I want to share with you a theory I’ve been developing over the past few years.  It’s a work in progress, my own opinion based on multiple elements, and I think, fascinating!

Let’s start with a working definition (the tough part that initially will sound like greek) and then pick it apart with stories & pictures (the fun part).

The Rosetta Stone ™ Effect is a brand marketing phenomenon where a product’s high perceived value influences consumers to purchase and then recommend the product regardless of actual value gained from it.

As a quick aside, I’m not the first person to use the phrase “Rosetta Stone Effect.”  June Cohen, Executive Producer of TED Media, the creators of the wildly popular TED talks, used the phrase in describing TED’s crowd sourcing of translation for their videos and other materials.  While I’m referring to the language software, I’m pretty sure June was tipping her historian hat to the original tablet.

I first started to notice hints at this effect while working at Transparent Language, a small shop competitor of Rosetta Stone.  I’m no longer at the company and don’t intend this article for product bashing.  If anything, it’s a big business model compliment.

Transparent’s consumer flagship, Byki, operates on a freemium model.  That is, they give it away for free and a certain percentage of users will ‘upgrade’ to the paid version.   That’s a hard offer to beat, but their brand is relatively unknown compared to the mighty yellow box of Rosetta Stone.  But it’s not just a strong brand, it’s a BRANDOSAURUS and when your brand has teeth- weird things start to happen.

Part I – The Purchase

Millions of people purchase Rosetta Stone. Have you?  It’s very likely that you have, as Rosetta Stone is a high powered marketing machine.  The $45 million in sales & marketing is roughly half of the $91 million in revenue for that same period.  We’ve all seen the television ads, kiosks in the airport, and maybe even heard the ad on Pandora internet radio.

Operating Expense, From S-1 Filing, 2006

Rosetta Stone’s products are also anything but cheap.  As of May 2011, the basic Level 1 Spanish is $179 and a full set of Levels 1,2,3,4&5 sells for $479.  Additionally, 3 month online access starts at $199.  (Source)

Instead of driving people away, the high price tends to appeal to people in two ways: First, many people equate price with quality or value.  Do expensive jeans last longer? Will expensive razors cut you less frequently?  We know this isn’t always true, but it’s not always easy to distinguish between the two.

The second appeal of the higher price of Rosetta Stone ties into level of commitment.  The more you spend on software to learn French, the more serious/committed/dedicated you are to actually learning the language.  Is this true?  Worth a collegiate study maybe.  It seems likely that the difference between prices will be most apparent comparing free vs paid.  My instinct tells me that the higher spend doesn’t end up equating to higher success rates and most of the people I’ve talked to confirm this.

Image Source: Emperor's New Clothes (Wikipedia)

The subject of commitment to personal learning is a huge topic.  With so many contributing factors, it’ll have to be more fully addressed in a separate post.  For the current issue, I propose that people are hoping that the more they spend the more they’ll “stick with it.”

The Emperor’s New Clothes, a fable from the school days of nap time and glue projects, may have a modern equivalent in Rosetta Stone software.

What happens if the product doesn’t work?  Being wrong about a $0.99 song on iTunes can make you feel a little regret.  You might be more grumpy if you paid for movie tickets only to find out that the preview contained the only actual funny parts.  How about a $500 purchase?

There is a typical response I continue to hear from people who have purchased Rosetta Stone.  “I liked it, learned some words, but never really got far.”  They very clearly spell out that it’s their fault, not the software that is at fault for not continuing.

In a way, there will always be personal fault found when engaging a learning tool.  Often you get out of it what you put in it.  And putting in large amounts of cash don’t fit into that equation.  It’s the Mr Miyagi elbow grease that shines cars (wax on, wax off).

Personal digs noted, I propose that there is still fault left over.  It is then significant that users assume it all on themselves- especially in a day and age of passing the buck.  But perhaps, this behavior is explainable.  After all, who could blame you for not having the time to memorize those phrases?  The social pain then weighs heavier on the potential embarrassment for being duped in the marketplace.

Part II – The Recommendation

The second part of the Rosetta Stone ™ Effect is the huge amount of recommendations.  Many of these referrals come from people who haven’t even used the product, but heard or saw advertising:

Image Source: Yahoo! Answers

Other recommendations come from people who heard ‘something’ about it from a friend- potentially the same friend mentioned above who never actually found success with it .  And it’s this instance that most intrigues me.  Not only could someone buy the Emperor’s New Clothes, but they then recommend it to friends.

Here is an additional recommendation from Yahoo! Answers that I thought was equally entertaining.  The question was seeking the best way to learn a language:

Image Source: Yahoo! Answers

Opening Thoughts

Normally people would summarize and close a topic here.  I want to do just the opposite and instead open this up for discussion.  This observation is far from over and there are elements you might have picked up on that I haven’t.  From broad business theory to experiences with Rosetta Stone, I welcome your insight.

Does a company that spends so much on Sales & Marketing scare you? Or is this ratio the secret sauce of Rosetta Stone- driving brand recognition and resulting sales?

Have you bought Rosetta Stone? Used it? Followed the same pattern, or did you diverge from what I’ve observed?

Update 5/13 – Has the modern social media consumer broken the spell?

The Motley Fool posted an article today titled “Is Rosetta Stone’s Cash Machine Empty?”  It appears Rosetta is having some internal financial issues- enough to peak the interest of investment gurus like Seth Jayson, the author of the article.  This begs the question of how long a company can sustain the high costs involved with branding and selling within the Rosetta Stone Effect?

  • Tinachesh

    Casey, this is an interesting and well thought out theory that I think may have some roots to it. It's been well known for years that people will pay top dollar for brands, not so much for the products these brands represent. Some popular examples include: Luis Vuitton, Prada, Burberry, the list goes on and on. Because of the high price tag, consumers see items from these brands as status symbols and “better than the rest.” Taking it a step further into the realm of education, don't the schools who argue that they are the creme-de-la-creme cost the most to attend? Harvard, Yale, Princeton to name a few? I absolutely agree that the “Rosetta Stone Effect is alive and well in all forms of commerce and this would be an interesting psychological study to conduct! Keep the research coming…this reader is intrigued!

  • http://twitter.com/ShawnyWayne Shawn McCarthy

    Well said on the “recommendation” part. I think that people make recommendations for high priced products they never really gained any ACTUAL value from for two reasons:

    1) Status – Recommending Rosetta Stone isn't saying,”This is a great product,” but rather,”I can afford $500 language learning software, look at me.”

    2) Reputation Protection – If someone were to say,”I don't recommend Rosetta Stone,” they would actually be saying,”I'm the fool that paid $500 for a piece of software that got me nowhere.” Nobody wants to make themselves look like the prey of a masterminded scam :)

    Now pass me some of that $500 lemonade!

  • http://www.CaseyCheshire.com/ Casey Cheshire

    Good points Tina! It sounds like this example is the tip of a gigantic iceberg. Interesting to think that software & tech has it's own Luis Vuitton purses!

  • http://www.CaseyCheshire.com/ Casey Cheshire

    Hey Shawn. You've zeroed in on this one. People make recommendations with varying levels of strength- from 'thought this looked cool' to 'i use it everyday.' Making it linear might not even cover it. Multiple dimensions to a referral. Wonder if anyone has distilled this down?

  • Spamcastinfo

    Thought provoking.  Your theory rings true as it combines the perception of value related to cost and the need to defend that position after you have made the investment.

  • Jallgire

    Interesting thoughts. I fall into the “friends used it & had good results” category.

    Made me think back to this recent article/research: http://newsfeed.time.com/2011/

    So maybe the higher cost of RS has customers placing a high value, but there's also added value to being able to tell others “I used RS”? Or to put it on a resume?

  • http://www.CaseyCheshire.com/ Casey Cheshire

    For a spam bot, your comment was well written! ;)

  • http://www.CaseyCheshire.com/ Casey Cheshire

    Thanks for linking to the article Jason!  I'd love to put different language solutions into the rosetta stone box- or law forbid, rebrand it as Rosetta and see if the brand actually helps you learn.  Split-second, blink decisions may have different findings than long term committments (diets, workouts, learning a language).

  • Jallgire

    I'm living in Lancaster, PA now & people live in “row homes”. So maybe we should launch it from here w/ the name Row Sitter or Row Setta'?

  • Colleen Bird

    Hi Casey, I interviewed with you, and others, at Transparent
    Language in 2009. Best interview ever, for me anyways. Regarding your topic, I’ve
    found it very interesting and agree with your analysis. And yet I diverged from
    your observations. I purchased Transparent Languages’ Mandarin for my daughter
    (and NOT Rosetta Stone). Why?  Well…

    Part I – The Purchase

    I agree that higher price is often equated with higher
    quality….to a point. Exactly what does “higher quality” mean? More gadgets on
    electronics? Thicker fabric on jeans? More tender meat? More options on
    language-learning software? Then, I asked myself what I needed for quality and
    whether the added expense will enhance that experience. I bought a
    less-expensive camera because, honestly, I’ve never used the advanced features
    of a more expensive camera. I wish I were the type of person who cared to know
    how to use them, but I’m not. Why buy Purdue chicken instead of Market Basket
    when all you’re going to do is make soup? As for clothes, it depends on how they
    make me look. If it knocks off 10 pounds and 10 years, then it’s priceless. As
    for language-learning software, the price of TL was significantly cheaper and
    the features worked well with my daughters style of learning. I made a cursory
    comparison against Rosetta Stone and since RS was more expensive, I was looking
    for the “WOW factor” on the website to justify the added expense. I saw none.
    We were happy with our purchase and don’t miss what we’ve never had.

    When money is no option, I suppose most people will buy the
    higher-priced item and be happy enough with it. But, in this economic climate,
    shoppers are starting to use their cerebellum and stop with impulse-buying. It’s
    easy to comparison shop when making repeat purchases of an item, such as jeans.
    I bet many people have owned both low-end and high-end jeans and know whether
    the added expense is worth it. The same is true for food, toiletries, services,
    etc… But, when a one-time, major purchase is imminent, then the rules change.
    Comparison shopping makes the buyer dependant on “the written word” rather than
    personal past experiences. That opens up another can of worms since reviews,
    blogs, ads, and testimonials are suspect to favoritism and bias. I guess this
    is where “The Recommendation” comes in and why it’s so effective.

    Part II – The Recommendation

    As I said earlier, a personal recommendation has always
    carried a lot of weight, provided it came from a valued source, such as a relative,
    friend or neighbor. People became conditioned to relying on personal
    testimonials prior to a major purchase. Now, people are searching for product
    endorsements on the internet. And that’s the crux of the matter. It’s
    impossible to know the credibility of any review found on the internet. Bloggers
    are paid to write negative stuff. The search for an unbiased site can be an
    immense challenge. I believe it’s human nature to make the effort to blog about
    something negative rather than about something positive. I think this is
    partially due to the fact that we expect an item to be good, and we’ll happily go
    about our business until it disappoints us. Once it disappoints us, we want to
    tell the world!  As I sift through
    negative reviews, I look for specific details as to why the reviewer did not
    like the item. If I see the same complaint, and on different sites, then it may
    have some validity.

  • http://www.CaseyCheshire.com/ Casey Cheshire

    Colleen! Wow!  Really honored to have you write up such a detailed comment!

    It’s interesting to hear your ‘divergent’ story. I’d say kudos to you for a wise choice, seeing through the allure of what could potentially be the ‘Emperor’s New Clothes.’  Kudos to the marketing team at Transparent (and I suppose the product team can reap some credit too).  Did I just pat myself on the back? Maybe. :-)  Though there are many people working hard to make Transparent shine.

    On price it sounds like you fit into a certain group of savvy shoppers.  I too have purchased store brand Ketchup. What’s ironic is that I actually spent a few seconds debating if it would taste as good as Heinz!  In this Walmart Age, fewer items that cost more have better quality.  My Asolo hiking boots are a rare exception- I love them and the $200 purchase 2 years ago has paid for itself many times over with happy feet.

    Qualifying internet reviewers is definitely a hot spot.  I’ve seen many sites attempt to establish reputation, but that’s not always the most accurate.  Positive and negative reviews on the web aside, nothing’s quite as powerful as a verbal peer recommendation.

    Thanks again Colleen!  Your comments are valued on this and future posts!

  • http://www.ScottBartell.com Scott Bartell

    This is a very interesting post… 

    Just today I had a conversation with a co-worker where we discussed the education system in America. He actually brought up Rosetta Stone and explained how the software figures out when a user understands a concept and moves on from there. (As opposed to repeating the same types of questions for a predetermined timeframe.) In other words, my co-worker argued that Rosetta Stone is able to determine how quickly a user is learning and adjust accordingly.

    My co-worker has brought up Rosetta Stone in the past and always speaks extremely highly of it.

    The funny thing is… after reading your post I asked him: “How far did you get in Rosetta Stone?” It turns out he never fully completed it. This is exactly what you had said.. people like the software but they never really end up finishing it.

    Disclosure: I could be entirely wrong with what I write below.. but based on the limited information I have… it may be true.

    I see this as a serious business problem for Rosetta Stone. What’s the average lifetime value of a Rosetta Stone customer? One level of software.. or $179? + the occasional free WOM marketing of course. Regardless, they seem to be putting all of their efforts and money into obtaining new clients who love their product.. but rarely end up buying more. 

    I’m really curious what the cost of a customer is compared with the lifetime value of a customer.

    Maybe it would be wise for Rosetta Stone to look into why exactly their customers don’t stick with their programs. Maybe then they will be about to turn a $179 customer into a $500+ customer who loves their product even more.

    Thanks again for the great post!

    Scott Bartell

  • http://www.CaseyCheshire.com/ Casey Cheshire

    Awesome comment!  Your observation of your friend’s buy-in on the marketing of the solution was fascinating- especially the extent that people believe it knows more than it does.  Learning algorithms are based on repetition, but I wouldn’t be surprised if some people felt there was AI inside!

    It’s also great to hear (for my theory, not for Rosetta) that your friend experienced the same lack of completion.

    You make a huge point here about the lifetime value of a customer.  This is going to be a MASSIVE issue they’re going to have to battle as
    they move more of their options into the cloud on subscription models.

  • http://www.ScottBartell.com Scott Bartell

    I found it extremely odd that my co-worker had brought up Rosetta Stone earlier that day – before I came across your post.

    It seems that more and more software companies are moving towards subscription models. Yes, the reacquiring income is great for the company, but from a customer’s perspective… when companies keep showing up on my credit card statement month after month… I begin to question the worth of the subscription much more often. It really forces them to provide a superb product that people actually use.

  • Colleen Bird

    I suspect many customers shop according to how they “wish” they live, and not according to how they “do” live. For example, I wish I were someone who exercised at the gym everyday, so I’ll get a gym membership. I’ll faithfully go to the gym for 2 months and then slowly stop. The gyms make good money from these people since they don’t use the facilities. I wish I could speak Spanish, so I’ll buy a software package. I’ll use it for a couple of months and then lose interest. Unfortunately, self-improvement isn’t incentive enough to stay with something. Maybe a bigger carrot should be held up to get people onboard and to stay onboard. Certifications?
    Free software? Cash back?

  • http://www.facebook.com/people/Brady-Beck/100000505424552 Brady Beck

    Thank you for this post, you are absolutely spot on in the statement about “what you put in is what you get out,” some people need to spend a fortune to find the commitment they need. Thanks to this post, I will continue on my way without spending a fortune for something I could get for free learning on my own.

  • dmbcouts41

    Could its success lie because it was first to market? Or do they really offer a product/service that has sustainable competitive advantage? The secret Sauce of Rosetta Stone… can it be replicated? Sure it can… but if they are in fact first to market it will be a tough sell to consumers who buy product based on recommendations from individual networks not only to contest with a company that spends so much money sales in marketing.. its almost like a way to smother your competition if you have to ability to shift with consumer change. If the paradigm shifts you have to be able to move with it collectively.

  • http://www.CaseyCheshire.com/ Casey Cheshire

     Thanks Brady!

  • http://www.CaseyCheshire.com/ Casey Cheshire

     Shopping based on how you “wish to live” is a great way of putting it.  What amazes me is the recommendation after the fact.  Thanks for the comment!

  • http://www.CaseyCheshire.com/ Casey Cheshire

     Do you think it’s first to market or their brand that has the most sway here?

  • Nick Couturier

    Brand recognition my friend. Brand recognition. They blown everyone out of the water. Branding is so key especially when you find a niche market.