Perceiving value in merely belonging

An academician friend of mine drew my attention to a blog post on the economics of gastronomy. The writer was wondering why customers would put up with an enormous amount of suffering to partake of food that could at best be described as average. Yet, they seem to want to do so if only to to claim that they have dined in some famous restaurant. He speculates that patrons of such restaurants vest the food with superior virtues only because it has been secured after considerable difficulty. There is, perhaps, some kind of reverse snobbery, he wonders. That may well be. But the business insight at work here could be something else altogether.

Theory tells us that the ‘utility', as expressed through the price of a product, is the sum total of value that customers are willing to assign to the product for the many attributes that they attach to it. These attributes need not be just what the rest of the market sees as valuable, but a few more that only each individual alone perceives in it. It is safe to say they are certainly much more than what the producer himself might have thought that the product possessed.

That brings us to the next important question. What is it that characterises products that are clearly not luxury goods but nevertheless command a premium price merely because individual consumers assign some extra utility to its consumption?

The network effect

It seems that if a product in the non-luxury category were to possess a ‘network effect' — a phenomenon made more popular with offerings on the World Wide Web — then it is possible for that product to command a premium price. The ‘network' effect embedded in such goods is something subtler than evident in product market categories where they fulfil a primary functional need.

We are familiar with the example of an operating system such as ‘Windows' that commands a premium because everyone has written applications that run on that software.

A classified advertisement inserted in a particular place in a leading newspaper also enjoys such a virtue. You could be inserting an ad in The Hindu to sell your Maruti 800 whose best days have long since past, only because everyone seems to look up to the publication for buying cars of semi-vintage quality. These are, of course, the traditional arguments for explaining the network effect.

But, perhaps, there is another kind of a ‘network' effect that draws its sustenance from a primordial need of human beings to stay connected with others. People no longer evaluate a restaurant in such obviously functional terms as taste, ambience and convenience. They measure it for attributes that they themselves have chosen to vest with it, namely, that they are doing it because everyone else seems to be doing it.

The MTR restaurant in Bangalore is a good example of this phenomenon. The wait for partaking of a meal is inordinately long — the coupons for lunch are issued an hour-and-a-half before the restaurant opens. The ambience is spartan to the core and the quality, while satisfactory, is not so exceptional that it can't be had anywhere else. But the mystique of MTR endures. Why? Because people want to savour the experience that so many others have done before them.

In the late '60s a Harvard Business School professor of marketing came up with the insight that producers see the market that they service with their products in what may be described as terms that are purely nomenclatural.

He referred to the case of a railway company that saw its business as that of running trains. The problem with such a narrow focus, as the professor argued, prevented it from seeing the changes in the broader marketplace that affected its business in some fundamental way.

Thus, the Pennsylvania Railroad Company or Penn Central as it was more popularly known in the US, went into bankruptcy because it didn't realise it was in the market for offering private transportation solutions and, hence, failed to see the broader revolution that was happening in the personal transportation space with the advent of cheaper cars and inter-State highways.

Essentially, Levitt argued for defining product and markets in functional attribute terms rather than the surface nomenclature that the product possessed.

But the restaurant example that the blog writer quotes would seem to suggest that the world of business economics has moved away from the purely functional attribute framework into the more rarefied atmosphere of ‘perceived' functional attributes.

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