. Conspicuous  – Consumption we do so others can see it, keeping up with Joneses

I make the following claims with the picture below:

  1. Some hedonistic consumption have utilitarian component to them
  2. Conspicuous consumption fall on the far hedonistic end of the spectrum
  3. All conspicuous consumptions are hedonistic with no utilitarian component

consumption2

Now that we have this classification, next we will look at how we value the products we buy and how this has changed with the economy.