Tuesday, February 6, 2007

I'm not cheap, you're a lousy marketer

Being a dinosaur in terms of technological adoption, I just got a DVR last month. The thing is amazing and the TV moguls and advertisers are right to be frightened of it – I haven’t watched a commercial in weeks. The question is what took me so long to get it?

You might say I’m cheap (it's actually a deep-seated aversion to having my pocket picked on a monthly basis), but I prefer HBS marketing prof John Gourville’s explanation for why I waited years to buy a DVR. In an interview for a story on pricing I wrote for Harvard Management Update a couple of years back, he called it the “TiVo Problem” and said:

TiVo is the kind of thing that if you don’t have it, you don’t understand what the excitement is all about. It’s a difficult value proposition for people to understand until they actually experience the product. You have to have it in your home and experience what it is like and suddenly it changes the way you think about television and entertainment. Once you get it, you can’t imagine living without it.

People are very bad at evaluating things in an absolute sense. So, for instance, there is satellite radio. Many people would think of it as a pretty innovative new product, but what are people going to use as the benchmark? They are going to think about their old AM/FM radio and in their minds, they say, ‘Jeez, radio is free. Why should I pay a subscription to get satellite radio?’ Whatever it happens to be, no matter how new the product, people are going look for some sort of a benchmark.

That is the hurdle that a company has to overcome. It’s the job of the firm, the developers, to communicate what exactly is the value. Why should we be spending $10 a month for satellite radio when AM/FM radio is free? I think what happens with product developers is they often fail to understand the benchmark people are going to use to evaluate the new product.

Gourville, along with Rotman School of Management marketing prof Dilip Soman, also wrote a very interesting research paper on overchoice, which explains why companies can lose sales if they offer customers too much variety.

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