Wednesday, November 30, 2011

How private labels are lulling us into higher prices

There has been quite a bit of press lately about the rise of private labels (house brands) in Australian supermarkets like Coles and Woolworths, and speculation about what this means for brand manufacturers.  An IBISWorld prediction cited in The Age has house brands growing from 23 to 30 per cent share of the $70 billion grocery market in the next five years, and companies like Heinz, De Bortoli and Goodman Fielder are publicly lamenting the dominance of house brands.  As most of us visit a supermarket every week, I thought it was worth examining private labels from a behavioural perspective to understand why we are shifting our consumption to house brands. 

How do private labels work from a behavioural perspective?
Private labels are behaviourally persuasive for a few reasons;

  • Rules of thumb - in order to deal with the level of stimulation and choices available to us, we operate on auto pilot a lot of the time, using rules of thumb to guide our decision making. Private labels simplify our shopping experience because they create one simple rule - "buy this brand because it is good value".
  • Self-herding - private label branding stretches across multiple product categories. The effect is that if I purchase and am satisfied with one category, I will be more prone to repeat my decision for that and extended categories rather than having to trial an alternative brand.  It's worth noting the risk for the private labels here - a poor experience of one category can poison all others. 
  • Relativity - to understand whether something is good value, we compare it with similar items.  Our tendency is to stay away from the extremities - too expensive or too cheap - and settle for something that is somewhere closer to the middle.  Amongst others Woolworths have "Woolworths Select" and "Homebrand" and Coles have "Coles" and "Smartbuy"house brands.  This enables them to use one of their brands as their loss leader, leave the supplier's brand as the most expensive and their second brand as the attractive option in the middle. 

How our behaviour is changing the supermarket industry
By influencing individuals, private labels are changing the market in a couple of ways;

  • Short-term bias - we are strongly swayed by the immediate rather than long term, and this has significant consequences for the supermarket industry and why brand suppliers are so worried.  We shoppers are buying for now - selecting items that meet our requirements in terms of utility and budget, and house brands are more than ever meeting this brief.  The risk with this behaviour is that through our actions, in this case buying house brands, we are slowly driving brand suppliers out of the market.  We are being lulled into a future of diminished choice, diminished competition and ultimately, higher prices.
  • Drop in the bucket effect - along with our short-term bias, it is hard for us to contemplate how our individual purchase decisions can impact the whole supermarket industry.  We think that our actions are simply drops in the bucket that cannot have a broader implication, and this plays right into the hands of the supermarkets who know that engaging an individual is their path to engaging the mass.  

Lessons for other businesses
The rise of private labels clearly shows that shopper behaviour can be changed and new habits formed.  House brands have gone from being a dirty little secret in your pantry to a sign of 'smart' buying.  For all businesses it means that there are opportunities for growth by understanding how to influence consumer behaviour, and what better rule book than the field of behavioural economics to change the game?  See you at the check out.

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Wednesday, November 23, 2011

Unblocking the sale

One of the biggest barriers to purchase is fear that you are going to miss out on a better deal.  As consumers we sweat the price, wondering whether we should hold off and wait for the item to go on special. But as businesses, we want to lock in the sale today so how can you unblock your customers to get them to buy?

What's blocking the sale?
A recurring theme in my posts has been how loss aversion shapes a lot of our behaviour. It's where the fear of what we may lose is stronger than our motivation to gain. In this case, it's our fear that we buy the product today and it goes on sale tomorrow.  I know this sounds fairly innocuous, but we are psychologically tormented if we realise we have missed out on a better price. The extent of torment is of course commensurate with the value of the product - buying apples today when they will be cheaper tomorrow won't keep me up at night. But buying a new computer and seeing the same model for $500 less the next week will hurt.

Intensifying the sense of loss aversion is the availability of pricing information.  Thanks to the digital age, consumers have more pricing data available than ever before to ingest before transacting.  Whilst in general terms this is a good thing for the consumer, it can also mean they are so trapped by the search phase that they don't get around to making the purchase.

Unblocking the sale
As a result of information overload, search intermediaries like, and have popped up to aggregate product pricing and feature information for consumers.  But that is just the start. To move customers into the decision making phase, US based e-commerce startup Decide uses a pricing prediction model to power its "Buy" or "Wait" app that helps consumers know when the product they want is worth acting on. This is a perfect example of how to overcome loss aversion.

However, whilst Decide might be great for them as an intermediary and great for the customer, as a business you want to overcome "wait" and get them to buy today.  Knowing that your customers are armed with lots of pricing data but still prone to inertia, you need to employ tactics to unblock the sale.  Here are three options to consider;

Price guarantees - providing the customer a guarantee that you will match or beat the price of a competitor even after the sale has been made is a very effective way of unblocking the sale.  The customer has nothing to fear and everything to gain by dealing with you because they get the goods today and can enjoy them without continuing to price hunt after the purchase.

Don't ever discount - this depends on your competitive situation, but if you have a product or service that is clearly differentiated you should consider a policy of no discount, ever!  Why? Your customers will never have to worry about which day they shop with you because there is no risk they will miss out on a better deal.  I can buy a product from Apple today knowing that it won't be on special tomorrow.

Trade-in guarantees - a clever tactic to stimulate sales today by guaranteeing future value has been introduced by car maker Hyundai in the US.  The Assurance Trade-in Value Guarantee has been launched to overcome customer fear of what they 'lose' on car depreciation.  According to the press release;

"Purchasing a new vehicle is one of life’s big events. You want to know everything you can about the true value of your options. But at the time of purchase, how can you know the future trade-in value of the vehicle you are considering?

Introducing the Hyundai Assurance Trade-In Value Guarantee. A program that future-proofs the value of your new Hyundai by guaranteeing today exactly how much it will be worth, two, three, or four years from now.

Hyundai: Impressive value today. Guaranteed value down the road." 

Hopefully you are now looking at your business a little differently.  Whilst a lot of our time and thinking as businesses is on how the customer will benefit from our products and services, a big part of our sales process actually needs to be dedicated to overcoming our customer's fear of what they may lose. Tackle that and the sale will follow.

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Tuesday, November 15, 2011

Stop bitching about dull presentations and do something!

Business presentations.  Hands up if you've ever sat through a dull, overly wordy Powerpoint presentation about which all you can remember is the boredom?  If anyone asked you what the content contained you'd draw a blank.  Now hands up if you've ever given one of these presentations?  I'm guessing all you felt was relief that it was over rather than elation that you had moved your audience.  You see as audience we want to be entertained, informed, enticed, provoked and stimulated, and yet as presenters we are terrified of differentiating ourselves. What's the deal?

First let me be clear that I am not talking about the big annual sales presentation, up on stage Steve Jobs style.  For those such events it is generally understood that highly visual, multi media, well paced presentations are appropriate.

I'm talking about the types of presentations where you are informing stakeholders about your business or strategic plan - what you've done, what you need to do and what you need to do it.  Too often these become templated, drone-like dull-fests that waste time and feel more like a homework check-in than articulating a business vision.  After all, matching slide headers does not a consolidated thought process make.

Why do we fall into this trap?
  • Status quo bias - our tendency to stay with what's known.  If a templated Powerpoint pack laden with charts and narrative is what the CEO is used to, then that's what gets dished up. No one wants to rock the boat.
  • Herding - our tendency to follow others and hide in the pack.  Now, given the invariable inter-company competition that goes on within all businesses, herding can seem counter intuitive - after all, each team is really trying to distinguish themselves as the best.  But our willingness to conform to a specified style of presentation is most definitely herding behaviour - we are choosing to not stand out. 
  • Group think - the dynamic where conflicting views are suffocated in favour of the prevailing shared view.  Dissenting voices are not welcome.  The culture of dull-presentations is an embodiment of group think and if you yourself are uncomfortable about presenting in a different way, it's because group think rules.
Fear of losing face
Underpinning our resistance to stepping out of the convention presentation style is our fear of what happens if we do.  We are more frightened of what we have to lose (credibility, promotion, even our job) than gain (engaged audience, insightful questions, endorsement, recognition as a thought leader).

It's cowardice.

Am I being too harsh?  It could be argued that a conventional, templated presentation does it's job because the content rather than the style can take centre stage.  And of course there have been countless examples of sloppy "creative" presentations where the slides have undermined the message.  But I do not agree that slides with four charts and multiple statements does an effective job at articulating your message (unless of course your message is that "I'm really really smart and impressive because I've spent a lot of time on this slide").  These presentations are written to give the presenter comfort rather than sway the audience, and would more appropriately distributed as Word documents.

Tips to make great presentations
By first acknowledging what holds us back we can then use behavioural techniques to make memorable and evocative presentations.
  • Vividness - make your core message vivid for the audience. Bring in props, use multi-media, use metaphors and analogies to help crystallise the message.  Ideally, make your presentation three dimensional - by this I mean take it off the slide and give your audience a sensory experience of what you are trying to convey.  If you are losing customers, bring in a tray of eggs and smash them to represent the extent of your customer attrition. If you are trying to stop operational inefficiency, bring in a bucket of water and pour it into a sink to show the money that is going down the drain.  You get the idea!  Your presentation will take on an energy and engagement that the business will be buzzing about for weeks.  
  • Saliency - we overweight recent or memorable events, so try to be first or last on the program and use your vividness tactics to differentiate your message from all the bland presentations.  Use group think and convention as an opportunity to cut through by being different.  
  • Tension - great movies, TV shows and novels create tension in their narrative before providing release.  Presentations should be no different.  Your job is to create emotional unease in your audience so they are engaged in your story, and when you have them, alleviate the tension by showcasing your solution. Putting all the answers up front in an executive summary means there is no reason for your audience to stay engaged through the story, and you therefore lose control of how the audience understands your plan.
Ultimately it takes courage to overcome the pressures of status quo, but I would hope that you are being paid for your individual talent rather than your ability to herd.  There is only one you, so how about injecting that into your presentation, being inspired by the payoff that comes with risk, and making your audience's day in the process?

For ideas on a similar topic, check out my piece on "Why We Hide Behind Big, Boring Reports".

For some great tips on creating memorable presentations, I recommend Dan and Chip Heath's "Made to Stick" and Nancy Duarte's "Resonate". 

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Sunday, November 6, 2011

How to introduce a charge for a free service

SmartCompany's exploration the other week week of News Limited's introduction of a paywall included my thoughts on how the newspaper giant could use behavioural economics to transition their service from free to paid.

To round out this discussion, I thought it was worth looking at what makes "free" so alluring in the first place, so that you can consider whether and how to give away products or services without charge.

So let's start by looking at chocolate.

The persuasive power of "free"

In an experiment outlined in Dan Ariely's Predictably Irrational, participants were given the choice of two chocolates: higher quality Lindt or Hersheys.
Through the course of various experiments, the price of each brand was manipulated to see how consumer rationality was affected. In other words, what was the point at which price changed our judgment of what we were willing to experience from our consumption of chocolate. When the Lindt was 15 cents and Hersheys one cent, 73% chose Lindt. Makes sense. We are willing to pay more when we receive a quality experience.
But then life got interesting. Prices were dropped by on cent. Lindt was therefore 14 cents and Hersheys, free. Suddenly Hersheys gobbled up 69% of the custom, reversing the earlier trend. Was it the one cent price drop? No. It was the impact of "free". The majority of participants were now willing to act in spite of the lower level of anticipated pleasure just because the chocolate was free.
It seems that "free" dramatically impacts our assessment of what we are willing to experience.
Ariely goes on to speculate that the reason we are so swayed by "free" is that there is no downside. In most transactions, we weigh up the pros and cons, rewards and risks, but when something is "free", there is only upside.
This is the behavioural principle of loss aversion, where we are wired to avoid loss more than seek gain. In the case of chocolates, participants were unwilling to trade Hersheys for Lindt even when they had only to pay one cent for the lower quality brand. The risk was still too great. Take away that risk by making Hersheys free, and the game changed.

Introducing a charge for a free service

That's fine for chocolate, but what does it have to do with a paywall where News Limited are trying to introduce a fee? After all, it's a bit like charging for Hersheys when we are used to pigging out for free.
It shows how difficult a task News Limited have ahead of them because "free" is one of the most persuasive of forces. So here are some thoughts on how to reverse engineer free in order to transition to a paid service:
1. Differentiate the product – if a brand wants to charge for something that they have previously given away for free, they need to change the product. For chocolate, it may mean changing the ingredients or packaging, or emphasising something new about the product that people didn't know (eg. now from sustainably managed cocoa suppliers). For News Limited, it means re-skinning the online experience, introducing new content and/or features, and new marquee journalists.
2. Reframe the pricing – News Limited customers will be paying between $2.95 and $7.95 instead of zero. These are small amounts relative to most things, but not relative to free, so News Limited needs to contextualise the price for its customers. For example, less than a gym membership, less than a zone two train ticket, less than what you spend on lunch per day to get 24/7 access to real-time Australian news.
3. Introduce decoys – Pricing decoys are a very effective behavioural technique because we assess prices relative to others. At the moment on News Limited's subscription page for The Australian they are offering a digital pass for $2.95/week, digital plus weekend papers for $4.50 or digital plus Monday-Saturday papers for $7.95. Here it would have been helpful for them to also offer a "decoy" seven day print subscription on the same sign up page. Why? It sets a value for the print subscription that makes the print and digital bundles look more attractive. (On The Australian's offers page which is buried a few clicks in they have moved in this direction but made the mistake of making print look the better deal at $2/week).
4. Get it over quickly – the behavioural principle of adaptation means we get over bad news more quickly if we are not reminded of it. News Limited will have to be careful how it treats its customers throughout the sign-up, sign-in and billing process, with the aim to have the pricing recede in the customer's consciousness. They are currently offering a digital pass three month trial. My suggestion would be that the pass defaults to payment as part of the terms and conditions rather than reminding people at the end of that period that they have to pay up.
5. Demarcate the process – anyone who has used iTunes may have noticed that the payment is confirmed a few days after your purchase. Apple are effectively disconnecting the process (purchasing music) from the pain (payment), which means we are less likely to remember that our downloads have cost us. News Limited should likewise consider how it finalises the payment process with the customer.
6. Guilt – don't underestimate how guilt can turn freeloaders into paying customers. Of course there will always be some people who take without giving, but most of us are susceptible to contra-free loading. This is our innate desire to work for reward rather than just get rewarded. Don't scoff. A recent move by the Indiana Museum of Art to move to free entry resulted in a 3% increase in paid memberships.
The key lesson to take away from this discussion of chocolates and paywalls is this; offering something for "free" changes the game. It comes with significant behavioural implications that can work well for your business to stimulate volume, but can also change how your product is perceived. While not impossible to reengineer a free service as paid, it is extremely tricky and therefore should be used with due consideration to your longer-term and competitive goals.

This article was originally published by Smartcompany,

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