Have you ever been watching a game show and found yourself screaming at the TV because you know the answer to the question, but the contestants don’t? That’s how I felt listening to a recent episode of NPR’s Planet Money podcast. It’s a great show that boils down complex economic issues like the European debt crisis into digestible narratives.

But on this one, they missed the boat.

The Topic: Labels

The topic of this particular episode was the effects of labels on product purchasing, starting with the example of generic pharmaceuticals. The story on generics asks why anyone would buy a brand name like Tylenol or Bayer instead of the generic version with the same active ingredients. The imprecise conclusion they report is the following: consumers waste money on a brand name when they lack information and don’t understand the goods are identical.

This is only true if you assume consumers evaluate products solely based on their function. In reality, every product has three components in the eyes of the consumer:

• Functional: As the name suggests, this is the core function the product performs for the consumer. (“How clean does the detergent make my clothes?”)
• Emotional: This is how the product makes the consumer feel. (“This detergent makes me happy because it reminds me of my childhood.”)
• Social: This is how the product affects the consumer’s relationship with other people. (“When people see the detergent bottle and notice it’s a ‘green’ product, I’ll look good in their eyes.”)

A product that costs more primarily due to emotional or social factors could also be called a luxury product. There may be some small functional differences between the Casio MQ24-1B2 and the Tag Heuer Monaco Calibre 36 but not enough to explain why the former costs less than $10 and the latter costs more than $10,000. They both tell time, but somehow Tag Hauer can charge 1000 times as much. Or, you can take a page from Apple’s book and sell a higher volume of affordable luxury items.

The lesson here for product teams is that if you want to charge more, focus on the emotional and social components. (Better that than becoming a commodity.) Despite the fact that you could email your friends photos of where you are, Facebook bought Instagram for $1 billion. And despite the fact that it’s easy to set up a free web site, Yahoo! bought Tumblr for $1 billion.

So how do you understand the emotional and social impact your product has on your customers? Simple: go talk to them. You need real stories of purchase and usage to get this right. And don’t forget this isn’t the same as market research…that focuses on feelings about the brand, whereas you need to access the feelings about the product.

Taking the next step

The method of analyzing a product by its functional, social and emotional components is another aspect of the Jobs-to-be-Done framework. You can learn more about this at the workshops hosted by Bob Moesta and Chris Spiek.