I read an interesting piece on the role of information in the choice between branded and generic products. For example, the CVS brand of aspirin costs about a third of the Bayer version. It’s almost the same product. The active ingredient has the same effect. If anything, the CVS tablet causes a smaller headache since it hurts your wallet less than the Bayer version. Professionals with relevant knowledge such as doctors, nurses, pharmacists buy the generic version. The vast majority of the population prefers the expensive stuff. We are literally paying for our lack of knowledge.
Now that we have established that pricing is all about psychology, how should a smart (or should I say evil?) business price it’s offerings?
- Identify a genuine human need
- Make your solution to that need as mysterious as possible
- Make sure your people (employees, marketers etc) appear knowledgeable, alluring and distant.
Apple is good at all three, but it’s nothing compared to churches, nations and universities. No one’s gone to war on behalf of Apple yet. There are people for whom the relationship to their church, nation or university is a sacred value ; deeply religious people, patriots and true scholars. For the rest, the business model of nations, churches and universities is simple: sell a utilitarian commodity as a sacred value. I call such goods “mystery goods.” That judgment might offend some people’s nationalistic and religious sensibilities. Since I not ready to go to war, so let me set aside churches and nations and look at the mystery goods sold by universities.
We want a systematic way of uncovering the utility of education. Before doing so, let’s see if there are any counterexamples to the sacred vs utilitarian argument. Luxury goods aren’t sacred (do you want to die for that Hermes bag?) but their price inelasticity suggests that they aren’t utilitarian either. Luxury goods seem to be lie outside the sacred/utilitarian axis.
Perhaps you’re thinking that sending your child to Harvard is like buying a Ferrari instead of buying a Toyota. A Toyota will do as well as a Ferrari on your daily commute. Nevertheless, some people do pay ten times the price of a perfectly good car for the occasional spin on a highway. It’s not about the functional utility of the car.
Is Harvard like a Ferrari? I don’t think so. For one, most middle class people don’t buy Ferrari’s, but all of us save up for years to send our children to college. While sending your child to Harvard give you bragging rights, we aren’t spending all that money to bask in the adulation. In my subjective assessment, the Harvard degree is closer to the aspirin than to the Ferrari.
The Perceived Utility of Education
If education spending is based on perceived utility, we are left with the puzzle of it’s pricing structure. That’s where the branding study I cited earlier comes in — most of us are uninformed customers of the utility of higher education. Do I really know what I am getting for my money? How is a Harvard course taught by adjunct faculty and graduate students better than a Michigan course taught by adjunct faculty and graduate students? Or a Cal State course taught by adjunct faculty? The honest answer for most of us is “I don’t know.” Education is the ultimate mystery good.
In this age of big data, you might think that the key to demystification is more measurement. The popularity of the U.S News ranking of colleges suggests that we are hungering for data. Unfortunately, the measurable variables such as faculty-student ratio’s aren’t that useful. From a utilitarian perspective, education is a ticket to white collar jobs but the payoff from education is long-term. . College rankings could predict whether you will get a job after graduation but they are pretty useless ten years down the road. You get your education today but the benefits are spread over decades. When you are forty, what’s the relative contribution of your alma mater and your own personal attributes such as character and ambition? We need longitudinal data to answer such questions but even longitudinal data misses the point of a mystery good.
Mystery goods are usually about the experience of consuming the good. Apple knows this better than anyone else. University presidents aren’t that far behind, which explains the investment in food courts and gyms over professors. If the student is a consumer of a mystery good, she should leave the college with a measure of awe and delight at the experience. Gourmet food and olympic class gyms don’t lead to better learning outcomes but they do translate into an awesome experience. Colleges understand their product better than you do — that’s part of the information asymmetry.
What about disruption?
The obvious response to the mysterians is to offer an educational product that’s purely utilitarian, such as “take this course, get a job.” Easier said than done, for jobs are part of the mysterian’s empire. No one ever got a high status job by taking a course. It’s the degree and it’s pedigree that gets you a white collar job. The places where the utilitarian pitch is working is in domains that seem white collar but are actually blue collar; skills like web design and programming that are twenty-first century versions of the machining skills of the twentieth century. These are the most commoditized skills in the knowledge sector with the smallest element of mystery. That’s where utilitarian disruption will work best. Of course, one might also hope for disruption at the other end, i.e, a modern education platform that emphasizes the sacred qualities of learning. That too will happen in due course.
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