In which we discuss how branding changes reference points, how even though a large coffee milkshake would taste as sweet, it would not seem worth the high price

Reference points are based on expectations.  When people evaluate the quality of Argo, their assessment takes into account how good they expected the movie to be.  These expectations, in turn, are based on what we’ll call a “reference group,” a group of similar things that people make comparisons to.  Though reference groups are often implicit—nobody writes down every film they associate with Argo—they have a significant impact on how we evaluate our world.

Different people will use different reference groups when considering the same thing.  Some people will focus on how Argo was directed by Ben Affleck, and will form a reference group of other films Affleck directed.  Others will form a reference group of movies with a similar Rotten Tomatoes score, while still others will form a reference group of other Best Picture winners.  These people will ultimately end up with different reference points for Argo, affecting their viewing experience and subsequent Netflix rating.

Companies exploit this dynamic, changing the reference groups of their products to downplay unfavorable comparisons while highlighting favorable ones.  Take Starbucks, a company whose existence depends on convincing customers to pay more for quality coffee.  In its early days, Starbucks’s main challenge was to keep customers from focusing on the prices they were paying.  High quality coffee goes down better when you don’t think about the cheap coffee down the block, after all.

To downplay price, Starbucks created an ambiance that wouldn’t remind customers of cheaper competitors.  Starbucks didn’t sell large cups of coffee with cookies and McMuffins.  They sold venti americanos with biscotti while jazz played smoothly in the background.  They coined the term frappuccino, a portmanteau of frappé and cappuccino, extending their assertively European vibe to a distinctly American product.  There was nary a donut in sight.

All of these nuances combined to alter Starbucks’s reference group.  People didn’t compare Starbucks to McDonald’s and Dunkin Donuts.  They compared Starbucks to a magical, if imagined, Viennese coffee house.  They entered the store; read the menu; scanned the crowd, pregnant with Pumpkin Spice Latte fever; and thought:  Sure, I’ll get a latte today.   McDonald’s Dollar menu never crossed their minds.

Starbucks eventually convinced people that their coffee was different, fundamentally better than the usual stuff.  As a result, managing customers’ associations, keeping them from thinking about cheaper coffee vendors, became less important.  Starbucks could finally sell profitable products that people associated with lower-priced competitors.  Cookies and donuts appeared on the menu, inviting comparisons to Dunkin and its ilk; breakfast sandwiches appeared on the menu, inviting comparisons to McDonald’s and its fast food brethren.  Starbucks still included flourishes to distinguish themselves—for a global chain, their sandwiches are impressively “artisanal”—but they have unquestionably advanced into their competitors’ turf, confident that customers will view them as the high quality option rather than the expensive one.

The upshot is that if you are introducing a premium version of an existing product at a higher price point, you should prevent your customers from associating your new product with the cheaper variants your competitors are hawking.  Once time has passed and you’ve built a distinct brand around your product, though, you can invite the comparison, confident that quality concerns will outweigh price.

Just as Starbucks sells expensive coffee, microbreweries sell expensive beer.  And just as Starbucks doesn’t want its customers thinking about the $1.00 coffee down the street, microbreweries don’t want customers thinking of the $2 PBRs down at the local dive.  An easy way for microbreweries to avoid this unfavorable price comparison is to keep “beer” out of the name by calling their libations “microbrews.”  As was the case with Starbucks, this distinction has mattered less as time has passed.  Once people got on the small batch bandwagon, microbreweries could call their lagers “craft beers” without worrying about the inevitable comparison to cheaper beers.

The chart of Google Ngram data below bears out this tale. “Microbrew” showed up more frequently in books over the course of the `90s, but its popularity fell after 2000.  “Craft beer,” on the other hand, steadily but slowly increased in popularity until the end of this data in 2008.  A current measure of online usage indicates that craft beer has now overtaken microbrew:  “craft beer” generates 6.6 million hits on Google while “microbrew” generates only 1 million.  There are numerous ways to interpret this, but it is suggestive of the story we’ve outlined here:  usage of the term “microbrew” was high until 2000, when microbreweries had amassed enough loyal customers that they could talk about “craft beer” without sending their customers off in search of cheaper beers.

Beer Graph

Whether we’re considering the price of a pint or a grande Pike Place, we use a reference point based on what similar products cost.  Much of branding amounts to changing what we consider to be similar, altering we include in a product’s reference group.  Viewed in a favorable light, with the right comparisons made to the right reference group, a product will reach its potential to dazzle customers.  That venti caramel frappuccino will make your mouth water in a way that a large flavored coffee milkshake simply cannot.

Stray Observations:

This is why they’re called Brazilian steakhouses, not international meat buffets; resort fees, not hotel fees; and Whole Foods Markets, not Whole Foods Grocery Stores.

Although Apple stopped making Macbooks in 2011, “Macbook Pro” still has a high quality ring to it.  Even discontinued products turn up in reference groups.

The exception that proves the rule:  the $5,000 Fleurburger, a hamburger with foie gras, truffles, and a bottle of wine.  This premium product invites the comparison to cheaper hamburgers to heighten the absurdity of the conspicuous consumption.  It’s not a meal where you care about the price comparison.  It’s an experience that ends in a certificate of authenticity.  (Literally.)

Oxymoronic names try to invite favorable comparisons along multiple dimensions.  Example:  “Luxury hostels” like Miami’s Freehand.  With rooms costing less than $50/person/night, it wins in a price comparison against luxury hotels; with classy décor and functional AC, it wins in a quality comparison against backpacker hostels.  This strategy is risky, though.  If it’s not executed well, customers might invert the comparisons, finding the Freehand too expensive for a hostel and yet too bare-bones for something aspiring to luxury.

The comparison between Starbucks and Dunkin Donuts was inspired by a talk behavioral economist Dan Ariely gave in 2006.  He includes further thoughts in Predictably Irrational, his wonderfully readable overview of the intersection of psychology and economics.

Photo:  Flickr