Making dough from the right behaviour

Fresh from a breakfast seminar with Tom O'Toole, I wanted to share some of his pearls of wisdom plus some behavioural insights.


Who is Tom O'Toole?
Tom O'Toole is known as the Beechworth Baker, a man who started a bakery in a country town in Victoria (population 3,500) which, over the past 28 years, he has grown into a multi-million dollar, multi-site business.  He is now sought out by businesses across the globe to learn his recipe for success.


Business is very straightforward for Tom.  It's all about staff and customers.  As he says, 5% technology and 95% psychology and attitude.


Here are some of Tom's pearls;


Staff training:  "What if we train them and they leave?" "What if you don't train them and they stay?!"

• Tom's first nugget was in response to small business owners who lament spending money on staff who then leave (loss aversion rears its head). Yes, it's a hassle if you invest in someone who then leaves, but you don't really have any other option.  Instead, focus on creating an environment that they don't want to leave.

Staff empowerment: "If you wouldn't buy it, then don't sell it"

• Tom recalls being torn between anguish and pride whenever he sees goods disposed of for failing to meet the standards of the staff member in charge.  Whilst he may have disagreed with their decision, Tom knows it was theirs alone to make.  This is where too many owners and managers undermine their own policies when it comes to the marginal, subjective decisions.  Overruling means undermining. 

Customer focus: "You're not making 200 pies, you're making one pie 200 times"

• Tom used this when training a baker who was making 200 pies.  Known as the "Drop in the bucket effect", it can be hard to focus on the outcome of our work when we are producing things repetitively and/or en masse.  In this case, it was easy to see 200 pies but forget the 200 customers that would each have an individual experience of their pie.

Accountability: "Anytime I have a problem in my business, it's within my four walls"

• In other words, stop blaming external factors.  Your competitor, the roadworks out the front, the weather...Known as "actor-observer bias", we tend to blame negative outcomes on things external to us whilst thinking positive outcomes are always down to us.

Pricing:  "Quality and service will be remembered long after the price is forgotten"
Tom tapped into a few very powerful behavioural principles here.

• First, there's what is called the "hedonic treadmill". This means we overestimate the joy we will feel from a purchase (eating this pie will make me happy for weeks), because we adapt very quickly and move on.  But the experience of service and atmosphere will be with us longer.
• Second, we have a "remembering" and "experiencing" self.  This means we are persuaded by not only the experience but our memory of it, 
• And finally, we self-herd.  This means we follow decisions we've made previously so because the memory of a great quality pie and great service will outlive the memory of cost, we will be more likely to buy a pie in future.

Personal growth: "Everything you want is just outside you comfort zone"

• A believer in raising the bar and constant self-improvement, Tom challenges our "status-quo" bias where we tend to stay in our comfort zone.

Leadership: "When you are placed in charge, take charge"

• We can often be scared to assert ourselves as leaders because that can mean failure is on our head.  This is classic "loss aversion" where the risk of losing is more persuasive than the benefits of succeeding, so acknowledge that's what is holding you back and try anyway.

Communication: "Everyone smiles in the same language"   

• In talking about language gaps he has experienced here and overseas, Tom keeps it simple; See similarities rather than differences. We can all smile, and that's the greatest bonding device you can have.  Behaviourally, Tom is using our tendency to seek patterns and commonality to overcome our tendency to demarcate.

A refreshingly authentic and animated presenter, Tom is the poster-child for smashing through lazy mediocrity by keeping it simple and getting it done.  As he says, "you can starve to death reading a cookbook".  Time to get cooking. 


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Image from http://blogs.abc.net.au/victoria/2012/03/by-popular-demand-tom-otooles-inspiring-conversation.html

Money jars of the mind

Does the money you put aside for bills have the same value as money you spend on fun and entertainment?  Behavioural Economics would say no because we tend to think differently about money depending on its context.  It's called "mental accounting", and whilst it has nothing to do with the mental health of your CPA it is very important to know about if you are running a business.


How ING Direct are using mental accounting
ING Direct in the US have cleverly designed savings accounts that can be split out into mental bank accounts.  ING customers can create as many sub-account buckets as they want and call them by a nickname (for example 'Trip to Australia', 'New car', 'Rainy Day' and so on).  According to the article in The New York Times, ING have introduced the tool to help people reach their savings goals but this is really about good business because in order to acquire funds through personal savings accounts ING (and all banks) have to overcome some behavioural blockers.

ING Direct My Savings Goal

Behavioural blockers
To get us to save more, banks have to overcome our

1. tendency to think short-term (ie I'll buy smaller items now rather than save towards a bigger goal) 
2. laziness (ie it's too hard to save so I won't bother) and
3. 'bunny in the headlights' inertia when overwhelmed by choice (ie I get confused by which bank and which accounts I should have so I'll just stick to what I have)

Behavioural enablers

ING's new savings site overcomes the behavioural blockers by using the following techniques;

• Vividness - we are more likely to act if we can readily comprehend the outcome.  By graphically representing the savings goal and allowing the customer to use personal and meaningful descriptors for the sub-accounts, ING are helping make the savings goals come alive.  Just think how much more likely you are to save towards "ski trip $2000", "emergency fund $500" and "new car $25,000" than leaving it all lumped into a generic account.
• Hedonic framing - we get a bigger buzz out of separate gains than a single one of equal value.  By splitting the accounts into specific goals, ING is improving the customer's willingness to save because there is simply more opportunity to attain success.
• Hyperbolic discounting - our impatience means we tend to like gains that we get now more than waiting for larger gains later.  This means we risk whittling away at smaller balances rather than building towards the larger target that might feel too far away. By breaking the goals into specific accounts, we can concentrate on a mix of shorter and longer term objectives and control our impatience without jeopardising the collective savings target. 

Business applications of mental accounting

There is an opportunity for every business to map out the 'mental accounting' that applies to their industry in order to look for behavioural blockers and enablers.  In short, it's about making the purchase decision easy for your customer.  Your customer will more readily spend money with you if they feel comfortable about justifying it to the bank manager in their head, so using the same principles that ING are using to motivate spending rather than saving, consider making the benefits of purchase to the customer vivid, encourage payment by credit rather than cash because it separates the pain of cost from the joy of purchase and if your product or service delivers a longer term payoff, bring some of the benefits forward to ensure the customer gets gains in the shorter term.

Images
ING from http://www.mybanktracker.com/bank-news/2012/05/17/ing-direct-tool-helps-set-savings-goals/
Money jar from http://totalwealthcoaching.com/wp/wp-content/uploads/2009/03/moneyjars1.jpg

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.


(Image from http://www.foodmag.com.au/news/demand-for-private-labels-set-to-double-in-2025--r)

5 Tips for better customer service from Behavioural Economics

This weekend I visited a café famous for being one of the first to bring real coffee to Melbourne.  But in my estimation, that business is surviving on its heritage alone. Both the product and, more strikingly, the service left a lot to be desired.  A sneering barista who barely grunted to acknowledge our orders and practically threw change at my friend made us feel that we were not living up to his expectations.  Needless to say, I won’t be back.  This got me thinking about five principles of Behavioural Economics that can help businesses (well, at least, those who think customer retention is important), improve areas of poor customer service.

Framing

In Behavioural Economics framing refers to the language and context you use when interacting with a customer.  It has been shown that using language like “can’t”, “won’t” and “that’s our policy” inflames the customer experience.  Offering to “take you through the steps…” is much more constructive than “you can’t do that before you do this” because you have framed it in the affirmative. 

Drop in the Bucket Effect

In environments like call centres where the sheer volume of customer inquiries can be overwhelming, it can be difficult for your staff to feel they can make a difference – the drop in the bucket effect.  The knack is to think of the one rather than the many.  Metrics like “How many customers you helped” is better at motivating staff than measurements like call handling time because it takes performance back to the one-to-one relationship.  Likewise, celebrate the success stories where a staff member has helped a customer – noting it doesn’t have to always be ‘going above and beyond’, it should be the goal of every interaction. 

Procedural Fairness

We cope better with outcomes when we feel that we have been treated fairly through the process. To this end, inform your customers of the process that will be used to evaluate their request to help them understand what happens and why.  “I’ll have to speak with my manager” is not as effective as setting up the interaction by outlining the steps and escalation points. “Just before I ask you to go into detail about your concern, I would like to explain my role in this process.  I will…then…and finally…Do you have any questions before we start?”

Uniqueness

Just as we cope better when we know what the evaluation process will be, we also want to be treated as unique individuals. As Dan Ariely writes in Predictably Irrational, we have a “need for uniqueness”.  But whilst of course we are not unique in thinking we are unique (we all do), the lesson here is never to tell a customer they are one of many because that will diminish their sense of individuality. “My issue”… “My situation”. I once had a spat with my car manufacturer because they were interested in their policy whereas I was interested in the inconvenience the car break down meant to my life. 

Endowment effect

The endowment effect means we tend to overvalue what we own.  That’s why you think your car is worth more on trade-in than the dealer. In a customer service setting, this can help explain why customers can be all consumed by their issue, which to your organisation may seem trivial. Again in my car manufacturer’s case, they saw my car breakdown as an isolated issue to be resolved through their usual process. I saw it as a failed new car purchase that stranded me for a whole weekend.  To deal with this you need to see the issue from the customer’s perspective and work with them to understand what it would take to have the concern resolved.

Customer service undoubtedly one of the trickiest areas of business management.  The good news? Whilst the challenge of balancing your organisation’s policies, procedures and resourcing with the expectations of individual customers seems to be in constant flux, there actually consistent and predictable behavioural reasons why customers react in the way they do. An understanding of Behavioural Economics can mean more effective, efficient and satisfying customer service models, so why not get started?  Until next time, happy serving. 

This article also appeared in Smartcompany http://www.smartcompany.com.au/blogs/20110822-5-tips-for-better-customer-service.html

Image source: http://www.google.com.au/imgres?q=next+teller&hl=en&gbv=2&biw=1280&bih=603&tbm=isch&tbnid=gNH_K6WLyMUTtM:&imgrefurl=http://www.posdisplays.com.au/menu_card_holder.html&docid=0UdatlbuNpnqhM&w=325&h=63&ei=AxRSTp-BFObliALctYjjAw&zoom=1