Status: When and Why It Matters

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.

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 châteaux in the Médoc 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."

[This article was provided with permission from Harvard Business School Working Knowledge.]