Sunday, July 29, 2012

Loading the dice in the game of business

Last week, together with around 100 others I rolled the dice as part of Leverage: The Game of Business, a facilitated business fundamentals board game.  Yes, a board game.  I'd never heard of this product before, and it struck me as a novel way of educating small business operators about key concepts like conversion, average sales value, turnover and margin as well as expanding thinking about what strategies are possible.

Game time
Tables of 5-6 people sat around a board game that resembled many others in that we moved our pieces in a clockwise direction according to our roll of the dice.  When we passed the square called "Profit" we collected money from the bank, and our objective was to invest in business strategies that would increase this amount.  Our other objective was to invest in business leverage strategies that enabled the business to function without our involvement, such as developing a recruitment strategy to ensure attraction and retention of talent and securing a robust and accurate bank transfer system to optimise cash flow.

Yours to own
Each player was randomly given a business to run, for instance mine was a menswear retailer, another was an engineering firm.  This is a great idea because it taps into what is know as the "endowment effect" - in other words, we try harder if we feel we are invested in something.  Sure, they could make this more effective by getting each player to write a slogan or choose their business rather than having it assigned, but it is much better than not characterising what you were playing for.

By the way, if you've ever been frustrated that no one, staff included, is as passionate about your business as you are, get over it.  You can't expect others to feel like you do unless they have been deeply involved in developing the character of the business and feel they have skin in the game.

Distorted reality

The game's chief objective is to educate business people about key business concepts, getting used to the language and mathematics involved, so my next point might be a little harsh.  A shortcoming of the game is that is predicated in the positive, so every strategy - from an advertising catalogue to product line extension - resulted in either an increase (1-10% gains), or at worst, status quo.  You couldn't fail.  

This is far removed from the reality faced by every business owner, where it’s our fear of what we stand to lose that holds us back.  Where does this fear come from? Uncertainty about what our customers, our suppliers and our staff will do in response to our decisions. Yes, I can run a campaign to existing customers to grow sales but what if I stuff it up and annoy them so much they churn?  What if I raise my prices and my customers turn to my cheaper competitor?  How do I find the time to document every system and process when my major concern is keeping the lights on?

Behavioural strategy to load the dice
Running a business is undeniably challenging, and like the board game illustrated, you have to keep dozens of plates spinning in the air.  The good news is that by using behavioural science in your business, you can reduce your uncertainty about what people will do in response to your choice, increasing your odds of success no matter what you do. In a way, you can make your life more like the game's distorted reality.  Every choice you make - an ad campaign, recruitment strategy, customer service policy, pricing decision - can be tweaked in your favour simply by using behavioural economics. Time you loaded the dice in your favour?

More information about Leverage: The Game of Business is available

PS Why not join the People Patterns mailing list?  Every month you'll receive a short wrap-up of top news from the behavioural sciences and other nuggets of goodness from me. Click here to sign-up.

Monday, July 23, 2012

Lessons in behavioural economics from a small business owner

"Find your happy place" is what my photographer kept telling me as he snapped away for my website head shots. Well, I want you to find a happy place too by learning about how my photographer Con intuitively used behavioural economics to persuade me to buy his services.

1. Present services as clustered packages
Con offers three packages for professionals, Start-Up, Professional and Entrepreneur.  By packaging up the options Con was doing a couple of things.  First, he was creating a perceived value gap between them to support the price ladder, and second he was reducing the complexity of the decision. Contrast this with a longwinded and overwhelming conversation where the customer has to define their requirements such as number of shots and intended use - packaging options is a much smarter play. 

2. Include special offer pricing
Con uses anchoring in his package pricing.  Anchoring is where we fixate on the pricing information first presented, and then judge other prices in relation to that.  Every business can and should use anchoring to help their customers contextualise value. In fact as the price tag image showcases, retailers use this technique all the time to make the sale price seem like great value compared with the Recommended Retail Price (RRP).

In this case, the most expensive package was presented first on the page to anchor me with the other two below, helping to persuade me that they were reasonable.  

Then, under each package was quoted the "Regular Price" followed on the next line by a "Special Offer" price in larger font.  As an added bonus the amount saved also specified.   Now not only was I anchored to differences between packages, I was primed to work out how to qualify for the significant savings.  By this stage, I had mentally accounted for the Special Offer price, triggering my behavioural intent to avoid paying full price before even knowing how to qualify for the discount.

Whatever you do with your pricing, do not underestimate the power of the pain your customers will feel by missing out on the discount.  Intellectually I know that the RRP and the 'amount saved' is a fabrication, but that doesn't mean it does not persuade me.  

3. Use payment terms to your advantage
The Special Offer price was related to the payment options. The first option was to pay 50% on booking with the balance on the day. The second option and "by far the most popular" according to the collateral was to qualify for the special offer by paying 100% upfront at the time of booking.  Cash flow is king for small businesses, so locking in payment ahead of the work is a great strategy.  Note the "most popular" is a clever way of using social norming to influence adherence to Con's preferred option.

4. Up sell once the cost is sunk
Having elected for the most frugal package before the shoot, I was then caught when the number of photos I liked exceeded my allocation.  No problem, I could pay extra on the day.  This is a great way for businesses to drive some extra revenue for two reasons. One, I had already worn the cost of the initial outlay so it was a 'sunk' cost, and two, I had by that stage engaged in the process and so it was harder to walk away. Known as the 'endowment effect', we find it harder to let something go when we've had a hand in creating it.

So there you go. As a small business operator Con was effectively using behavioural principles such as anchoring, social norming, loss aversion, endowment effect and choice architecture to guide buying behaviour.  Con's found his happy place, so you can too.  

PS Why not join the People Patterns mailing list?  Every month you'll receive a short wrap-up of top news from the behavioural sciences and other nuggets of goodness from me. Click here to sign-up.

Monday, July 16, 2012

Using time to heal payment wounds

Ever noticed those print and billboard ads for expensive cars that tell you how little per week you have to pay to own the latest model?  Welcome to "duration neglect", our tendency to ignore the time period over which we would need to repay and concentrate instead on the size of the repayments.

Short-term bias
Lurking behind duration neglect is the behavioural principle of short term bias.  In effect, we can better understand the impacts of something in the short rather than longer term. That means I can more easily make an assessment of the impacts of the repayment on my financial circumstances in the coming weeks and months, but I can't readily comprehend the impact having to make the repayment every period over the term will have on my lifestyle.  Added to that, I can easily see the benefit the product I am buying will have, but I will be fuzzy on whether I'll still be enjoying it in two years time.

Big ticket items like cars and mortgages use duration neglect to great effect. For example, say I was going to buy a fancy car for $89,000.  Weekly repayments over 12 months would be $1,700.  Let's spread that out over 24 months instead. Wow, now only $856.  Seems obvious, but that doesn't mean every business is using this "duration neglect" to best frame their costs.

1. Soften the blow
As all shrewd business folk know, when a customer baulks at the price it is sensible practice to reduce its impact.  Whilst discounts are an obvious strategy, breaking the payments down into time periods is another useful tactic, for instance marketing the weekly or monthly value with greater prominence than the yearly value*.  Phone companies are masters at this. I mean, who would want to pay over $1,700 for an iPhone for two years? Much more tolerable to pay $72 a month.

Remember that having a conversation with a customer about what the total value means when you think of it over a daily, weekly or monthly period is different from actually marketing, contracting and structuring your payment terms this way.  The first is helping the customer contextualise the amount they will spend by using smaller units ("it's like two coffees a week"). The second is this plus a contractual arrangement that has implications for your business cash flow.

(*Please confirm your legal obligations as they relate to disclosure of the full value over the contract period.)

2. Consider the peak-end rule
The peak-end rule in behavioural economics effectively means that people judge the experience based on the highest/lowest point and the conclusion.  Now if they receive the goods immediately and pay the balance later, this will obviously be a high point. For that reason I'd suggest getting as much money at that point as possible, when excitement is at its peak.

But what if my customer is cash-strapped? Fair enough, and "buy now, pay later" can be a very effective inducement. In that case, better to have instalment options so the customer doesn't get slugged at the end.  Paying a big sum for a couch that now has stains and dog hair on it will hurt.

If they are layby-ing (paying by instalment) and receive goods at the end, you can consider making the final payment the largest to again couple it with the benefit of the product.

So the key lesson for businesses from duration neglect is to consider how best to discuss and structure your costs. Of course, I would also caution you to consider the financial circumstances of your customer and comply with your legal and ethical obligations.

PS Why not join the People Patterns mailing list?  Every month you'll receive a short wrap-up of top news from the behavioural sciences and other nuggets of goodness from me. Click here to sign-up.

Image from

Monday, July 9, 2012

Decoupling cost and benefits to swing the sale

When we make a purchase it means we have made a judgement that the benefits of the transaction have outweighed the cost.  As businesses, we therefore spend a lot of time, energy and expense convincing our market that they are getting a worthwhile deal.  But have you considered how the payment process itself contributes to this equation?  Let's look at this with some help from a behavioural principle known as 'decoupling'.

De lowdown on decoupling 
Decoupling is our tendency over time to forget that the product has a cost. As you sit on your couch every night watching your flat screen TV, chances are you are not thinking how much you paid for these creature comforts even though they would have been significant at the time.

As a business, you can influence your chances of converting a sale by decoupling the cost from the benefit.

'Touch and go' to soften the blow
Credit cards are a potent example of decoupling the purchase from the payment.  The customer gets immediate access to the goods (benefit) whilst the cost is not recognised until their credit card bill arrives (cost) which can be days or weeks hence.  Further, the cost of the good is buried amongst multiple other purchases, reducing the impact of it as a standalone item.

On the other hand, due to its tangibility cash is extremely vivid and therefore more psychologically painful for the customer to part with.  For this reason, it is often recommended to people on budgets to cut up their credit cards and use cash just so they keep tabs on their spending.

So as a business, credit has the advantage of lowering the pain barrier of your customers.  This is being taken a step further by new "touch and go" payment terminals.  These payment systems benefit businesses by reducing the customer's cognitive and physical involvement in the payment process.  Remember the days of having your credit card swiped in triplicate before you signed on the dotted line? Ouch. These systems made you concentrate and therefore increased the impact of the payment compared with simply tapping a bit of plastic against a machine.  

Let your customer forget
If you've purchased anything on Apple's iTunes you will have noticed the delay in having your purchase documentation confirmed.  Around two or three days after your purchase, Apple sends an email confirming what you have bought, which is an obvious strategy to decouple the benefit and pain. Obvious but flawed.

Apple have botched the decoupling process because they have interfered with the principle of 'adaptation' where we get over things faster if we are not reminded of them.  Downloading a track only to be alerted a few days later that I paid for it tends to remind me of the cost rather than benefit.  After all, chances are I am not listening to the track at the time the email arrives.   It would be better for Apple to process the receipt at the time of download, particularly because the payment is already decoupled anyway through electronic banking.

Averaging the pain
Whilst both credit card statements and Apple's email delay the notification of purchases, they are different in a key aspect.  Credit card statements are an itemised account of multiple purchases whereas Apple specifies individual items.  As a result, the pain of the credit card statement is averaged over the whole month's purchases whereas each Apple purchase sticks out to be scrutinised on its own.

The key lesson from decoupling is that your customers will forget the cost of their purchase over time. However, you can enhance your chances of getting them to commit to the purchase by minimising the impact the payment process itself has on their assessment of the deal, tipping the balance in favour of benefits over pain. 

Image from

PS Why not join the People Patterns mailing list?  Every month you'll receive a short wrap-up of top news from the behavioural sciences and other nuggets of goodness from me. Click here to sign-up.

Monday, July 2, 2012

Persuading buyers with number psychology

We're in the season of mid-year sales, so here are a couple of pointers about representing discounts and prices to maximise your conversion.

1. How to best represent a discount range
Many businesses offer a range of discounts depending on the stock. Some might be marked down by 20%, others 50%, so is it better to say "20% to 50% off" or "up to 50% off"?

Here are a couple of examples from the local paper. Advertiser 1 is communicating the discount range whereas Advertiser 2 is using the upper limit only.
Advertiser 1 Range of dicsounts

Advertiser 2 Upper Discount only

According to Dr Flint McGlaughlin from Marketing Experiments, people tend to assume the first number represents the most common discount, so in the case of Advertiser 1, most people would believe that the majority of rugs are 25% off.  You are therefore better to follow Advertiser 2's technique and go with "up to xx% off".

2. Use decimals to elongate or diminish the number
To make a number look bigger, add decimals. To diminish the number, round off.

Sometimes you want the number to look big, for instance when offering a cash prize or promoting the amount of money you have donated.  Take an example from Advertiser 3 below who is touting a cash prize and therefore has added decimals to elongate the number, and compare it with Advertiser 4 who missed the opportunity and instead rounded the amount they have donated to the community.

Advertiser 3 Added decimals
Advertiser 4 Rounded number

When you want the number to look smaller, try rounding.  Flip through a real estate section to see examples like Advertiser 5 who has diminished the price and contrast this with Advertiser 6 who has not.  And finally, learn from Advertiser 7 who missed the chance to make the price seem small by adding unnecessary decimals, elongating the number.  Representing the price as $139 would have been more effective.
Advertiser 5 Rounded  number
Advertiser 6 Unrounded number

Advertiser 7 Added decimals

There are examples all around you of how numbers and discounts have been communicated.  Whilst we're only scratched the surface in this post, the lesson is that you cannot take the decision about how to represent a number for granted because it will have a significant impact on buying behaviour.  Be smart about your choices and you will maximise your marketing conversion.

PS Why not join the People Patterns mailing list?  Every month you'll receive a short wrap-up of top news from the behavioural sciences and other nuggets of goodness from me. Click here to sign-up.