ekoshapu

My Prof at IIM-A once said that every subject in management has its roots in some mother subject. For example, he said, Economics has its roots in Psychology. Finance is a derivative of Economics (Micro-economics, to be precise). HR has its roots in Organizational Behavior, which in turn borrows from Social Science. Operations Management is loosely based on Applied Mathematics (Graphs, Queues, and Optimization techniques).

However, Marketing is the only subject which is a creation of Management studies. It is partially true. Because Marketing also has links with Psychology.

My other professor at the Lancaster University, UK gave a very interesting perspective. He said:

Basic law of Economics is: “People pay a lot for things they like”

Basic law of Psychology is: “People like a lot the things they pay for”

Between these two ends you embed all your functions: Strategy/Sales/Production/Finance/Pricing/Marketing/Distribution/Branding/Advertisement.

If you ponder over this, the idea is so fundamental. I will build on this and borrow from the great Management Guru Peter Drucker.

Let’s start with what the UK prof said.

Basic law of Economics is: “People pay a lot for things they like”. This simple looking sentence has many complex themes within itself. It suggests that “value” is always “perceived value” and not absolute value. The perceived value is based on the key concept in economics called “Utility”. I am willing to pay more for iPhone because I like it. That in turn is because I perceive more value/more utility in it. So if you can manage the “perceived value” part, you can sell a product for good price – probably a lot more than other similar products.

At the other end, the basic law of Psychology says, “People like a lot the things they pay for”. This is natural human tendency. You tend to overvalue your own possessions and downplay what others own. This is true of material possessions as well as opinions, and beliefs,…or achievements. One always feels that his/her success is hard earned and the other’s success is more of luck or chance. Dan Ariely, the author of bestsellers such as “Predictably Irrational” and “The Upside of Irrationality”, conducted an interesting experiment to prove this basic law of psychology. In one of the lectures he gave away signed copy of his book for free – but only to few “select” people chosen at random. Those who got the books felt “lucky”. Then he asked people who had received the book how much would they want to give away the book to others. i.e. how much would they sell it for. People who owned the book quoted significantly high price – because they valued the book, which they got exclusively, much more! Then Dan asked people who didn’t have the book how much would they pay for the book. And that set of people quoted very low number – as if they were downplaying the worth of the book.

This happened even when people who got the book got it for free! Now imagine what would happen if they had paid for it. They would have been “forced” to like their possession even more…because “People like a lot the things they pay for”.

Now let’s focus on Marketing. Marketing, in simple term is, converting wants of people into the needs. Job of marketing function is to change people’s habit; to make them buy more and more, as if they “need” things. And that is where these two Basic laws become relevant for Marketing.

To achieve the effect of Basic Law of Economics, the job of Marketing is to create the visibility and brand perception of their product and develop special “liking” for their product. To achieve the effect of Basic Law of Psychology, the job of Marketing is to maintain the aura of brand through advertisement, promotion. The idea is to constantly hammer the message: “As a buyer of this product, you belong to an exclusive club!”.

For many decades people and businesses focused only on the Basic Law of Psychology and thus focused on branding, advertisements, strategy of differentiation and product niche etc.

In recent years people are understanding that the Basic Law of Psychology is more significant. It is the backbone of Luxury goods. Also, it is the basis why “freebies” and “price war” is now seen as a bad strategy. If people like a lot the things which they for, it also suggests that there is no such liking for freebies. Yes, the customers would lap up anything given free; but they would also not hesitate to criticize and dislike such products, because there is no skin in the game. On the other hand, if customer pays for the product, it is also in his interest to “like” the product. He doesn’t want to be “seen” as a fool. And the more he pays, the stronger this feeling, and hence stronger the liking. It is very unlikely for someone to buy an expensive Diamond or a luxury car and not like it. And that is the cornerstone of all luxury goods.

I have experienced this myself so many times (I also admit that I have conformed to this law, willingly). I attended a 3-day Value Investing workshop last year. The workshop was conducted by a very famous professor who is perceived to be a great Guru on Value Investing. The program fee was Rs. 35,000. He has been running same workshop for last few years and have consistently increased fees – from Rs. 18,000 4-5 years back, to Rs. 25,000 3 years ago, to Rs. 30,000 2 years ago, to Rs. 35,000 last year.

To be honest to myself, the program was mediocre. You could have got the same Gyan from 2-3 books (worth Rs. 1500 max). The delivery was also nothing extraordinary. In fact it was monotonous and boring beyond a point.

However, nobody who attended the program admitted that the program was mediocre, or not great. Mainly because of the Basic Law of Psychology. How could you pay Rs. 35,000 for a 3-day program and say that it was all crap…you were fool to attend it? So the good perception of the program continues. People still find some good facets to justify the fees. For example, they would say “It was a great networking opportunity. I met so many good participants and exchanged good ideas, that the fee was totally worth it”. Or, “it was not just about the course content, but about having face time with the Professor. I learned so much from 1-on-1 interactions with him during breaks”. Or most ridiculous: “I got a selfie with the Professor, which means a lot to me!”.

Another example. A person who is earning decent salary but is stuck with job. He decides to pursue an expensive MBA thinking the perceived brand and quality of education would do wonders to his career! He leaves his job; spends 1 or 2 years and few lakhs (often more than his gross salary for 1-2 years) and attends the MBA program. Do you think he would ever say (in public) that the program was useless and he was a fool? 99.99% of the people would not (the rest 0.01% is Yours’ Truly, or that kind).

This is exactly what the Basic Law of Psychology says. And the more you spend the more you “like” it.

So whether you are a Marketing professional or not, do remember the two basic laws which form the boundary of Marketing!

As Peter Drucker said:

“Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

Lastly, understand the connection between the two basic laws. Economic theories are based on many assumptions. But the key assumption underlying all of Economics is that the man is a rational animal and would always behave rationally and in self-interest. Psychology is the subject which addressed the very assumption of Economics. It addresses question: “What if man is not rational, or does not always behave rationally?”. Both taken together complete each other and enhance our understanding of the world.