Four Types of Value a Product Offers to a Customer

Eric Ries writes an excellent blog on start-up tech entrepreneurship called Lessons Learned. It's one of the few very good instructional blogs in the entrepreneurship category.

A lot of people struggle to understand why people buy silly icon-gifts on Facebook or purchase different product features in online virtual worlds. Eric's most recent post in a sentence: If you're trying to understand the economics and psychology around virtual goods, remember that you already buy virtual goods.

As he says, all "real world" products — like the jeans you're wearing — contain a virtual goods component, such as the premium you pay for the cool brand that offers no additional practical value.

Every product's value consists of the following tangible and intangible elements, he says. The more your product can tap into the "virtual" benefit chain (like Apple products becoming part of the customer's identity) the better off you are:

Practical utility – This is the tangible benefit that a product enables, whether that's transportation, warmth, cleanliness, or entertainment. Many products derive all of their value from this utility, online as well as off: generic drugs are pretty similar to a number of non-epic consumables in your average MMOG.

Perceived value – This is the extra value a customer perceives as a result of good marketing, product design, product quality, or exception product/market fit. For example, many customers derive satisfaction from feeling like they bought the "best" product in a given category, even if that product has no objective performance difference from its nearest competitor. This is true even in cases where the customer derives no status benefit from the product (which we'll cover in a second). For example, home electronics brands like Sony and Bose work very hard to create an impression of exceptional performance even in products that are used primarily in private.

Social value – When I can use a product to my benefit in a social situation, it can be transformed in value. All gifting-type products are influenced by this source, as Hallmark has long understood. But plenty of other product categories depend on social factors: status purchases, beauty products, fashion products, and (at least here in San Francisco) food and produce. For a non-brand example, look no further than De Beer's successful, if pernicious, marketing of diamonds.

Identity value – This is the strongest source of value of all, and it's a little tricky to differentiate from the preceding two sources. This is the benefit you get from incorporating a product into your self-conception. For example, take your average Mac fanatic. When they buy an Apple laptop, they are doing more than enjoying a premium product and showing off. They are saying to the world and – more importantly – to themselves: I am the kind of person that buys Apple products. Apple has done a phenomenal job of convincing us that we, too, can be a little like Steve Jobs, if only we had one more iFoo in our lives. Many fashion and beauty products create this kind of affinity, especially in products that are not visible to others (don't make me spell it out). Identity products are not easily displaced, because the emotional investment is very high. This is every bit as true for online goods – just try and trade your friend's level 80 warlock for your "equivalent" level 80 rogue. Good luck.

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