Perceived Value, Hidden in Plain Sight (The Five Guys Effect)

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In his legendary 2005 commencement address at Kenyon College, David Foster Wallace riffed on the melodramatic moments of adulthood, emphasizing that life after graduation is not uplifting and vibrant but filled with “boredom, routine, and petty frustration.” He describes the checkout line in a crowded grocery store during the end-of-the-day rush. “You finally get to the front, and you pay for your food, and you get told to ‘Have a nice day’ in a voice that is the absolute voice of death.”

Wallace’s speech is a hallmark of postmodern thinking. Instead of pivoting off rousing anecdotes and graduation clichés, he describes the sad loneliness of adult life, stressing that we must use what we learn in school to construct meaning for ourselves. We can spend our time complaining about the dreadful bits of life, like how we always seem to pick the slow checkout line, or we can use what we know about the world to fundamentally change how we experience it.

Wallace probably exaggerates the tedious nature of grocery store checkout lines—sadly, he suffered from depression his entire life—but his existentially loaded parable reveals something fascinating about what happens in the mind when we buy stuff.

In the early 1980s, the behavioral economist Richard Thaler conducted a clever experiment that began to change how people understood economic transactions. Economists traditionally believed that consumers make decisions based on price and quality. In this view, it’s obvious why businesses like Wal-Mart and Amazon are so successful—they’re selling the best stuff at the best price.

It’s a seductively simple formula, and it’s gravely incomplete. Thaler had participants imagine that they were laying on a beach during a hot summer day, parched and craving something refreshing. A friend, offering to bring back cold beer from a run-down grocery store, asks how much they’d be willing to pay for the beer. “If the price is less than your stated maximum, I’ll buy it. If it’s higher, I won’t.”

There’s nothing surprising about the average answer, $1.50. The ingenious part of the experiment is that when Thaler replaced the word “run-down grocery store” with “fancy resort hotel” for half the participants, the average price jumped to $2.65.

According to decades of economic theory, this shift makes no sense. Both groups are getting the same item and deriving the same amount of pleasure from it. And yet, their price limit was dramatically altered by a subtle change in wording. Why would they be willing to pay more for the same item?

Thaler explains that during any given purchase, there are actually two types of utility: “Acquisition utility” and “Transaction utility.” Acquisition utility is the pleasure or pain we receive when we consume a good. Transaction utility is the pleasure or pain we feel when we buy it.

Once you grasp the distinction, it’s much easier to understand what Wallace was hinting at. We don’t walk around logically calculating market norms. The psychological experience is just as important, which is why, paradoxically, we can appreciate a great deal at the grocery store but dread the experience of being in the store. The implication isn’t just the obvious point that a good shopping experience matters. It’s the more intriguing hypothesis that we can boost the pleasure we receive from consuming something by improving the experience of buying it.

To see how, consider Five Guys Burgers & Fries, a fast food chain based in the United States. Five Guys is one of the fastest growing chains in the country because it serves delicious burgers. It’s also taking advantage of some shrewd consumer psychology. When a customer orders fries, the server places a cup of fries into a bag and then dumps some extra fries into the same bag, right in front of the customer.

No one is receiving bonus fries. The servers aren’t especially generous. Five Guys calculated how many fries it serves per person and then split the delivery system into two stages. The second stage, which supplies those yummy bottom-of-the-bag-fries, is perceived as extra because the anchor for the expected amount is the size of the cup. Start low, end high—it’s a brilliant use of Prospect Theory.

What makes this maneuver especially smart, though, is that it ignores the standard assumption that customers rationally compare the fries at Five Guys to the fries at McDonald’s or Burger King. In reality, how we perceive the quality of a good, especially something as subjective as food, is deeply intertwined with the physical experience of acquiring the good. I’m willing to bet that fries at Five Guys actually taste better when they are perceived as a bonus.

In fact, that’s precisely what empirical research would predict. Psychologists have shown that children think apples and carrots taste better if they come from a McDonald’s bag, Coke tastes better when drunk from a cup with a brand logo, and protein bars taste worse when they are described as “soy protein.” In one study, a team of neuroscientists found that people reported liking wine more when it was listed at $90 versus $10, even though the wine was the same in each condition.

Obviously, food has objective physical properties. I’m not suggesting that taste is purely a function of perception. It certainly is not. However, the experience of buying food does modify how good (or bad) the food will taste.

There are, I think, two implications of this fascinating line of research. The first is that while most businesses intuitively understand the link between buying something and enjoying something, they often believe that the key to improving customer perception is expensive top-down interventions. The logic is, “In order to achieve big change, we must spend big money.”

Five Guys shows that small inexpensive changes can have equally big effects. Instead of trying to perfect the customer experience, Five Guys does most things well enough but one thing unexpectedly great. That’s the logic of the halo effect: one moment of delight can make an entire, mostly average experience, seem great.

The online retailer Zappos.com is another great example. Zappos is renowned for its customer service. They offer free shipping both ways, erasing the worst aspect of online shopping—the fear of wasting money on an item you’ll never use. At the same time, Zappos occasionally performs surprise overnight shipping to loyal customers. Customers who order as late as midnight EST sometimes receive their shoes the next morning. I imagine that’s a delightful surprise, just like those greasy fries.

The second implication brings me back to David Foster Wallace. If you’ve heard his commencement address, you’re probably familiar with his introductory remarks.

There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”

It’s a witty existential reminder that we often gloss over the most important components of life, a cautionary parable about the difference between learning and learning how to think.

Even though Wallace wasn’t contemplating the principles of behavioral science, I think the two young fish perfectly illustrate the problem with standard economic theory. Economists have traditionally assumed that a good has an intrinsic and immutable value. In this view, how much you enjoy a shoe shouldn’t depend on whether you bought it on Zappos.com or at the Nike Store. A shoe is a shoe.

And yet, years of smart psychological research reveal that value, though not entirely arbitrary, is mostly perceived. In fact, there is no sensible distinction between the value Five Guys creates by cooking the French fries and the value Five Guys creates by presenting the French fries in two stages. The only difference is that the later—what Thaler called transaction utility—is usually hidden in plain sight.

Wallace emphasized that education has almost nothing to do with acquiring knowledge and everything to do with simple awareness. We have to keep reminding ourselves over and over:

“This is water.”

“This is water.”

 

This post was inspired by a Rory Sutherland article in The Spectator. The second to last paragraph steals from a Ludwig von Mises quote, which I originally discovered in a Sutherland lecture.