The perception economy 📈

Secret opportunities are hidden in the perception economy

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The Perception Economy

Imagine creating billions of dollars of value without spending a dime or changing anything in the physical world.

Well, that’s exactly what you can do in the perception economy.

Not all problems can be solved with good old fashioned logic and economics.

If our perception of the world is more important than the world itself, then we can create immense value by simply modifying perception.

Humans are highly irrational and our perception of value is not so simple.

Entrepreneurs who understand both technological and psychological solutions will have an edge over the competition.

Most people compete in the traditional economy, but there are few players leveraging the opportunity that exists in the perception economy.

Will you be one of them?

IPSO: The Magic Formula 🧙‍♂️

IPSO helps us understand why so many engineers fail to create value when trying to solve the world’s problems.

I recently posted about the IPSO formula on LinkedIn:

Engineers think people want a bigger, faster, better TV, but they often fail to realize the real reason people are buying them.

If engineers understood the real reason people bought TV’s perhaps they would build them differently.

Eurostar wastes £6M to save 20 minutes

The Eurostar is a train that runs between Paris and London. It takes 2 hours and 17 minutes from start to finish.

Eurostar spent approximately £6 million to reduce the train time by 20 minutes.

Rory Sutherland, an Olgivy marketer and behavioral economist, makes the point that for 1% of the cost they could have created the same economic value had they just purchased high speed internet and served top quality food.

Sure, good internet and quality food wouldn’t have reduced the journey time, but it would have made the experience better. Now instead of wasting 2 hours and 37 minutes of your day you could spend that time being productive and work (or watch your favorite film on Netflix 😉).

The Eurostar is an example of being really good at solving the wrong problem.

The problem was never an engineering one, it was a perception one.

Solving the wrong problem for £6M

• ❌Pain: Train takes 2 hours 37 minutes
• ❌solution: Spend £6m to make the train 20 minutes shorte

Understanding the IPSO formula could help us operate more efficiently in the perception economy.

Solving the right problem for £60,000

• ✅ Impact of Problem: Inefficient use of 2 hours 37 minutes
• ✅Pain: The train’s lack of wifi means you can’t work or watch films
• ✅solution: Spend £60,000 to install high speed wifi
• ✅Outcome of solution: Customers can spend the 2 hours 37 minutes just as productively as they would if they were at home

In the perception economy, those who build solutions for desired outcomes not surface level pains will win.

The problem was never the amount of time on the train, it was how well customers could spend that time.

If you want to check out some more Rory Sutherland examples I’d recommend his book Alchemy.

Michelin: From selling tires to monetizing miles

Michelin has a reputation for quality tires which enabled them to charge a premium for a long time, however Chinese competition in the 2,000’s put pressure on them to lower prices or increase quality to justify the price difference.

Michelin continued to create better quality tires that lasted longer and drove further. They released a new tire that lasted 20% longer.

But when the sales team forecasted the improvement would only warrant a 1% increase in price they knew they had a problem that engineering and product couldn’t solve.

Not only this, but longer term demand would fall by 20% due to the tires lasting 20% longer.

Increasing quality wasn’t going to help them win the market.

Michelin decided to play in the perception economy.

How?

By playing with pricing.

Pricing is one of the most powerful ways you can increase profit.

For a company with average economics, improving unit volume by 1% yields a 3.3% increase in operating profit, assuming no decrease in price. But, as Exhibit 1 shows, a 1% improvement in price, assuming no loss of volume, increases operating profit by 11.1%. — HBR

So increasing revenue through pricing is far easier than creating more demand from scratch, but Michelin had just forecasted they could only increase price by 1% with the new product improvements.

They stopped looking at pricing through the lens of the traditional economy and started looking at it through the lens of the perception economy.

How?

They stopped charging per tire and started charging per mile

Michelin started to charged customers based on mileage, not by the number of tires sold.

Anchoring pricing to distance traveled was simply linking price to what customers truly valued.

• Pricing per tire would make Michelin 20% more expensive: say $120 vs $100 per tire, thus crushing demand
• But pricing by the mile would make them cheaper since the tires lasted longer: say $0.01 per mile vs $0.03 per mile.

Michelin changed the perception of their tires from ‘too expensive’ to ‘great value for money’ simply by correctly anchoring their pricing to a value metric that customers cared about.

A traditional economist would have said “to justify a price increase 10% we must increase the quality by 50%”.

A perception economist would have said there is no need to modify the tire we just need to anchor the price to a value metric which the customer cares about… miles.”

Before long Michelin had the largest profits in the industry, by 2011 it’s profits were 25% than Bridgestone and 300% higher than Goodyear.

Certain inefficiency > uncertain efficiency

When I don’t know how long a train is delayed by it makes me frustrated, if the delay ends up being just 10 minutes late I would’ve spent the entire 10 minutes angry because I had no certainty when it would arrive.

On the other hand, if I knew how long the delay was going to be it somehow wouldn’t feel so bad, even if the delay is longer.

Why do I prefer certain inefficiency over uncertain efficiency?

Well, a rational economist would say that knowing about a delay would not change the fact it was always going to be 10 minutes late. They would say the negative impact is the same regardless of whether you could anticipate it or not.

A perception economist would realize the time delay is not that important, but rather the uncertainty about the delay is the true problem.

Uncertainty of the time delay means you don’t know whether you have enough time for a quick coffee, or whether you should leave the station altogether and have a sit down lunch.

We don’t need efficiency, we need certainty of inefficiency.

A traditional economist would spend millions building train infrastructure to ensure trains arrive on time.

A perception economist would spend zero dollars and just show a minimum time delay on the board.

Context over Content

Joshua Bell and the Washington Post

Put great content in a shitty context and you can render it worthless.

In 2007 the Washington Post did an experiment where Joshua Bell, one of the best concert violinist’s in the world played entirely for free in the metro for 45 minutes.

Thousands of people walked by without a care in the world. Only seven people sopped to listen to him play.

When they took the content (Joshua Bell’s incredible music) and put it in the wrong context (a metro station instead of a concert hall) the content was perceived less valuable, some even found it irritating.

A perception economist would know that the way a product is packaged and presented is just important as the product itself.

You wouldn’t serve a Michelin star meal in a takeout style paper bag would you?

Rolls Royce and private jets

If a Rolls Royce was sold on a car lot next to a Tesla or a Honda Civic it’d be considered expensive.

Instead of adding more features to justify the large price tag you could simply change the location where the car was sold.

Context over content.

Sell the Rolls Royce at a trade show for private jets and suddenly the Rolls Royce becomes the more ‘sensible’ investment.

Context can make you more attractive

Dan Ariely gives a great example of context over content in his book ‘Predictably Irrational’ where he explains how you can make yourself appear more attractive without having to change how you look.

It’s simple.

Go to a bar with a friend who looks like you, but is less attractive.

This is called the decoy effect.

How does it work?

Dan took a photo of two equally attractive men called Adam (A) and Ben (B) and made a duplicate image of them both in photoshop, the only difference was they had been ‘uglified’ (A-) and (B-)

He handed the two separate sheets to six hundred students.

• 50% were shown Condition A: (Adam + Adam uglified) + Ben
• 50% were shown Condition B: (Ben + Ben uglified) + Adam

Students were then asked who was the most attractive.

No one chose the uglified photo’s, but the other results were shocking.

“Where ugly Adam appeared, 75 percent of participants said they found the original Adam the most attractive. Where ugly Ben appeared, the exact opposite happened: 75 percent of people thought that the original image of Ben was the best-looking.” — article extract

In both scenarios, the uglified version made the original image more attractive.

So the next time you go on a tinder date, find a slightly uglier version of you to accompany you to the bar 😉

Summary: The Perception Economy

Not all problems can be solved by modifying physical reality.

We don’t always need to make things faster, stronger, better to create value.

Understanding human behavior and psychology is equally, if not more, important.

Find the untapped opportunity hiding in the perception economy and create value in ways that engineers don’t know how to.

Recommend reading:

There are many tools available for perception economists such as reframing, anchoring, and the IPSO formula to name a few.

But if you want to learn more I’d recommend starting with these books👇

• Thinking Fast and Slow — Daniel Kahneman
• Alchemy — Rory Sutherland
• Predictably Irrational — Dan Ariely
• Monetizing Innovation — Madhavan Ramanujam & Georg Tacke

And if you made it this far, thanks for sticking around!

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