Communicating Water’s Value: Talking Points, Tips & Strategies

Shape the Perception of Water’s Worth© 2014 American Water Works AssociationAvailable at the AWWA StoreIdeal crop marksDedicated to the World’s Most Important Resource ™Melanie K. GoetzCommunicating Water s Value Talking Points, Tips & StrategiesExcerpt from the book included.Buy Now© 2014 American Water Works Association53Chapter 8The Paradox of Value: Water Rates and the Law of Diminishing Marginal Utility“How wonderful that we have met with a paradox. Now we have some hope of making progress.” — niels bohRWhy is it that diamonds, shiny and nice as a fashion statement, are valued more highly than water, which quenches our thirst and is an absolute prerequisite for sustaining life? Could it be that the water we use on the other end of the “sexiness” scale—filling a scrub bucket, hos-ing down the driveway, or flushing the toilet—has a dampening effect on water’s value?Rarely do we think about the disparity of price among the myriad products that surround us. Apples-to-apples, it’s obvious that a Kia Sorento doesn’t hold a candle to the Rolls-Royce Phantom. But apples-to-oranges, why such a chasm between cool blue water and hot blue diamonds? (Iron-ically, diamonds are often referred to as ice.)Economists tell us that the law of diminishing marginal utility dic-tates that consumers place a greater value on diamonds than on life-giving water. It’s just the way consumers prioritize price—by a product’s least-value usage. You may crave life-giving water if you’re lost in the desert, but even the humblest industrial diamond carries a certain sexiness that satisfies us in a way that the redoubtable H2O never can.20757 text.indd 53 8/25/2014 9:46:20 AM© 2014 American Water Works Association54Communicating Water’s Value: Talking Points, Tips & StrategiesAh, the allure of a precision-cut marquise diamond Well, let’s just concede that the value of water pales in comparison, as it courses down the storm drain, in most people’s eyes. Few would ever capriciously discard a diamond, yet water flows down our gutters every hour of every day. And if gutter runoff is the worst face of water—that is, its least-value usage—this explains its low prestige among economists and, by extension, average consumers.Yet that devilish voice whispers in our ear: “Isn’t there something you can do to spiff up that image, and put cool clear water on a par with those exquisite diamonds over there in the jeweler’s window?” Or, as the Market-ing Department might view things: Can you find a way to reposition the product and boost its perceived value in the eyes of the consumer, even if it sells for only a penny a gallon?Objective Versus Subjective ValueTwo schools of economic thought drive the discussion about the value of a product: the intrinsic and the subjective. The first holds that the price or value of anything is objective. The second school says price and value are strongly linked to our subjective perception of the worth of goods or ser-vices. Most of us—economists, retailers, and consumers alike—function in this subjective mode; thus, we give little or no value to an object unless it’s perceived by a consumer to satisfy a human need or want. What does it cost to bring a product to market? Irrelevant. What are the variable costs for larger quantities? Meaningless.If the consumer doesn’t covet your Pet Rock or Beanie Baby, you may as well try selling snowballs to the Inuit in Alaska. Objectively speaking, delivering snowballs intact to the shores of the Bering Strait surely involves massive cost (labor, packaging, transportation, and the like). What price could you possibly hope to expect from the Inuit in return for your invest-ment and efforts? Subjectively speaking, zero. But offer that same product in liquid form and voila The lowly H2O is viewed in a new light. Think pipeline. Think bottled water.In either case, objective value is irrelevant to the consumer. Econo-mists would point to the economic value—simply put, what a product is worth to the person who wants to buy it rather than how much the seller will give it up for.20757 text.indd 54 8/25/2014 9:46:20 AM© 2014 American Water Works Association 55The Paradox of Value: Water Rates and the Law of Diminishing Marginal UtilityDiamond–Water Paradox and Diminishing Marginal UtilityAdam Smith defined the contemporary Western notion of economic value. More than two centuries ago, the Wealth of Nations author mulled the conundrum that even though life cannot exist without water and we can easily subsist without diamonds, diamonds are, pound-for-pound, vastly more “valuable” than water. This paradox endures today.Figure 8-1 illustrates the law of diminishing marginal utility in the “diamond–water paradox,” showing the marginal utility of diamonds and water as a function of the amount consumed. As a person buys or con-sumes more diamonds or water, each additional unit of diamonds or water results in a lower marginal utility. At low levels of consumption, water has a higher marginal utility than diamonds and thus is more valuable. People usually consume water at much higher levels than they buy diamonds; thus the marginal utility and price of water are lower than the marginal utility and price of diamonds.Let’s return to our Far North water marketplace. Suppose we deliver five pallets of bottled water to the small town of Barrows, Alaska. That shipment might last the entire winter as a supplement to the residents’ WaterDiamondsQuantity ConsumedMarginal Utility (utils) 0 10 20 30 40 50 60 70 80 90 1006005004003002001000Figure 8-1 Marginal utility of water and diamonds as a function of amount consumed20757 text.indd 55 8/25/2014 9:46:20 AM© 2014 American Water Works Association56Communicating Water’s Value: Talking Points, Tips & Strategiesexisting water source. Beyond that, however, their willingness to purchase more pallets of water almost certainly decreases. The law of diminishing marginal utility kicks in and the law of diminishing returns looms over any subsequent transaction you might propose.Basically, as you buy more, you are less inclined to shell out your hard-earned dollars for each incremental unit you might purchase. As your need approaches saturation, your wallet starts to go back in your pocket. And when you don’t need any more of something, your wallet is zipped tight, and it disappears into your pocket’s deepest recesses.Ironically, you save your marginal purchasing power for—yes—a rainy day. And although an Inuit’s definition of a rainy day might be the off-chance that a day will come when his sled dogs get thirsty and he’s run out of pallets as the spring thaw nears, it’s far more likely his wallet would next be opened to buy more money-making sled dogs. (FYI, it might surprise you to know that Alaska is overall a rainy state—though all that precipi-tation has a way of turning white in higher elevations and way up north.)Similarly, once a family is quenched from the gallons of water it needs for personal consumption, additional outside water becomes less valuable. Put another way, water has a diminishing marginal utility once personal-use needs are met.Throw in one more paradox: In the world of water transmission, as we discussed earlier, the price of water goes up with usage (increasing-tier rates). This system is ingeniously engineered to encourage water conserva-tion. Yet at the core, the price of water is geysering upward exactly at the time consumer demand is flowing down the sidewalk.In The Wealth of Nations, Adam Smith insightfully noted, “Nothing is more useful than water, but it will purchase scarce anything.”15 In ana-lyzing Smith’s seminal work, P.J. O’Rourke tried to clear up any confusion with a humorous illustration: “With an additional eight ounces of water, all we get is a trip to the bathroom in the middle of the night. With an addi-tional eight ounces of gold, we get the upfront payment to lease a Lexus. Marginal utility explains why gold, vital to the life of no one except hip-hop performers and fiancés, is so high-priced.”16Establishing the Value of Tap WaterHere’s the point: The value of any product, water included, is established subjectively by the consumer’s perception of its importance. Families 20757 text.indd 56 8/25/2014 9:46:20 AM© 2014 American Water Works Association 57The Paradox of Value: Water Rates and the Law of Diminishing Marginal Utilitymoving into a new housing development need water, true enough. But these families want to buy a new house, and the land developer’s creation of a water-delivery infrastructure slakes that demand. But nothing happens until that family/consumer perceives the value of water in reaching their status-driven goal of buying their dream castle.Thus, to establish the value of tap water, we must also include its diminishing marginal utility—that is, how it is being used, how much is being used, and for how long it will be needed or demanded. A wise man once said that it’s far easier to sell a man a sandwich once you’ve established that he wants lunch. And that is equally true in the water industry: We do not sell water, we sell status—we sell a solution for thirst, but we handcuff ourselves if we only think of thirst as a need of someone with a dry throat. A new homeowner buys a water tap the same way a hungry man seeks out lunch—not focusing, perhaps, on the sandwich or water per se, but on the anticipation of a need to be filled.In the dual-pipe system, outside (nonpotable) and inside (potable) water usages are separated, so the rates are different. This system has the luxury of fitting within the two very different perceptions of value. A utility in a new development may carry potable water in one line and nonpotable water in another. Rates for untreated water are less than those for tap water, and the billing statement carries two line items to objectify the very subjec-tive way most consumers value water. It also works well for separating out increasing-tier rates. In this case, consumers can align the quality of water with its usage—there is, after all, no need to irrigate with treated water.Alas, a dual-pipe system is rare, and most utilities cannot segregate indoor from outdoor water usage. So what happens? As the average con-sumer’s personal needs for water are met, the marginal utility of water decreases. At the same time, water rates are unchanged—or even go up with usage if increasing tier rates are employed. This principle flies in the face of the very natural question that many consumers have: Why is the first, most valuable gallon of water the cheapest, but the last and least valu-able gallon the most expensive?Ah, have you forgotten already? Water is not a commodity; it’s an idea, a means to an end.People value water less the more they use, so perhaps visual clues are in order to emphasize the differences on the billing statement. By parsing the billing statement in this way—indicating the first tier of water would represent the average indoor usage for a household—utilities could begin leveraging a huge educational tool.20757 text.indd 57 8/25/2014 9:46:20 AM© 2014 American Water Works Association58Communicating Water’s Value: Talking Points, Tips & StrategiesGenerally, people don’t like paying more when they use more, espe-cially because many of those last 1,000 gallons are the very gallons that flow down the driveway and into the gutter. Perhaps the value of water could become more of a straight line rather than a plunging roller coaster that largely ignores the relationship between consumption and marginal utility. Current industry best practices emphasize environmentally friendly pricing, but increasing evidence indicates skepticism among consumers about pricing strategies that conflict with their own values.One must ask: Is it time to rethink pricing strategies that in real life may or may not encourage water conservation and instead frame those same rates in a way that recognizes how most people value water—by its usage?20757 text.indd 58 8/25/2014 9:46:21 AM© 2014 American Water Works Association75Chapter 11Perception and the Value of Water: It’s All Relative“Price is what you pay. Value is what you get.” — WARRen buFFetThe glassware we pulled from our energy-efficient dishwasher was cloudy, and the plates had a vaguely milky coating—as though they had too much detergent left on them, I thought—and that, in fact, turned out to be the case. In our zeal to get the dishes super-clean, we had been filling the detergent to the brim, slamming the door shut, and dialing the dishwasher up to the longest timeframe available. That seemed logical, but apparently (from the looks of our glasses at least) that’s not what we were supposed to be doing. Sure enough, we looked closer and discovered a thin line a little less than halfway up the soap dispenser that marks the appropriate level for a full load of dishware.With a feeling that more must be better, we had been pouring detergent up to the top and overflowing—more than twice what was recommended.Relativity of Human PerceptionPsychophysics experts call actions like ours the relativity of human percep-tion. I was compulsively filling the tiny box to capacity and beyond because it was, well, tiny. Consumer Reports aficionados recognize this as one of many “sneaky consumer product tricks”24 designed to encourage product overuse—tricks that manufacturers quite tidily rack up as profits.The makers of things like laundry detergent long ago learned that we humans will use more of a cleaning product or supplement when the 20757 text.indd 75 8/25/2014 9:46:21 AM© 2014 American Water Works Association76Communicating Water’s Value: Talking Points, Tips & Strategieslaundry detergent cap or the fill line of a measuring cup is some small fraction of the total volume available. We use just a bit more than needed (usually recommended in the fine print at the bottom of the label). Bottom line: The manufacturer sells more soap—but my glasses come out cloudy.Back in the 1800s, German physicist Ernst Weber,25 in many ways the father of experimental psychology, discovered that all things are rela-tive when it comes to perception. And perception, he quickly learned, is integrally related with behavior.In an early experiment, he blindfolded people and put a weight in one of their hands. He asked his subjects to signal when they noticed any change in its weight as he incrementally added metal filings. What Weber concluded was that the subjects perceived a change in weight when 13 per-cent was added to the original weight. Thus, if the participant was handed a 10-pound weight, he noticed no difference until it weighed 11.3 pounds. Invariably, the same held true regardless of the original weight: Starting with 1 pound required Weber to stack on a scant additional 2 ounces; 30 pounds, almost 4 pounds more.Think of standing in a dark room and someone lights a match; it’s almost blinding. Yet, strike that same match in broad daylight and you hardly notice it.Dieting? Using a smaller plate makes the amount of food appear larger, a good rationale for why people eat less using smaller rather than larger plates. If my dishwasher’s detergent box were half the size it is, surely I wouldn’t pour in an amount that I could easily perceive would be qua-druple its capacity.In short, we perceive just about everything in relation to its surround-ings. Take, for example, the two lines in Figure 11-1.If you glanced at the two lines quickly you probably perceived line A to be longer than line B. Bring out the ruler, however, and you will find that the two lines are exactly the same length. The illusion of different lengths is created by the relationship of the boxes on each end of the two lines.Perception and RealityThe tie between perception and reality jumps out at us in retail price discounting. We jump at the chance to buy a $1,000 television for $699, but turn our noses up at the exact same TV, undiscounted and offered for the same $699. We consumers just don’t get the same feeling of 20757 text.indd 76 8/25/2014 9:46:21 AM© 2014 American Water Works Association 77Perception and the Value of Water: It’s All Relative Figure 11-1 Are the two lines the same length?accomplishment if it isn’t discounted; we judge many, if not most, of our purchases relative to the “manufacturer’s suggested retail price” (MSRP). The MSRP being the gold standard reference point a manufacturer uses to convince consumers they are getting a “good deal.” And as we all know, the MSRP is often irrelevant and, in some cases, wholly fabricated.In fact, once we realize an MSRP is bogus, we fall back on our innate sense of what we believe a product is worth in order to find a comfortable place in the marketplace again. If you think about it, the economist Adam Smith told us that prices invariably fall to the price that thousands or even millions of prospective buyers determine is how much they will or will not pay for something. Our collective consciousness steers our sense of “what should be” in the market, not only in terms of price but also quality, avail-ability, service, warranty, variety, convenience, and more. The successful entrepreneur, the successful manufacturer, even the successful water util-ity is one that communicates some combination of perceived costs to create value in what they are selling.Consider the lowly infomercial. How do these not-ready-for-prime-time mini-dramas manage to reach out and massage the collective mass psyche and cultivate amazingly lucrative subsocieties of consumers that seemingly will buy almost anything? Well, infomercials use price reference points to sell billions of dollars’ worth of products annually. One has only to turn on the television on a Saturday morning to see the score of channels with paid advertising. It goes something like this:20757 text.indd 77 8/25/2014 9:46:22 AM© 2014 American Water Works Association78Communicating Water’s Value: Talking Points, Tips & StrategiesThis amazing Miracle Multipurpose Vacuum can suck up a gallon of water in less than 3 seconds Watch as I quickly vacuum up a spilled soda pop. You might expect to pay $100 or $300 for a vacuum like this, but call right now and you can get this incredible vacuum for the special price of only $39.99. And that’s not all….The effectiveness of the mentioning a higher price sets a reference point, which is designed to make the final price of the $39.99 seem like a really good deal.Consider two scenarios. What would you do?scenARio A: You go to buy a vacuum at your local appliance store. You find the Phantom P170. It’s perfect for what you want. You also are happy to discover that it’s on sale. Originally priced at $350, you can take it home for just $250.Like most people facing Scenario A, you thank your good fortune, lay your $250 on the counter, and walk out of there quite pleased with your purchase. After all, that’s a $100 savingsBut imagine a slightly different scenario:scenARio b: You walk down the appliance store aisle and spot the Phantom P170. It’s just what you’ve been looking for. It’s not only perfect—it’s on sale. Originally priced at $255, it is now only $240.Do you buy the Phantom P170 or go look for it at the store down the street? Hmmm. It turns out most people don’t think Scenario B is such a great deal.The two scenarios were played out with 100 people, and 75 of them opted for the vacuum in Scenario A. Only 25 shoppers said they’d pur-chase the vacuum in Scenario B. Fully 3 out of 4 people, it seems, preferred “saving $100” as opposed to paying 10 bucks less for their treasure.20757 text.indd 78 8/25/2014 9:46:22 AM© 2014 American Water Works Association 79Perception and the Value of Water: It’s All RelativeWhat seems, at first glance, to be perfectly logical in terms of relative pricing makes no sense at all when you stop to rationally consider Scenario B: It’s the same vacuumBut whether you’re looking for the best price, battling a “limited time offer,” or you just want that cool trinket for your very own, the underlying psychology involves going along with the crowd. Being one of the guys.And then there’s the Lottery. We all love to moon over our dreams of winning the Lottery. This is an almost universal application leveraging relative perception. Watch the television commercials: There’s you—and there’s that one lucky winner. Lottery promoters are geniuses at helping you perceive yourself as the winner of those mega-millions in prizes. It’s easy But these advertisements are very effective by tricking our mind’s perception of relativity. We see one winner, and we relate it to a single, wannabe winner—our own self. It’s a fever, and it’s contagious.Ideally, we never see the millions of people (like us) who lost. We never stop to calculate the unfathomable odds of actually winning the mega-millions. (Do the math: Showing the 1 million losers, each in their own ad, from a single week’s Lottery would require running 30-second commercials around-the-clock for an entire year)Utilities and Relative PerceptionWhat’s the takeaway for utility gurus? What is important for the utility to know about relative perception is that most people make their decisions by comparing to local alternatives—favoring the choices they can see with their own eyes and hear with their own ears.In other words, what does the neighboring community pay for tap water?In Colorado, hundreds of water providers provide service outside the Denver Water service area, which is far and away the state’s largest and best endowed. Here in the United States, many consumers consider tap water to be a commodity, and thus, those customers living outside the Denver Water service area strive to understand the relatively higher price they pay. “Why is it that my friends living a few miles away in Denver pay a fraction of what we pay in the suburbs for water?” And it’s a valid question that’s asked over and over, in towns and communities across the United States.“Making relative judgments is the natural way we think,” behavioral economics guru Dan Ariely asserts in his watershed book, Predictably 20757 text.indd 79 8/25/2014 9:46:22 AM© 2014 American Water Works Association80Communicating Water’s Value: Talking Points, Tips & StrategiesIrrational.26 But in almost the same breath, Ariely notes that his friend, James Hong, is a rare exception to the rule—a dot-com entrepreneur whose social circle includes a gallery of wealthy friends such as the founder of PayPal, among a host of others.Eschewing the need to compare himself to another, Hong went out and bought a Toyota Prius, trading his flashy Porsche Boxster for the sig-nificantly cheaper car. Hong expressed great satisfaction in recognizing and breaking the wealthy comparison game: “When you get a Boxster, you wish you had a 911,” Hong told the New York Times. “But do you know what people who have 911s wish they had? They wish they had a Ferrari.”What does Ariely’s doctrine of relative perception have to do with the utility and its rates? One of the best examples involves the town of Castle Rock, Colo., located a half-hour south of Denver. With a population of about 50,000, it has in the past relied solely on groundwater. Historically, its groundwater has been very good, but given that this source is embed-ded in rock, the replacement rate is virtually nothing. As the town grew, it needed to convert to a sustainable, surface source of water.But that cost money—lots of it.Rates were forced up immediately, and notices of incremental increases were spread over several more years. Naturally, residents of Castle Rock wanted to know why their rates were higher than those just up the road in Denver. Town Council members and the utilities department were backed to the wall with a substantial public communications challenge.Here’s what they did.27Officials created a “you live here—they live there” strategy (Fig-ure 11-2), and showed two houses, using a map to illustrate why “local” water was not comparable in the two localities. Operation of a system, barely three decades old, to deliver water from groundwater sources bore scant resemblance to Denver Water’s 160-year history of acquiring water rights and installing service systems.Little could be done to change the reality of the situation, but at least people in the town of Castle Rock had a basic understanding of costs in the greater scheme of things. So, yes, their water bills continued to be relatively high compared with those of Denver, but their perception had been altered through better understanding of the process—and it should be noted that other outlying utilities picked up on the town’s success and incorporated Castle Rock’s approach into their own community outreach strategies.Often the best way to compare apples-to-apples is to show how a com-paratively smaller utility’s rates stack up against similarly sized or located utilities (Figure 11-3).20757 text.indd 80 8/25/2014 9:46:22 AM© 2014 American Water Works Association 81Perception and the Value of Water: It’s All RelativeFigure 11-2 The “you live here—they live there” strategy20757 text.indd 81 8/25/2014 9:46:22 AM© 2014 American Water Works Association82Communicating Water’s Value: Talking Points, Tips & StrategiesFigure 11-3 Comparison of drinking water cost for SMWSA utilitiesSource: Graphs are public record and were provided by Castle Pines North Metropolitan District, 2011When the utility’s rates are average or a bit below average compared with neighboring communities, the use of bar charts can give a visual side-by-side comparison. By making posters out of the graphs and plac-ing them at community meetings, on websites, and on billing statements, there is a relative perception benefit. Instead of comparing the apple to the orange—the teeming metropolis versus the sleepy bedroom community—the choice of comparisons must be appropriate to others similarly situated in the general area. Real estate agents call these comparables. Perhaps, as in the case of Denver/Castle Rock, it is a question of size or the maturity of infrastructure. Another area might be confronted with challenges of topography, population density, or innate water quality. In any case, the clear communication of an honest rationale, drawing upon valid methodol-ogy, often wins understanding and approval from customers. Somehow we can accept our own situation as long as we realize why our rates are higher (or lower) or why our water quality is better or worse than our neighbors two or three valleys away.Think of a mother explaining to her teenage son why he can’t be one of the Cool Kids with the newest, hottest iPhone. Maybe Johnny won’t fully understand the depth of the family’s tight budget, but at least his resent-ment is tempered by the reality of understanding why.20757 text.indd 82 8/25/2014 9:46:23 AM© 2014 American Water Works Association 83Perception and the Value of Water: It’s All RelativeSimply stated, it’s human nature to make decisions by blending a healthy dose of emotional irrationality with the logical calculation of con-crete factors like price, history, quality, service, and availability. Utility rates, like everything else, are no exception to this rule. The question for utilities is how they overcome this innate human weakness to view things from a relative perspective and make their customers understand the true value of what is being provided. Perhaps the answer lies in finding a recipe of just the right blend of daydreams and cold hard facts—because all of us, in the public and private sectors alike, are coming face-to-face with impossible options in a national and world economy built on a foundation of facts that seem to just keep on getting colder and harder.20757 text.indd 83 8/25/2014 9:46:23 AMCommunicating Water’s Value offers tips and tools to assist communications staff, management and employees at both small and large utilities in shaping their messages about the value of water to the public. The tactics outlined can especially be useful during situations such as advocating for proposed rate hikes, or when conservation measures are needed. Communicating Water’s Value also includes “success stories” from various utilities and corporations who implemented strategies that effectively shaped and changed the public’s perception of the value of water.About the author:Melanie Goetz is a speaker, consultant and writer. She specializes in assisting water utilities to effectively convey the value of water and energy to their customers. With more than three decades of public communications experience, she has been a driving force behind community-supported rate increases and effective strategic marketing, education and outreach campaigns to change behaviors. An ongoing contributor to Journal - American Water Works Association, she holds a bachelor’s degree in business from the University of Colorado Boulder and a master’s degree in business administration from Old Dominion University in Norfolk, Va. President of Hughes & Stuart Marketing since 1980, Goetz serves as the Senior Account Executive.About the publication:Communicating Water’s Value: Talking Points, Tips & StrategiesBy Melanie GoetzPublished by American Water Works AssociationISBN: 978-1-58321-979-9Softcover, 250pp. Price: $59.95 AWWA members, $79.95 non-members Product #: 20757© 2014 American Water Works AssociationThis Book is Available at the AWWA Storewww.awwa.org/CWVBuy Now