23 Sep 2013  Research & Ideas

Status: When and Why It Matters

Status plays a key role in everything from the things we buy to the partnerships we make. Professor Daniel Malter explores when status matters most.

 

Consumers pay handsomely for products that are considered the best of the best in their league, whether they are the fastest cars, the fanciest handbags, or the finest wines. But for what, exactly, are they paying a premium? The superior quality of the product or the status of owning it?

"We like to believe that people pay for status for purely symbolic reasons, but the empirical evidence for that has been weak at best," says Harvard Business School's Daniel Malter, an assistant professor in the Strategy unit who studies status and its effects on organizations and individuals.

"We like to believe that people pay for status for purely symbolic reasons, but the empirical evidence for that has been weak at best"

Think of the Bugatti Veyron, for example, a car with 1,000 horsepower that goes 252 miles an hour. "The $1 million price tag alone would lead many to believe that status plays a role in the price. But we also have to admit that it is one of the best cars ever produced, and that many deem the combination of its performance characteristics and quality without equal.

"To get at the symbolic value of status," Malter continues, "we have to find evidence that buyers are willing to place a premium on status, holding constant quality and the reputation for quality." What sounds easy in theory may be difficult in practice, however: "Look around and you may be hard-pressed to find a high-status producer that consistently produces second-grade products or a low-status producer that consistently produces first-grade products."

For answers, Malter turned to the wine industry and an investigation of whether France's prestigious 1855 grand cru classification of châteaux in the Médoc wine-growing region still influences wine prices today. Looking at grand cru-classified wines of the vintages from 1991 to 2008, Malter found that the wines from the first class earned three times as much as wines from the second class, holding constant the quality of the focal bottle and its quality in the recent vintages. The second-class wine earned about 20 to 30 percent more than châteaux in the lower classes.

The differences in price between third-, fourth-, and fifth-class wines, on the other hand, were relatively small or zero once differences in quality or reputation were accounted for.

High-status wines come with a price."It is the cream of the crop that benefits most from status. For everyone after that, status differences do not matter nearly as much, if at all," Malter says. His paper on the grand cru classification has been conditionally accepted by a major academic journal.

But Malter also found that we might overestimate the degree to which status matters.

"Status effects are estimated much smaller once you account for two factors. First, the market places disproportional value on the pinnacle of quality—the Bugattis of this world, for example. And second, the market has an enduring appreciation for quality demonstrations in the past, for which there is good reason because you do not know how good a wine really is before 20 years' time."

Malter concludes that we should remind ourselves that placing disproportional value on the pinnacle of quality is not the same as conspicuous waste on status goods. A recent study by Azoulay, Stuart, and Wang came to a very similar conclusion for the effect of status on citations to academic articles. Both studies provide compelling evidence that the purely symbolic value of status is considerably lower than we commonly think.

STATUS AND VENTURE CAPITAL

In another study, Malter looked at the venture capital industry between 1995 and 2009 to determine how firms can create a distinct identity by setting themselves apart from high-status organizations within their industry. Specifically, he examined how a VC firm's position in a coinvestment network and the position of its coinvesting venture caital firms affected the focal firm's chances to raise a new venture fund.

When companies collaborate with similar others, it may be difficult for outsiders to discern who did what. This raises the question of how a firm that depends on outside audiences can distinguish itself from competitors. "Being distinctive from the high-status firms in an industry should be particularly crucial, as high-status firms attract a disproportional share of attention and resources from their audiences," Malter hypothesized.

Reproducing earlier findings, Malter first established that the more central the focal firm was, the greater the likelihood that it was able to raise a new fund. However, the more central the focal firm's partners were, the less likely the focal VC was able to raise a new fund. This effect was stronger when the focal firm was itself a central player in the industry.

"I see it as a tale of competition for a distinguishable identity," Malter says. "You want to be mindful about how much you associate with central players in your industry if you are one or are trying to become one yourself," he adds. The paper concludes: "Audiences commit resources less willingly to organizations that fail to distinguish their identities from the established elite."

"If you're aspiring to be a high-status player in your industry and you have to partner with other firms in your industry, you can establish your legitimacy first by partnering with central players because that signals you have the quality to solicit those relationships," Malter says. "But there comes the point at which you have to switch from partnering with the central players in your industry to being the central partner in your relationships. You want your audience to evaluate you on your own merit and make the most favorable attributions."

About the author

Dina Gerdeman is a writer based in Mansfield, Massachusetts.

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Comments

    • David
    • Plouffe, Personal

    Read your article right after Seth Gogin's blog Compared to what: Marketing and relativity

    Does experience trump Status?

    http://sethgodin.typepad.com/seths_blog/2013/09/marketing-and-relativity.html

     
     
     
    • Hugh Quick
    • Home, None

    Individuals opinions vary so much I do not see how it is possible to make useful predictions of what people will pay for. However, I think a lot of people do just that and the ones that get it right prosper. A lot of people get it wrong.

     
     
     
    • Kapil Sopory
    • Company Secretary, SMEC(India) Private Limited

    Status plays a great role in making purchase choices by the elite who have sufficient available resources to meet such demands. For others such thoughts are meaningless as while they do understand what such status items stand for, they are unable to even think of imagining they could acquire any. Status apart, the purchaser needs to first find out whether the intrinsic worth of such items matches cost and benefit. It is no fun to acquire and then repine.

     
     
     
    • Dr. Uzo Eric Chukwu
    • president & CEO, RESSOS, Inc.

    I would like to say that the motivation to pay high premium price on any product, car, wine, or a fountain pen, is first motivated by quality before status.

    When I was twenty one years of age, a mentor paid the equivalent of three Toyota cars for a new Mercedes Benz. When I first saw the car, I was saying to myself, if I had his money, I would have bought a Toyota car instead of the Benz. My thinking was that if I bought a Toyota, when it gets old, I would buy another and another, and hopefully, the three Toyota would outlive one Mercedes Benz.

    You would not believe what happened, when I had a ride on that same Mercedes Benz, on the roughest road that ever existed. I did not for once had the jolting and noise that anyone would normally experience in many r similarly built cars like Toyota. The journey lasted for over eight hours and caused a mental-shift that has lived with me forever, thus influencing my keen desire for pursuit of excellence.

    In my second year engineering school at the University of North Carolina at Charlotte, while we were discussing design obsolescence, I was in favor of engineers to design the most reliable products, as against some school of thought that preached that more money are made on the low end products that are easily affordable by majority of the customers.

    It has been proved by test and evaluation, that in most cases most high end products, have either high reliability, or show high superiority in their class that justifies the top dollar paid by those who are willing to pay to have them. So, I am inclined to say that quality is the reason why high end products become the desire of those who have class.

     
     
     
    • Ayodele Asaju
    • Project Officer, Community and Social Development Project (CSDP), Nigeria

    Quality is a symbol of status. If the quality is not in the product, the product cannot represent the owner well or satisfy him over a long time. There are connoisseurs to testify to qualities of wines. When Jesus turned water to wine, the guests attested to the the superior quality of the last set of servings. This is what the rich are paying for. But some wannabe may want to fake it by buying the label and a bit of the quality. This is why the lower end of the high quality makes poor showing. This is not to say that some products are not just mere mythical in quality. But the service with which the products are delivered are high enough to provide some form of satisfaction. This is the reason you buy the same table water at 10 times the price in a 5 star hotel. The question that arises from this is, 'Do the differences in prices justify the differences in qualities?' It is the answer that gives the answer to whether it is abou t the quality or the status.

     
     
     
    • Scott Hunt
    • CEO, The Endocrine Society

    I'm not sure the distinction between status and simply Brand identity has been well made. Every brand has a place in the status pecking order. But that place can move, and the last para is compelling for that reason. SH

     
     
     
    • Frankie Salinas Contreras
    • USA ES TRADE, LLC

    Most people I know buy wine base on the quality of how the wine taste not the price. In this case, the whole idea that expensive is equal to high status in a person does not mean anything. A $7.00 dollars bottle of red wine from Sonoma, California can be of a much better quality than a $125 dollars ch?teaux red wine from France.

    The high price in an item does not bring high status to a person, basically, it the other way around the qualities in a person bring high status to items they wear, drink or use.

     
     
     
    • ED
    • Tangled, Sometimes

    So yes, so there are ways to exploit another's status, and there are ways to usurp another's status, and there are ways to create one's one status. Hmm, sounds vaguely like high school. In any case, the central question of the central premise of the article has not been defined. What is "status"? Yes, of course, we all have our personal assumptions and understandings of what status is. But to use the term in a quasi academic paper with the assumed purpose of influencing business strategy, I for one would care to see a more fully defined terminology. If for no other reason than it is insidiously difficult to measure something that is "sort of" defined.

     
     
     
    • Daniel Malter
    • Assistant Professor of Business Administration, Harvard Business School

    Thank you for your comments. I will share a number of reflections on them. Accepted definitions are that status is an audience's belief of superiority of a social actor without proof or a higher position in a social hierarchy holding objective criteria like quality or the reputation for quality constant.

    This has two implications. First, along with quality, reputation, and other factors, status is part of a brand's identity. As brand identity is thus an umbrella term, it is managed by managing its constituent attributes (such as quality, status, fashionability) in a targeted and coherent way (@ Scott, Beverland (2005) has a paper on the brand identity of wineries. Status is one aspect of what is called brand authenticity there. And while status is fairly well defined, I would imagine that brand identity is much more difficult to pin down because of its umbrella nature and shifting importance of these components in different industries).

    Second, it means that in order to prove that there is an effect of status at all, quality and the reputation for quality need to be held constant. Picture the difference in an audience's perception of an Oscar winner and the runner-up. If the truly best actor always wins, then quality (as demonstrated through acting) and status (as reflected in winning the Oscar), are perfectly aligned. In such cases it is impossible to distinguish between quality and status; they are the same thing. For status to be different from quality, you have to find two actors that are of equal quality, but only one of them gets the prize. Here the prize creates a distinction that is purely status, without a difference in underlying quality. Empirically, prizes, rankings, or hierarchies are most likely to create such arbitrary status differences that are unrelated to differences in underlying quality.

    My paper on the grand cru classification exploits such distinctions. It shows that of two wines that are of the exact same quality the one that ranks more highly in the classification can charge a higher price. However, the paper also shows that this status effect is smaller than we commonly think, because we have neglected there is a disproportional appreciation for the pinnacle of quality and because reputations for quality are extremely durable in this market. Thus, as long as high-status goods are always the ones that are of higher quality or reputation, we cannot say that they are not worth their price.