In my previous blog I tried to explain my view that vast majority of the investment decisions are driven by emotions, with little rationale behind. What I would like to discuss with you, folks, now is purchasing decisions, which is obviously not a news, however, I think it shall be used as puzzle in our picture.

Buying things has always emotions behind. Guess why Apple fans stand in a queue overnight against Apple Stores  awaiting for their admired iPhones, iPads and other “iThings”. I am in China now, writing this blog, and I have seen the same queue against Gucci shop, with the entrance guarded by security – they let few people get in while few go out, so they try to rescue this shop from wiping out all the goods with the shelves. Guess why you buy food of common brand and when exactly you decide to try something new. When you prefer safety and buy Heineken in a bar at the very end of the world, and when you prefer to try very national food, even if you know you will never ever try it again?

When do we make purchase? Well, unconsciously we always (always!) make vis-a-vis comparison between Price and Value. Price is what you actually pay for what you buy. Value is what you actually get with this purchase. What that means? Simple thing: if Price is higher than Value than you don’t buy. If Value is higher than the Price you buy. if Value is way higher than the Price you stay in the queue 15 hours against Apple Store.

Value is very objective and closely related to yourself and to the context. Say you go walking on the street in your home city and buy bottle of mineral water. How much would you pay? 50 cents? 1 dollar? Would you pay 50 bucks? Would you pay 100 bucks? Would you pay 100 bucks for bottle of water if you are in desert, thirsty and almost dying and no other chances to get any drop of water whatsoever? Value is relative, value is subjective.

What Value actually is? In other words what exactly do you get for the Price?

Often Value means status or kind of image you would like to be associated with. Rolex, Parmigiani, Bentley, Louis Vuitton, Four Seasons you can count further. But this is not always luxury. Diesel, Burton, Apple, Sony, Honda, and whole tribe of other brands, not luxury, but still shaping some image, so other people associate specific features of the brand with you, who use (wear, drive, drink, eat, ….) things of this brand. Brand is a formula, a DNA of specific features / qualities which shall be attributed to whatever thing under this brand, but that’s separate story.

Lets get back to the Value. Sometimes Value is some memory, or wish to catch up and maintain some good feelings or emotions. Otherwise, what the bloody reason is behind spending billion dollars on useless toys, magnets, photos, souvenirs in every tourist location in the world? The Value could be experience of specific feelings or getting other utilities.  Roll-coasters, skiing, snowboarding and all other types of sports, fitness and tourism could be an example.

Now, could anyone confirm, is Lexus actually better than Toyota at the same degree it is more expensive? Nope. People are prepared to overpay for perceived Value (utility, status, whatever other forms of the Value you can imagine). Value is relative, value is subjective.

That is one of the key reasons why advertising and all other marketing campaigns are often so much emotional and targeted to raise specific emotions and inject DNA of specific brand into your brain.

The purchase is always action to meet expectations that you have. You expect to experience some taste and enjoy specific food in Japanese sushi restaurant. The same way you expect to get satisfaction to your ego when you buy (if you are lucky enough) the next Lamborgini. You expect to survive and ready to pay whatever you have for the last bottle of water in desert.

So, the purchase decision sequence in my view is more or less this.

1. You get some cocktail of emotions, associated with what you are thinking to buy. This could be something you already know or aware of (brand you love) or something very spontaneous.

2. You get expectations (actually what you will get if you buy this). In other words you formulate your immediate perception of Value, as of now.

3. You (consciously or unconsciously) weight it with the price.

4. You buy or you don’t buy. Or you negotiate trying to put the Price below the Value.

Emotions formulate our expectations from potential purchase and thereby drive our decisions.

Next time we will try to figure out what are the tricks with expectations.

See ya!!