Paying for Status vs. Service

Washington Post business columnist Steven Pearlstein was online Wednesday, Feb. 21 at 11 a.m. ET to discuss why consumers will spend large amounts of money to buy status, but are tight-fisted when it comes to paying for services.

The transcript follows.

Read the column: Why Status Sells Better Than Service (Post, Feb. 21).

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

His column archive is online here.

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Bowie, Md.: Steve, I think you answered your own question. People will pay big money for something that's tangible, like an expensive car, because they can show it off. Service though, is not as tangible, so someone paying $3000 for 60,000 mile service for their luxury car is not only shocking, it's embarrassing. It reminds me of when I found out a Ferrari oil change costs about $1000, while a brake job costs $8000. I'm sure the rich can afford it, but it makes them look like idiots.

Steven Pearlstein: Interesting point, that people tend to underestimate the value of service -- of course, until they don't get it. But you also raise the issue of whether the service is priced correctly (add $25 to get a glass of wine in a real glass NS cheese plate on long flight, for example) and the $8,000 brake job at the Ferrari dealership, which you know has a huge markup because you are a captive, rich customer whose time is too valuable to spend the day looking for another repair shop.

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Columbus, Ohio: I wouldn't lump flat-panel TVs in there with the other examples of male status goods. First, they are much higher quality in terms of picture size and resolution and lighter weight. Second, their higher price is justified by their higher manufacturing cost.

Steven Pearlstein: Fair point, although I'm not sure the distinction would hold much weight with someone, a woman, whose been asked to defend the $2,000 she just spent on a purse.

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Princeton, N.J.: Hi Steve. You raise an interesting question. I think part of the answer lies in the growing inequality in wealth and income in the U.S. The Rich are getting Super Rich so why shouldn't they pay $5,000 for a handbag. The rest of us have to watch our pennies. I think it is a different group of people that value status over price than those who value price over service.

Steven Pearlstein: Ah, my reliably lefty friend from Princeton. Its true, though. Status good confer status only if they have limited fallibility if there is a period of prosperity and there is a sizeable super-rich class, it tends to start an arms race in pricing for these status goods that in the end, nobody wins other than the people selling the goods. In other words, the inflation in prices for status goods is quite high, while the price of commodity goods is actually going down. Thishas a tendency to offset the effect of income maldistribution, since the investment banker who has to pay inflated prices for his Manhattan condo and his Ferrari isn't as well off as he, or you, think.

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Washington, D.C.: Could part of the phenomenon you cite be attributable to the fact that these status goods are tangible and lasting while services are fleeting?

Steven Pearlstein: Yes, as previous correspondent argued. But if i know that Singapore Airline consistently has good service, and you asked me if I was willing to pay 10 percent more on my ticket price to get it, and I traveled frequently, I would make that investment because the service was reoccurring. In that respect, a service can be "long lasting."

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Denver, Colo.: The point that your article appears fails to address is that of value. Certain luxury items have a real tangible value in that they serve a "ticket" affording the bearer entry into places and situations from which they would otherwise be excluded. I've had candid discussions with female co-workers who reject or entertain male advances based on the brand of his shoes or the appraised value of his watch. It is a pure Darwin situation for guys in that "market" - it is well worth dropping a grand or more on a watch that tells time no better than a $10 digital, so long as it improves his odds of getting laid.

The airline value is not the same. For one thing, there is no perceived relationship between ticket price and value in air travel, or at least outside of the charter market. Every traveler assumes that his ticket cost considerably different than that of the person across the aisle. Even if insane price discrepancies were not the norm, airline choices are typically limited by destination, type of plane and seat placement have more bearing on comfort than carrier, and many of the greatest inconveniences are functions of individual airports. And no extra fee that the airline could proposes would guarantee that you won't be smothered by the fat bore sitting next to you or that you won't be sharing your red-eye with an infant insomniac.

Steven Pearlstein: That's fascinating what you say about he signals women get from shoes and watches. I agree, by the way, that those are the right things to look at, if what you are looking for is some combination of high income, sophistication and style. Never knew women thought that explicitly about that sort of thing. I guess I'm naive.

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Kensington, Md.: One of Don DeLillo's characters in the novel Cosmopolis comments that what many wealthy people are really consuming is a claim to having spent X exorbitant dollars on a product. Even if that information is not known to anyone beside the consumer, the person gets a great degree of satisfaction from that knowledge; they derive utility from the ridiculous dollar amount. In your example, someone is walking around showing off a bag, but, as you can see, DeLillo removes the object altogether, and its value as a sign, i.e. status symbol. There is something perceptive in this.

You can observe this fairly directly with regards to airlines. You see a huge disparity between first and coach class ticket prices that only came about in the last few decades. Nobody in first class is really getting an extra $4000 in service on a trans-Atlantic flight, they have no product to show for it, and nobody else on the plane really gives a [care] about them. What they take away is the satisfaction of knowing that they can afford to fly first class.

Steven Pearlstein: Interesting comments, both of them. You are exactly right about the first class fares. The question is why don't airlines offer business class fares that offer the higher service and are, say, double the fare you could get at that moment in coach? I suspect they could double the size of business class that way, and increase profit margins. But it is religion among airline execs. that that won't work.

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WDC: Status does not sell better than service, contrary to your comments today--they go hand in hand. Unfortunately, good service these days comes at a price. Places like Saks and NMarcus make it a point to provide unique merchandise AND full service with no hassle or challenges, even when the salespersons know that I buy mostly during their sales events. I shop there because I get the value I value for my dollars--and I emphasize the plural! Gil

Steven Pearlstein: You are right -- those places Do provide good service along with status goods, and that is one reason the cost is high. When buying clothing, that kind of service really has lots of value. Buying a handbag? It's less important I would imagine.

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Alexandria, Va.: Sounds like a topic Thorstein Veblen would be interested in!

Steven Pearlstein: Indeed -- and economist Robert Frank, who has written brilliantly on status goods.

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Pittsburgh, Pa.: I read your column with interest and agree from my own experience how little people value service. Being associated with a computer store I have found that people will go through [heck] dealing with one of the major manufacturers time and time again when they have a problem. In our shop if you have a problem with a warranty or non-warranty issue you drop it off and the issue is resolved without calling and going through all the phone diagnostics, that most people have no idea of what is going on. And yet the shop is somewhat more expensive but has extraordinary value if you have a problem...still people will generally go for the buck. I would guess that the people dissatisfied with JetBlue will still take the least expensive flight, just probably not JetBlue.

Steven Pearlstein: The irony is that people liked JetBlue precisely because it managed to have better service in some areas. But they were willing to do that only within the parameter of having as low a price as any competitor. In that way, I think they failed to learn the lesson that was staring them in the face -- that they needed to invest even more in service, even if it required them to charge a small premium.

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Harpers Ferry, W.V.: I drive a LexusRX330--in this case, we test drove "luxury" SUVs in the same price range and settled on this unit because quality and price were equal AND because of the service we get at the dealer whenever we have to take it in for servicing -- I know I'm paying for it, but I'd rather pay them what they charge than a lesser quality place that basically charges the same. Gil

Steven Pearlstein: Thanks, Gil. Does your Lexus park itself?

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Washington, D.C.: Wow. I'm a woman and I've never thought that way. Maybe it is because I'm highly educated and (now) highly paid myself. But it probably is more because of my solidly middle class, single-parent upbringing -- I'd never dream of spending such money on things as purses and TV, even though I guess I have it now.

Steven Pearlstein: I got a call from a friend today who is repulsed by the $2,000 handbag but says her teenage daughters lust after them.

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D.C.: I'm not one of those "status types" and I tend to watch my pennies, as I remember the bad old days when I was struggling. That means that I know how to live on fumes (although I really don't want to anymore), unlike those who don't keep those days in the back of their mind.

That being said, when I travel long distances I use my frequent flier mileage (if there's enough) to upgrade to business class -- I have an arthritic knee and I'm tall. That means that if I'm on a long flight I really can't walk on the other end without excruciating pain. It's only for that reason -- not status at all.

I think an $8000 oil change for a Ferrari serves them right, frankly. Hmmm, wonder how many kids that could feed. . .

Steven Pearlstein: I'm trying here not to make value judgments myself, but I'm happy to print yours.

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Arlington, Va.: Good column, but I don't think there is much mystery. First, people tend to by things for themselves or for those they care for. Services are more likely to be charged to others, often in a business relationship. For example, organizations care about their staff getting somewhere far more than they care about their comfort in getting there. Thus, with the exception of top executives, who care very much about comfort and can use business money to purchase luxury services like private jets, they have rules mandating lowest cost modes of transportation. With this group of people taken out of the market for better services the returns to companies from providing them are not as high as they would be if all users could freely choose luxury versus cost.

Second, products are more like investments; they remain and one gets continually rewarded. Services are consumed and memory of their value fades particularly as one cannot directly compare pleasures of first class travel with travails of coach the way one can compare my Coach bag to your Wal-mart knockoff. One also can get a good idea of what one will be getting regardless of advertising hype with products, but with services - maybe the first class flight attendant is surly and the coach class pleasant or the high priced gardener may have different ideas about what to plant and is a struggle to deal with.

Third, cultural shifts take time. Yesterday paying $500 and up for a handbag was outrageous - bags weren't supposed to cost that much. Today it is expected, just as we are used to $2.50 gas. Today it is outrageous that NW or united is charging extra for a coach seat that happens to have 4 inches extra legroom - I won't pay it as a matter of principle - tomorrow when this is the way things are I will make my reservations early to be sure I can still get that extra leg room for just $15 (though recently in United it was $44)

Fourth, few of us can make handbags or other products, but we are more likely to be able to do services: wash car, cook meal, garden, shop, etc. For some service production has its pleasant side and for all doing it yourself doesn't require spending already taxed dollars; indeed no income is imputed for the value of self-service.

Finally, there are many exceptions. Bidding wars arise for prize nannies and baby sitters; eating at high priced restaurants even without an expense account is common, personal shoppers, decorators, gardeners, private security guards, etc. etc. all have customers willing to pay more, and sometimes very large sums, depending on reputation for quality. Indeed having the right decorator or personal trainer can become a status symbol much the way an expensive handbag might. Note that the services that command the highest prices relative to what one could get a similar but lower quality service for (e.g. dinner at the Inn at Little Washington rather than the Silver Diner, or a high priced nanny rather than a high school girl baby sitter) are those in which those who consume the service can choose what to consume and not where an organization's rules constrain the choice.

No doubt I am missing some explanations, but these are the ones that come to mind. Thanks for your continually interesting columns. Rick

Steven Pearlstein: That was quite well put. Thanks.

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Baltimore, Md.: Re status handbags: I cannot remember the name of the company, but there is an outfit that rents high status handbags to women, using their credit card number as collateral. I thought, "Who in the world would do this?" But if you have a super special social event coming up and want to use a $5,000 bag for a fraction of the cost, this is the answer.

And re Marshall Field: I think it is unfair to say that they should have been more service oriented. Service at the State Street store in Chicago was always excellent--better than Macy's. But the parent company, which is Target, I believe, wanted out of the old line department store business and sold to Macy's, much to the dismay of Chicagoans.

Steven Pearlstein: Yes, there are two Web sites from which you can rent the bags for an evening or a trip. I couldn't find a way to fit that in the column, but it illustrates how crazy this has gotten.

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Dayton, Ohio: Steven - what about "experience" purchases -- expensive vacations, ridiculous parties? Those are services, and people are willing to pay a lot for them, yet they are completely intangible other than some photographs. Is it the bragging rights thing again?

Steven Pearlstein: Maybe, or maybe just that people have a lot of fun and value them highly. I can think of the expensive safari i took the family on a few years back. My wife was horrified by the cost. She now remembers the trip as a wonderful experience and has completely forgotten her price concerns.

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Falls Church, Va.:"a friend today who is repulsed by the $2,000 handbag but says her teenage daughters lust after them."

This is the expense-account effect: A person is much more amenable to consuming luxuries when someone else (like a parent) is paying for them. Another example is corporate executives on private jets. That sort of travel would happen a lot less often if it weren't financed by shareholders.

Steven Pearlstein: Indeed.

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Seattle: Sad truth in airlines is that people will ALWAYS take the cheaper flight, domestically anyway. American tried to take a couple rows out and charge a bit more; they got hammered and put the seats back. People choose their flights based on 1: price. 2: Time of day. Cheap, frequent flights -- small airplanes stuffed to the gills -- are what consumers want. Not what they SAY they want, but what they'll pay for.

Steven Pearlstein: I just disagree. They never give these things a chance to work, and figure out how to do it right. I'm not surer offering them as an add-on like the one you describe is the way. I'm talking about a generally higher level of service (Nordstrom) and somewhat higher price point to pay for it.

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Alexandria, Va.: Another status phenomena I've seen the devaluation of status goods via eBay. Some articles of clothing, such as Izod shirts and designer purses, no longer connote status because it's easy for for them to be copied in Asia and sold as originals on eBay (who don't check). I assume this will lead to a class of secret status items, goods that can't be advertised or sold to a mass market.

Steven Pearlstein: Fake goods are a real problem for status products because they often expose how much the brand premium is. That's why they have to keep changing the styles and models, to stay ahead of the counterfeiters.

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Harpers Ferry, W.V.: Well, you do inadvertently raise a good point when you ask if my Lexus parks itself. That is, a careful and wise buyer differentiates among, basic, enhanced and luxury. He/she also considers features that are superfluous--in this case, no, I am perfectly capable of parking the car. But, I do appreciate the design technology. It tells me that Lexus engineers are forward thinking! Gil

Steven Pearlstein: Good choice.

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Arlington, Va.: For a long time, people wanting to buy a computer or other heavy hardware at Best Buy had to pretty much know everything because the staff clearly knew very little about the product except possibly whether it was in stock. Now Best Buy is advertising that their sales people have expertise about the products. This could be an indication that service does matter even to people who are mainly shopping by price.

Steven Pearlstein: I think it does. It may also be a reason that HP is pulling ahead of Dell - because Dell's back end service has deteriorated, while HP is being sold through retail outlets they are beginning to add real value in terms of service, help desks, etc.

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Washington, D.C.: Hi - I was once lucky enough to own a Mercedes, and the biggest pleasure and surprise about it was the service. Too bad the car couldn't handle the snow! Thanks, Allison

Steven Pearlstein: And thank you.

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Debt, Status and Service: The guy who mentioned "Watches and Shoes" nailed it in one. What he didn't do was follow the logic further, which goes a long way in answering your question. The "shoes" thing starts an arms race, which most of society can't win.

If I'm in competition (at $100/K yr) with trust fund kiddies, I spend more on the outward showy items. I cut back to compensate the cost (aka, I get Bruno Maglis at Filene's Basement, not Saks) on service expenses. Who can tell I flew Southwest? But they can tell I wear a Movado.

Now factor in the ever increasing household debt in the US, often caused by increasing income division trying to change the same arms race, and you have even more pressure to cut on the non-showy service.

Steven Pearlstein: I think we're onto something here.

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New York, N.Y.: Steve, you could have asked a much better question. Why do so many people who live on the Upper East Side in multi-million dollar co-ops, look to spend as little as possible by hiring illegal immigrants for childcare, or hiring citizens but don't pay social security taxes? I guess there's no status in a reasonable nanny, but there's status in a $30,000 per year nursery.

Steven Pearlstein: Or they spend so much on the condo (and the private school and vacation in Aspen, etc, etc) they don't have enough left over for the babysitter.

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Falls Church, Va.: I agree with your column, as I do most of the things you write. There is some value to certain items, which might have better, "Quality" as the author of "Zen and the Art of Motorycles" once wrote. A designer good that lacks refinement is not really quality. But my 1987 Porsche 911 is a handbuilt, work-of-art, racing machine that I love driving and it makes me feel like a million dollars. It's 15,000 mile tuneup costs $1,000 and albeit expensive, is worth it to me to keep it going. Driving a mustang or even an older corvette isn't the same. Better service is worth some value, it would make me decide to use a product if price was equal.

Steven Pearlstein: I think this explains Porsche's continued success, in fact.

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Elmhurst, Ill.: How do airlines really know the traveling public wouldn't be willing to spend $25 more for a ticket? Even price-sensitive buyers like me might choose $25-75 more on a $500 flight if they were -guaranteed- more leg room, overhead bin space, a clean bathroom with short lines, maybe a meal. Some airlines have talked about legroom, but in my experience it's not that easy to find out what seating space, etc., you're getting. So why pay more?

Steven Pearlstein: That's the point -- the company would have to have a reputation as reliably offering better service. And I think we can say that none of the airlines have really tried it since the service levels have declined, so they really don't know how it might work. They are very smug and confident about this, by the way. I know this because I have talked to them. But what I observe about them is that they are actually quite unoriginal, and behave like a herd.

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Washington, D.C.: Re the Lexus that parks itself: For some reason, the folks at Lexus contacted the wonderful writer Calvin Trillin about loaning him their self-parallel parking vehicle. Trillin proceeded to write an hilarious op-ed in the New York Times about it, noting principally that the self-parking feature requires, "a space the size of which the average New Yorker encounters every 100 years."

Steven Pearlstein: I read that. It was a hoot.

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Richmond, Va.: The last sentence of today's column ends, "you'd be surprised how much people are willing to pay for something they really value." As you have pointed out in previous columns, Americans pay a great deal for health care products and services, and presumably repairing their health is something they really value (no comment on maintaining health). Recognizing our insurance system greatly desensitizes many Americans from the costs of their care anyway, does this cost-blind commitment to highly valued services or goods help to explain increasing health care costs?

Steven Pearlstein: Well, its a good point. We do value our health care, and overpay for it as a result. That doesn't mean we shouldn't try to get a better value proposition from health care, particularly with 46 million of our countrymen with no insurance. BTW, we like our health care DESPITE the fact that the service component that goes along with it is somewhere from mediocre to terrible.

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Bethesda, Md.: It's interesting how things have changed over the past 40 or so years. Growing up, my parents had "nice" things, driving Buicks or Chryslers, shopping at stores similar to Woodies or Garfinkels, drinking brand-name booze (Seagram's or Smirnoff), and the like. Now, many of these upscale brands are not exclusive enough for buyers, and have suffered as a result. But from my perspective, I think paying a little more for something nicer makes sense, but these exorbitant prices are crazy - the marginal utility is just not there. Leaving out the car example, did the brands change, or has it been our society's values?

Steven Pearlstein: Something has changed, you are right. In general, I'd say that as the country got richer, the quality levels at these "upper-middle" brands did not rise with it, making them susceptible to competition from higher quality brands and lower.

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Arlington, Va.: In the 70s to 90s, my aunt owned an dress alteration shop in a very upscale suburb. She did beautiful, detailed work--often repairing what cheap alterations had ruined--and charged higher than the going rate. What often galled her was that women who would easily spend hundreds of dollars on a couture outfit would balk at paying $25 to shorten the hem or sleeves. There were others, though, who would pull out their checkbooks and pay her whatever she charged, which also (pleasantly) surprised her.

Steven Pearlstein: That's a perfect example.

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DC: I think the Post would be providing a great service if you guys did some reports on the profit margins that are made by these luxury retailers. For a $1000 pair of Jimmy Choos, the cost of materials is probably $5 or less.

Steven Pearlstein: That's probably an exaggeration. But the big money is spent on marketing, on the rent up there in Chevy Chase (close to $100 SF, I'm told)and the salary of the top designers. But even with all that, I'm sure the margins are phenomenal.

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Steven Pearlstein: That's it for today folks. This was fun.

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