Perceived value – Why people buy phones with two year plans

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Ever bought a box of wine bottles as you got one free? Because it was cheaper per bottle? You are fooling yourself. Buying one bottle is still cheaper and you were not intended to buy more than one, so at the end you paid more than you were intended to.

Most people do not make these choices very rational. Most of the time its a brainstate they have while making these choices which is, of course, good news for marketers. People don’t buy a product or service because it has a certain price, but because it has a certain perceived value. This has to do with the way our brain works. Without getting to deep in the psychological and medical stuff, it has much to do with habits. As people are not able to use all information available to choose, for example, which coffee the buy, they use habits. Customers in a shop look at some sort of product, look if they recognize something, if yes, they are likely to buy that product. If not they just look for products that look like other products they have bought/used before or products they like. These habits, combined with call-to-actions like: get six, pay five form the decision of the customer at that moment. So actually you don’t see a product for a certain price, because of rational choices, but all about perceived value. What’s feels that product/service worth at that moment.

In the market of mobile phones (and loans) there are even more of these perceived things. One new element here is time. People don’t have a clear view of the future. Or say it else: people don’t like to/can look further than today. Get something today is worth more than getting the same in the future. This is just an economical law of discounting things of the future (as I remember my economy lessons right). But as we will see with mobile phones, marketing can make the discounted difference much bigger.

Assume for example that your phoneplan will come to an end. You have two options: Do you buy a new phone with a new plan or take advantage of the sim-only option to call for cheap? Many people don’t even know the sim-only option. Assume you choose for a new phone, what would you choose: one-year contract with paying $ 200,- for the phone or two-year contract with phone for free? What will you do if the price of the phone with one-year contract was $100,- or $300? Most people will choose the two year contract with free phone as it feels cheaper regardless the price of the phone with one year contract.

Most of the time choosing for a phone with one year contract, paying an amount for the phone and a sim-only in the second year, will be much cheaper than choosing for the free handset with two year contract.

So the freeness of the phone has a higher perceived value than the more expensive two year contract you get with it (or even three years as is quite normal in some countries). Thereby, standing in the phoneshop, people have a hard job really comparing anything.

So the opportunities for marketers is pretty clear here: if you like to sell something, just get the highest perceived value at this moment and spread the fees over a longer time. The  same occurs with products/services like loans for houses and cars (remember the buy now, pay later ads for cars).

This same model can be valuable to drive the market of

• E-readers – Pay a monthly fee for the newspaper/magazine/weekly book and get the reader for free
• Electric cars – Get an energyplan for three years and get $2000.- off of your electric car
• Notebooks – Get a dataplan and get the notebook for free/cheap
• etc.

What each company has to discuss however is, which responsibility it has to inform people about the real costs of a certain product. This is something each company has to decide on their own (within the laws of course). It seems that more and more products and services will go this way, especially by moving physical devices more and more to the cloud.

We will keep a close eye on the developments of this.