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. 

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