Presence of Vice Products Increases Utility from Virtue Products

On a sunny afternoon you just finished your run and is hungry for a snack. Now consider these two scenarios

  1. You walk by a fruit stall that sells only fruits and you buy an apple
  2. You walk by a fruit stall that sells Snicker and other chocolate bars as well and you still buy an apple

In both these scenarios, which one of the two will you feel more virtuous? According to Dhar and Wertenbroch, you will feel  more virtuous in the second situation.

Selecting an unappealing virtue from a choice set that also includes tempting vices provides a positive self-signal (highlighting one’s ability to resist temptation) that enhances the utility of consuming the virtue

Utility from consuming the virtue when a choice is available is more than that when virtue was the only option available. Since consumer’s utility translates to their willingness to pay, can a marketer apply the findings of Wertenbroch and Dhar to increase perceived value of their virtue products and hence be able to charge higher price premium? Yes,  here are a few applications for this finding:

  1. For the said two stores, the one selling both candy bar and apples can price the apples more than the other stores and the customers would gladly pay for it.
  2. For a restaurant selling fresh green salads, offering a really greasy and fatty appetizer or entree  in the menu will enable it to price the salad at a higher price than it would have been possible with all healthy options. This is one reason why McDonalds is able to charge  premium prices for its salad options.
  3. A broader example is green products, these qualify as virtue compared to regular products. Are customers willing to pay a higher price for green products? In a study done by Yale forestry department it was stated that half the people surveyed they were willing to pay a 15% price premium for green products. A marketer cannot take these results to imply that customers will choose green products at the point of purchase. But we infer from Wertenbroch and Dhar’s study that a marketer is better off, in terms of profit maximization, offering regular products alongside green products instead of just green products.

Take the most recent story from NYTimes on how chickens are killed before they are processed.

Two premium chicken producers, Bell & Evans in Pennsylvania and Mary’s Chickens in California, are preparing to switch to a system of killing their birds that they consider more humane.

When customers see these benignly killed chicken next to regularly killed chicken, their willingness to pay for the former is likely to be higher than that for the latter.

The Price We Pay

If we always made rational decisions that is based only on economic reasons the price we pay for products and services we buy should leave us feeling that these are worth more than it cost them. At the very least these two should match. The  difference we perceive, between what the product is really worth to us and the price we paid is called the consumer surplus. But the problem with this is we are not all economists or rational number crunchers.  I am going to exclude emotional decision making for this post and focus simply on our quantitative ability or the lack of it.

I do not mean our capabilities with numbers but our ability to assign a dollar figure to the value we derive from products and services. Imagine you have an hand held device that can read bar code and an LCD display. You read the bar codes of any product and it displays the value you will get. Then you look at the price and decide whether this leaves you a positive consumer surplus or not  and decide whether or not to buy it. The value we get is our Willingness to Pay. We should be willing to pay any price up that and not more than that.

Unfortunately we do not have a device and even if there is one the device must not only work differently  for each person since the value you get is different from mine and from everyone else but also work differently for the same person based on time and context.

There is no such device. So how do we know whether are not a product is worth the price we paid for it? We never will for sure. I have heard a simpler and better definition for consumer surplus, ” it is the size of the smile on our face after we buy the product”.  If we kick ourselves for buying at a price obviously it means we paid too much.

The story does not end there, there are complexities like reference price, how marketing can increase our willingness to pay, how lack of value information (with no magic barcode reader) can artificially suppress our willingness to pay. There are emotional purchases in which we convince ourselves of higher willingness to pay or adjust our willingness to pay post-purchase to assuage our concerns of overpaying.

Now you know why  microeconomics alone is not enough to define pricing strategies for marketers and the need for behavioral economics and behavioral pricing.  I look forward to writing a few articles in behavioral pricing in the coming weeks.