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 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.
"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."
Dina Gerdeman ,a writer based in Mansfield, Massachusetts. http://hbswk.hbs.edu/item/7201.html
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