Goods and services can be broken into three categories:
1. Search Goods. These goods are commodities that have attributes that the buyer can evaluate before purchasing. With search goods, you can assess both the price and the value before purchase. Examples include paper towels, gasoline, apples, bottled water, canned vegetables, clothing, furniture, etc. This category mainly applies to goods but also applies to lower level services lawn mowing. Search goods are subject to substitution and price competition.
2. Experience Goods and Services. According to the Rutgers Business School, “experience goods are those where price, quality or some other attribute remains unknown until purchase.” You must experience the good or service before you can evaluate how it fits your needs and whether the price of the good or service matched the perceived value. Examples include wine, restaurants, and haircuts. Another interesting example is backup cameras on cars. A study found people who already had backup cameras on their cars would require a sizeable payment to buy a new car without a backup camera while those whose cars didn’t have a backup camera said they’d need to be paid less than $50 to be induced to buy a new car without a backup camera. Thus, after you’ve experienced having a car with a backup camera its hard to live without out it, but if you’ve not experienced having a backup camera on your car it doesn’t seem like it’s all that useful.
3. Credence Goods and Services. These are goods and services that are difficult or impossible to evaluate even after you’ve experienced them. This is the case because the consumer lacks the technical expertise or information to judge the quality of the good or service. “This is often the case with expert or high-end services like lawyers, surgeons, mechanics, management consultants and prestigious universities.” Source. For example, economist Winand Emons has made the point that “brake shoes changed prematurely work just as if the shoes replaced had been faulty”. Similarly, you don’t know whether the treatment prescribed by your doctor was the best cure for an ailment — you might have gotten better without the treatment or maybe there was a better treatment that would have been less expensive or worked quicker. You just don’t know.
Marketing Of Each Type of Good or Service
Each type of good or service has a different marketing challenge for the seller. With Search Goods the seller is mainly competing on price as compared to offered attributes. For Experience Goods the seller must convince the buyer that the product or service is needed and worth the cost. It often makes sense for purveyors of experience goods and services to provide a free trial or discounted introductory period. Credence goods and services rely on prestige and often signal quality by having a higher price (would you price shop for the cheapest heart surgeon if you needed a valve replaced). Entire industries exist that help consumers judge the value of experience goods and credence goods, such as US News rankings of colleges and hospitals, evaluations of wine quality by points, and expert reviews of movies and restaurants.
Effects of the Internet on Categorization
The internet has had a huge effect on how we evaluate experience goods. In addition to looking to expert reviews, user reviews are now ubiquitous on websites. Most of us read user reviews before staying at a hotel or Airbnb, watching a movie, reading a book, or going to a restaurant.
However, it is important to distinguish between user reviews of experience goods/services — where the consumer can judge quality — versus reviews of credence goods — where the consumer can’t adequately judge quality. For example, reading user reviews of a doctor or lawyer largely just tells you about their personality and whether the consumer enjoyed a good outcome. Such reviews don’t tell you whether the doctor or lawyer is skilled and whether the service was actually appropriate. For example, I’ve worked with a number of lawyers on joint client matters who I wouldn’t rank as skilled but were well thought of by the clients.
Hmmm. Point totally taken. But to play devil’s advocate, this same line of reasoning could be converted into an IFOD about consumerism (and maybe it already has been). E.g., the more we assume some seemingly “meh” good or service will become invaluable once we’ve got it, the more eager we may become to ditch the old in pursuit of bigger, better, faster. Applied judiciously, the quest for improvement is a most noble human trait. Applied recklessly (as mass marketing tends to encourage), it becomes a death spiral into discontent, not to mention all the material waste that ends up in landfills too soon. To all things, balance!
Re your experience example, yes, I bought a 2000 BMW 5 series demonstrator off the forecourt (in England) that had everything on it, including GPS. I have never bought a car without one since, even though Google Maps is now better than BMW’s version. For years my wife just could not see the point. Until she got one. Now she insists on it too.
Great example! I also remember thinking why the hell would I want a camera on my phone? It wasn’t until I had a camera on my phone but I was like oh now I get it. The same goes for having a built-in flashlight on my phone only after experiencing the amazing benefits of always having a flashlight with me do I now truly get it.