Last week I blogged about Nespresso and their luxury machine + capsule + service experience. While I was researching the topic, I stumbled upon numerous articles complaining about the high cost of the coffee capsules. These capsules can be bought for around 30p each – which makes the average cup of home coffee around three times more expensive than buying filter coffee – but still far cheaper than the average high street coffee shop. It got me thinking about how we perceive value, both in terms of time and in terms of pricing.
Time > Money
One of the selling points behind Nespresso is the convenience and the time saved during the process. No cleaning out a filter, no boiling a kettle, even the mail order service reduces the amount of time spent at the supermarket.
Aaker, Rudd and Moligner (2011) examined the connection between time and happiness, and found five time-spending principles that increased happiness, including
1) spend time with the right people
2) spend time on the right activities
3) enjoy the experience without spending the time
4) expand your time
5) be aware that happiness changes over time
Of these five principles, 3 and 4 directly relate to the Nespresso experience, in that the machine saves time, giving you more, and gives you an excellent coffee experience without spending the time. Indeed many people genuinely report being very happy with their Nespresso machines, this indicates why.
Of course, that’s not to say that spending time (and money) at the coffee shop isn’t well spent. A coffee with friends is spending time with the right people, which this study, and a study by Dunn, Gilbert and Wilson (2011) would argue is time and money well spent.
The Effect of Pricing Points
The pricing of the machines themselves are also interesting. The three machines priced from £70 to £125.99 all do pretty much the same thing. For £159.95, you get the bonus feature of heated milk. Why have Nespresso bothered releasing three different machines which all pretty much do the same thing?
Shafir, Simonson and Tversky (1993) presented the case that when we seek choices under conflict we seek different options. If Nespresso only had one standard coffee machine before the heated milk upgrade, the consumer might seek choices else where from other coffee machine makers. By producing the alternative choices themselves, Nespresso is accounting for this psychological ‘option seeking behaviour (scroll to chapter 3 – ‘Choice under conflict: seeking options’ for an explanation of this behaviour).
This paper also showed that by adding more options (three is ideal) can make the cheapest product seem like a better choice. Dan Ariely suggests that this is because as humans we judge value relatively, so in the context of these Nespresso machines, having two machines costing £109.99 and £125.99 makes the £70.00 look like good value. Or, on the other hand, a buyer who worries that the £70 option might be cheap might think that a more expensive machine indicates good value, and given the small jump from £109.99 to £125.99, might be more likely to make the jump.
In conclusion, the coffee and the machines that Nespresso sells are undoubtedly quite expensive compared to other home drinking coffee options. However, Nespresso utilise psychological principles to maximise customer satisfaction and create favourable price perceptions, giving their customers the perception of value, whilst simultaneously and maximising sales and profits.