Managing Perceptions - The Magic of Placebos

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In business, as in most areas of life, it is the perception that often matters more than the actual result. If you can manage the perception, you can win the customer, even if your result is less than perfect.

Let's look at two examples:

  • The price of, well, anything: I went to business school. I have consulted to companies and performed, literally, thousands of spreadsheets, including one that entirely modeled the cash flow of a complex premium finance business, to the point that the banker couldn't derive it! I know all of the classical valuation methodologies - discounted cash flow (DCF), comparables, price/earnings ratios, etc. In the end, however, the price of a stock, and hence the value of a company, depends entirely on the perceptions of the seller and the buyer. If the buyer believes the company will be worth more, they will buy it for more, and DCF be damned; if the seller thinks the company is going to hell in a handbasket, then they will sell the stock at a discount, and who cares about P/Es?
  • Medicine: The "Placebo Effect" is very well-documented. In many cases, there is no actual benefit to medicines being taken beyond the person believing that the drug has an effect. The pill that looks like the real thing, but is not, is called the Placebo.

Curiously, the term "placebo" comes from the Latin meaning "I shall please." In other words, the doctor is only giving you this medicine to please you, not because it has any real effect.

A few days ago, NPR ran an article online showing that the placebo effect actually can make real physical changes. In the study, hotel maids who were educated that their work lugging around heavy carts and cleaning rooms actually qualified as healthy exercise had better health outcomes - weight, blood pressure, etc. - than those who were not, despite no difference in physical activity.

The human mind is a very powerful thing.

In business, you are never, ever, ever looking for perfect service. You are looking for perfect customer satisfaction. Satisfaction, of course, is a subjective term, generally meaning that your results met the customer's expectations. In many cases, that subjectiveness can make it difficult to know how much service to provide cost-effectively. On the other hand, the subjectiveness is powerful because you, the service provider, often have the ability to change the expectations, and sometimes, using placebos, to even change the customer's outcome.

The rules of the road:

  1. Set Expectations: Service providers often believe they need to promise the sky. In the end, though, customers either see through empty promises and refuse to buy, or believe the promises and become disappointed when the reality falls short of the rhetoric. Instead, understand exactly what you are able to offer, and set expectations just below that point. Sure, you will lose customers who want more than that, but better to lose them upfront than to deal with them dissatisfied and angry later. Instead, the ones you do acquire are the ones who are happy to pay for the service level you can provide. 
  2. Use Mirrors, but not Smoke: One of the tricks of the trade when people are waiting is mirrors. When is the last time you saw an elevator lobby without mirrors? Having a more open-seeming space, and the perception of more people around, makes the time seem to pass more slowly, thus making you less impatient when you have to wait for that elevator. If a one minute wait feels like 30 seconds, everyone wins. Use mirrors and similar perception management techniques - placebos - to change the customer's perception of reality.
  3. Reset Expectations: Anyone heard of Six Sigma manufacturing? It means that of all your products rolling off your factory, only 3.4 out of a million (!) have defects. I have never seen a service business with that low of a level of defect. Face it: you will fail some customers. The only things that will matter are:
    1. Did you fail because of poor expectation setting, or because of inevitable defects?
    2. Did you fail at a reasonable rate (1 minute of downtime per year? 1 second? What is expected in your industry), or at an unreasonable rate?
    3. Did you manage the failure well?

Surprisingly, customers actually expect you to fail once in a while. They will understand and tolerate it... unless you are flying an airplane and failure means hitting a mountain at 600mph! What they really want to see is how you manage that failure. If you recognize it, apologize, show empathy, and help them manage around it, even if you give them placebos, they will stay with you. If you don't, you are done for!

Every single business can use these to reduce their churn rate and increase their satisfaction, which directly lead to higher revenues and profit margins. You just need to answer: how do I find out which expectations to set, which mirrors to use, and how to manage failures in my business.