What mangoes at the market teach us about buying behaviour

As an infrequent visitor to the fruit and veggie market I can find it quite overwhelming.  Stall after stall of similar stock, vendors shouting their deals and a strange mix of market aficionados weaving through crowds with their trolleys and bags, and novices, bumping into things as we try to ingest all the information and walk at the same time.  It reminds me of most online retailers - overwhelming those new to the website and designing for those who are already competent. So what can we learn from the behavioural techniques used by grocers to get people to buy?

1. Use a lead item that is desirable
Influencing buyers to select their stall over another is a major hurdle that grocers need to deal with. All stock looks the same, so price becomes a key criterion (sound familiar to online retailers?). Smart grocers therefore lure shoppers with a lead item, promoting a desirable product at a price that is easy for the buyer to understand. At the moment, mangoes seem to be the carrot (so to speak).

Grocer A: 3 mangoes for $5
Grocer B: 2 mangoes for $5 

No question that Grocer A is likely to generate more business because the relative value is easy to understand and whilst s/he may take a hit on profits from mangoes, this grocer has won the chance to sell more items to the buyer.  In colloquial terms, losing the battle to win the war.

What if you are Grocer B?  Should you change your offer?  What's interesting is that Grocer A's offer is powerful because it is contrasted with Grocer B; if that wasn't available it would be harder for the buyer to assess its merits.  Grocer B has a number of options;

• Match the offer
• Choose another lead item (eg nectarines)
• Use a different pricing structure (eg promote $2.50 per mango or 'get two mangoes and a third one free' so that it is more difficult for buyers to do a direct comparison)
• Bundle the offer (eg two mangoes and a punnet of strawberries for $5)

2. Simplify the value assessment
Note that both grocers have used a whole dollar amount ($5) rather than complex number (eg $4.99) in this case.  Why?  In an environment in which there are hundreds of prices displayed, and most per kilogram ($6.99/kg, $3.99, $4.99...) the whole number alleviates the buyer's burden of calculating value, effectively saying "you don't have to strain your brain, it's great value".  In behavioural terms, the whole number relaxes the buyer and increases confidence that they can successfully manage the transaction.  

I've also seen this technique used at Coles, where a discounted item is promoted using a whole rather than complex number. For example, yogurt that is normally $6.24 may be marked down to $4 rather than $3.99.  

3. Gain commitment
The mangoes not only attract the buyer but commit them to transacting with the vendor.  In other words, once the mangoes are in the basket, it becomes hard for the buyer to recant and take their business elsewhere. A couple of things are happening here.

• They have sunk the cost of their time and effort in queuing up and going through the process of sale.  Having committed to doing this with one vendor, the desirability of doing it with another (particularly when the upside is difficult to discern) diminishes.
• We like to think we are good at making good decisions. The buyer has given themselves a tick of approval for buying the mangoes, and therefore is likely to seek to build on that by continuing to shop in the same stall. 

New vs existing customers
As I mentioned, I am a relative newbie to the market and so my attention is soaked up just trying to navigate the environment. I look for simple price cues because my cognitive load is already high.

Experienced market goers on the other hand are familiar with the environment and so have greater capacity to discriminate between vendors, concentrating on micro rather than macro detail.  As such, these buyers are more likely move between stalls, visiting Grocer A for mangoes and Grocer B for potatoes for example.  

It's pretty clear then that each vendor needs to devise different strategies for new and existing buyers. Where lead items may attract new custom, factors like customer service, stock range and quality become central to retention. The same goes for all types of businesses; online and off.  

Lessons from the market
Next time you visit a market, think of it as an analogy for your business.  How are you enticing new buyers?  Are you making your offer easy to understand?  What's your competitive positioning?  How do you gain commitment on a small scale so that it turns into something bigger?  Take a moment to reflect on the behavioural state your buyer is in - are they new or existing? - and how you guide them through the experience of purchase.  Are they overwhelmed and looking at the macro level or familiar and more discriminating on micro detail?  Most of all, put yourself in the shoes of your buyer and from there you'll be able to shape an effective behavioural strategy.

PS Why not join like minded colleagues by signing up to the People Patterns mailing list?  Every month you'll receive a short wrap-up of behavioural tips for business. Click here for the 20 second sign-up.

Image credit: http://www.rgbstock.com/images/mangoes

Middle ground: How businesses should deal with our love of the middle

Do you tend to select wine from the middle of the list?  Order a meal that is neither too expensive nor cheap? Donate amounts that are somewhere between the highest and lowest? As consumers we most typically avoid extremes when selecting from a list of items, preferring instead to cluster around the middle.   Some recent research reported in Research Digest has added additional scientific weight to this behaviour, known as "Center Stage Effect".


In the most recent study, researchers Rodway, Schepman, and Lambert found a preference for the middle across both horizontal (moving left to right) and vertical (top to bottom) displays.  From this you can take two immediate actions for your website and/or printed collateral such as menus or product brochures.


1. Be smart about the sequence of items
Knowing that most people will select from the middle rather than first or last items, consider how you position items with the best margin.  Listing your highest margin wine as the cheapest will mean you are probably leaving money on the table because most customers will avoid the wine for fear of being thought a cheap skate.  Likewise, your most expensive wine should not necessarily be the one with greatest margin because volume will be low.  


Contrast a wine list on the left (image 1) that does not use price sequencing to influence purchase,  and image 2 on the right that does.  Image 2 takes better advantage of the Center Stage Effect.

2. Be smart about how you style the display of items 
You have a choice to work with or against the Center Stage Effect according to your business objectives. If it is to your advantage to encourage the customer to avoid extremes, style the middle of your list to capture visual attention. If however you want to counteract the Effect, you will need to visually style the list to drag attention away from the middle.


Image 3 provides additional visual cues to persuade the customer's choice for the middle option whereas image 4 pulls attention away from the center by styling the left-most laptop differently to the others.  

3. Visual emphasis given to middle option 

4. Item on left distinguished through styling 

With knowledge of the Center Stage Effect you can make deliberate choices about how you influence your customers, making it work in your favour.  With that, I'll exit stage left.


Interested in finding out more?  Email me at bri@peoplepatterns.com.au for an obligation free chat about your business.




Rodway, P., Schepman, A., and Lambert, J. (2012). Preferring the One in the Middle: Further Evidence for the Centre-stage Effect. Applied Cognitive Psychology, 26 (2), 215-222 DOI: 10.1002/acp.1812 cited in http://bps-research-digest.blogspot.com.au/2012/04/people-prefer-middle-option.html 

Pricing pain at the petrol pump: Why $1.60 hurts

Petrol prices are on the rise and so too hysteria about what this means to Aussie households.  So why does petrol fuel such intense consumer reaction? Let's see whether Behavioural Economics can provide an answer.


Price sensitivity but demand inelasticity

In Melbourne, petrol moved from around $1.40 to $1.60 overnight last week which is a 14% increase. Some media outlets are joyfully speculating that we'll be paying $1.65 over the Easter break, stirring outrage amongst their readership. The price hike means that a car with a 60 litre tank will be paying around $12 more for one fill.  Ouch.

According to ANOP research cited in the 2007 Australian Competition and Consumer Commission (ACCC)'s review of petrol pricing, 70% of consumers are price sensitive when it comes to petrol.  The 30% who are insensitive are largely those with company vehicles, meaning the rest of us are paying attention to whether petrol is higher or lower than it was yesterday.  

Our sensitivity comes despite petrol being a largely inelastic purchase; we have to buy when the tank is empty regardless of price.  It is this sense of powerlessness that I believe drives our desire to try to 'beat the system" by trying to anticipate price rises, and slavishly handing over our 4 cents off a litre shopper dockets.

Petrol is like the stock market; we think it's about knowing when to buy 

In some ways, buying petrol is like the stock market.  There is unforeseen variation brought about by mysterious offshore forces, and inevitable speculation about the right time to buy. And just like those in the stock market, we all have theories on when the price will move (school holidays, long weekends, Thursdays etc) because we can't help but look for patterns in things. And yet, as Nassim Taleb writes in his book The Black Swan, we fool ourselves into thinking we know more than we do.  There really is no pattern to petrol pricing, and even if for a time Tuesdays seem to be cheaper, the following week that may change.

Here's are some of the behavioural forces at play with petrol pricing.

Adaptation

Consumers generally cope best with undesirable change like price rises when it is done quickly, we can adapt and life can move on. The challenge with petrol pricing is that it seems to change day to day, keeping us guessing.  But here's the peculiar thing; we are so used to price fluctuation that we have adapted to not adapting.  Just like the price of fruit and vegetables, consumers expect there to be change in petrol. 

But, it seems consumers adapt to petrol price variation within a certain tolerance range. Changes a few cents up or down seem fine, and incremental price changes are tolerated, but leaping $0.20 is beyond the usual cycle. 

Anchoring
An anchor is the information on which a consumer relies to establish a sense of value for a product or service.  In the case of petrol, the huge price signs are blatant anchors, and drivers scan these as they assess whether they should stop to buy. In Melbourne we had been anchored around the $1.40/litre mark for a few weeks.  When $1.60 suddenly appeared, it interfered with our sense of value and created newsworthy confusion about why it had changed so significantly.


The interesting thing of course is that $1.60 is the new anchor, so if petrol drops back to $1.40 or even $1.50 it will seem like a better deal.   Remember it was only 2005 that we punched through the $1/litre psychological and price barrier, and from there on we have been continually re-anchored to higher price points. If you were visiting from New Zealand, by the way, $1.60 would seem like a bargain because they are paying nearer to $2/litre.



Loss aversion
Consumers hate the possibility that we will drive past the bowser only to see the price jump up when we need to fill the tank.  If only we'd stopped in the morning!  The sense of having 'lost' the lower price torments us because it reflects a poorly made decision. In the case of normal price variations, this may mean the difference of only a couple of dollars on a tank, so intellectually we should not be concerned.  But emotionally, we feel like we've lost.


Loss aversion is why price guarantees are such a popular behavioural device; they make us feel comfortable about committing to the purchase without fear of finding the product cheaper elsewhere. Loss aversion is also behind the success of fuel discount vouchers.  It is too painful to give up the fuel discount so we instead drive with purpose to particular outlets to save around $2.  


Lessons for businesses

Petrol pricing reminds us that pricing is as emotional as it is intellectual. As fuel discount dockets have shown, consumers will change their behaviour to save a couple of dollars.  Whilst this may not make rational economic sense, Behavioural Economics shows that we are all subject to forces that influence us to act in irrational ways.  For your business it means you must consider how your price is anchored, how you will help your customers adapt to a price rise and methods of supporting your customers to overcome their aversion to loss.  You have the power to positively control the response to your pricing with help from Behavioural Economics. Happy driving.

PS If you like my blog, I'd love you to consider supporting my fundraising trek of the Larapinta trail. Many have supported the trek already so to find out more, visithttps://www.gofundraise.com.au/page/BriforICV Thank you!

Will the carbon tax change business behaviour?

Thank you to those who emailed me about how the Australian Federal Government's proposed carbon tax would be viewed by behavioural economics. Political views aside, here's the run down;

Is a tax on emitters better than an incentive to drive behavioural change?
Absolutely.  We are more driven to avoid pain than seek gain, so in this case an incentive such as a rebate for organisations who reduce emissions (gain) would be less likely to change behaviour than the introduction of a penalty (pain).  The behavioural principle at play is loss aversion, where we are motivated to avoid a situation where we lose something.  The government is hoping to stimulate the large emitters to change their behaviour because otherwise those businesses will face significant cost.   As a more personal example, think of the following. Would you be more likely to join up to health insurance if you were paid an incentive of $400 to do so, or were taxed $400 if you did not? The proof is in the fact that in Australia we have compulsory health insurance because too few of us were taking proactive action to insure our health.


If the tax is simply passed on to consumers, is it really changing emitter behaviour?
Yes.  Whilst many businesses may adjust their pricing to pass on the cost of the carbon tax, we are all motivated by margin.  Just as with any tax, businesses will be motivated to reduce the amount payable because that helps the bottom line.   Again, it is loss aversion that motivates businesses to take steps to eliminate costs, and now emissions are part of that equation.

Can the carbon tax be used to charge higher prices?
Invariably the tax will be used to adjust pricing, and consumers will expect that. But here is the opportunity for you; by resetting expectations and having a publicly justifiable reason to change, new price levels will be anchored in the market.  Think back to when petrol was under $1 per litre.  Whilst  that now seems like a dream, as consumers we have had our expectations reframed and have been able to adapt to the new pricing levels. What about bananas? With supply of bananas contracting after Cyclone Yasi and the Queensland Floods, prices have skyrocketed ($13/kg in Melbourne). Whilst not everyone can afford to buy bananas now, once supply returns you can be sure that the normal average cost per kilo will be higher than it was before expectations were anchored at the higher price.

A side note on price anchoring. The federal Opposition and the Greens both played a role in helping the Government gain psychological acceptance of the carbon price of $23 per tonne. How? The Greens had asked for a $40/tonne price and the Opposition had jumped on Treasury modelling at $30/tonne.  This meant that by the time $23/tonne was determined, it hardly raised a whimper.

So in sum, the carbon tax will change the behaviour of businesses, but so too would any new impost.  No surprise that it will force businesses to look for new ways to reduce cost and improve margin, but it just so happens that this may help the planet in the process.

As always, let me know if you have an issue on which you would like a behavioural economics perspective. Email peoplepatterns@gmail.com or tweet @peoplepatterns. Until next time, happy taxing.

This post also appeared in http://www.smartcompany.com.au/blogs/20110726-will-the-carbon-tax-change-business-behaviour.html

Bananas, eggs and irrationality

The prices of fruit and veg are on Australian minds at the moment as we grapple with the devastating human, economic and environmental aftermath of flood and cyclone.  Bananas have topped $5.98*/kg (from a seasonal average of $2-$3) and many other crops and forms of produce are likewise facing price adjustments. At the same time, Woolworths and Coles have dropped the price of milk and butter in the hopes of luring more people through the door.

Shelf pricing reminded me of something the Brafman brothers wrote in Sway: The Irresistible Pull of Irrational Behavior; "If you reduce the price of eggs, consumers buy a little more. But when the price of eggs rises, they cut back their consumption by two and a half times".  The lesson was that the satisfaction of purchasing discounted eggs was far less powerful than the pain of paying more.  Can you picture yourself in this circumstance?  I know that I have recently walked past nectarines because they were $1/kg more than the week prior - that means I have elected to go without this gorgeous fruit because something deep in my DNA wouldn't let me spend more than the last time I'd bought them.  Rational? No way. What have I done with that massive $0.40 saving? No idea - probably spent it on a more expensive and less healthy snack. 

(Bonus question for those who have read my previous blogs, was it the Elephant or Rider at play? Answer below.)

So what's the egg lesson for marketers?  Don't underestimate the impact of your pricing adjustments. If you rely on a regular purchase cycle that is also a discretionary purchase, be prepared for your price rises to drop volumes more than your discounts will increase purchases.  Whilst this may not be new - we're really talking about the perennial debate between yield (more from each customer) and volume (more customers) - the magnitude of price increases vs decreases on behaviour (2.5 times for eggs) is what's interesting and possibly deserving of your attention.

* As an aside, many of the news outlets are speculating that bananas will end up at $15/kg because that's what happened on the back of Cyclone Larry in 2005.  Suddenly $5.98 doesn't seem so bad. Why? $15 has become the new psychological anchor price against which anything else will seem reasonable.


  Ans: Elephant of course. If my executive/rider mind had been engaged I would have happily paid $0.40 more because it makes sense on a rational level.

Price rises and salary reviews - how train tickets can show us how

I recently moved from an annual train ticket to a stored value, charge-by-trip system.  Where my previous experience had been that the annual cost was taken from my salary each fortnight (thanks to a system my employer provides), I now have to top up my card and see what value remains after each journey is completed.  The cost of course is the same as it's always been (and in fact a tiny bit less).  So what's the difference? After each trip I now have the personal cost brought top of mind.  If the trip has been bad, I'm resentful. If it's been a 'good' trip, I'm resentful because who likes paying for smelling unreliable service? 

The concept at play here is "adaptation", explored in Dan Ariely's Upside of Irrationality. We become desensitized to change - our emotions level out as the positive and negative perceptions of the change fade away.  Think about how excited you were when you bought that new TV, new car, new dress. The elation fades away as you adapt to the change.  Ariely describes this as the "hedonic treadmill" where we underestimate how short lived happiness through consumption actually is, and why 'keeping up with the Joneses' will only ever disappoint.

One of the lessons here is that when it comes to the annual pay rise, we'd be better off getting the increases in instalments. Why? So we can enjoy them more. Quarterly raises would mean you are reminded four times of your increasing worth to your workplace rather than just once.   (It would also benefit the business' bottom line just quietly....)

The converse is true and is why my train ticket has become very annoying.  Instead of me adapting to the annual cost and the pain receding to my memory, I am being interrupted every time I travel - I am not being allowed to adapt. 

The lessons for marketers? If you are increasing your prices, give serious consideration to larger rises less often - limit the number of times you remind them of what you are charging so that you give your customers time to adapt.  Think like an annual train ticket.

If you are rewarding your customers (Myer does this well with it's reward card), try doing so in instalments so the positive impact is felt more frequently. Think like a reward-per-trip ticket.

And if you are the new Victorian government, add this blog to the list of Myki ticket feedback!