How Your Customer's Brain Decides What to Pay For

The interplay between the three factors of your customer's needswants, and fears affects the perceived value of your product. Which is hugely important because it plays into how people decide what to pay.

This is what’s known as exchange theory. Here’s the gist: if the perceived value of your product is greater than its perceived cost, people will buy it. If the perceived cost is greater than the perceived value, they won’t buy it. It’s really that simple.

Perceived Value greater than Perceived Cost = Yes
Perceived Cost greater than Perceived Value = No

The key word here is perceived.

Value and cost involve more than just money. There’s a time consideration: Does the product save me time, or does it take a long time to use effectively? There’s the impact a product has on our reputation: if a product will make you look cool, professional, or smart, its perceived value goes way up. When Kanye West designed a plain, white T-shirt and sold it for $120, people bought it because they wanted to own the “Kanye shirt” even though they probably knew it was a bad economic decision.

On the other hand, if owning or using a certain product makes you feel embarrassed or out of style, the perceived value will plummet. Flip phones fell off hard when smartphones came out, didn’t they?

Opportunity cost also plays a role in the buying decision. If Joe buys your $1,000 television, what will he not be able to buy as a result? Opportunity cost is not directly reflected in your product’s price, but it absolutely affects its perceived cost.

Exchange theory affects every transaction people do. Think about it. Will you spend $99 on something when there’s a nearly identical product right next to it for $97? Maybe. What if the competing product were $79? Will you spend time to go to a store to get a product if you don’t really need it? Probably not. The price of that thing might not be the problem, but the time and effort required to get it are. (This is how Amazon beats your local store with the same product.) Would you buy a product you know you need—let’s say an email marketing service—if you’re unsure if it will have all the features you need? Probably not.

You might think your product is exactly what a customer needs, but unless they can perceive the value they’ll receive and see the value is greater than the cost, it won’t matter.

Posted in Design

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