Getting ripped not ripped off at the gym: Price anchoring at work

I walked away.  Her best offer was $16.50 a week for gym membership, better than the $18 I was already spending as a casual member, and yet I turned down the offer. Why? 

Pricing psychology is such an important part of every business and behavioural economics can go along way towards understanding why customers react to deals the way they do.  Here are eight lessons from how my gym botched the deal.

Over the past few months the gym had sent me text messages offering $18 a week memberships, the same price as my weekly Zumba class.  This was their attempt at winning me over by saying "you may as well because that's what you're spending anyway".  Why didn't it work? Commitment to 12 months. Lesson 1. Don't ask your customer for a commitment without rewarding them beyond what a 'casual' customer would receive.  And because the offer was texted to my phone, any other benefits of membership (better change rooms for instance) were not explained.  If using this strategy, parcel the benefits with the price in each and every communication. A text saying "Unlimited Zumba plus full access to pool, yoga + sauna no add cost" might have been better.

So now $18 was anchored as my membership price expectation.  Lesson 2. Whatever deal your customer first sees is vital because it is the offer against which all others will be judged.  This of course can work very well for a savvy business because it sets an upper limit against which you can offer discounts. 

The other important aspect here is that $18 anchored the price in context.  The $18 for gym membership was seen as relatively expensive and yet I have spent more on that in yogurt in the last 2 weeks. When I was later comparing a cheaper deal to that anchored price, I was judging them relative to gym prices only, not other lifestyle costs. Lesson 3. Take the opportunity to broaden your customer's frame of reference with other price anchors to influence how your pricing is perceived.  And the other anchors don't even have to be relevant! Duke University's Dan Ariely has demonstrated that numbers as random as the last four digits of a social security number can influence the price people are willing to pay for wine. My gym could have cited average costs per week of Internet, train travel or something else just to broaden the context in which I was judging the value of the membership.

The gym next texted me a deal for $16 per week.  Hmmm, that was getting more like it; I would be saving on my Zumba!   Note how I thought about it as saving money rather than spending less money; this is the concept of sunk cost where people fixate on the incremental change (saving $2) rather than the outlay (paying $16).  Lesson 4. Sunk cost is extremely powerful because your customer's mind will be busy calculating the differential value rather than worrying about the actual cost. 

But another week elapsed before I took action and the offer reverted to $18. So I now had an upper price anchor of $18 and a lower price anchor of $16.  This is another useful technique for savvy businesses because you can help your customer understand that the deals are not forever, and they need to act when one crops up.  The concept at play here is loss aversion, where it hurts to lose a potential discount.  Lesson 5. Sequencing favourable and less favourable deals can help drive take up.  Petrol pricing is typical of this behaviour where we rush to buy petrol at its low ebb during a particular day of the week.

So then it came to my next offer. A rep from the gym called me and offered $13 per week.  Well, that was too good to refuse.  I had rejected $18, so this saved me $5, and I had missed out on the great value $16 offer, so I was ready to sign. And the fact that a rep called me rather than texted probably didn't hurt either because it distinguished the deal from others.  Lesson 6. Make sure killer offers cut through as special and close the deal.

Having arranged to meet the rep at a specific time and had that confirmed by him via text that day, I was a bit confused when told he had gone home for the day.  Lesson 7. Customers hate being bounced and it can jolt them from a future focus (I'm going to me a gym member) to current focus (if this is how they treat prospective customers...). Confirming an appointment only to sub in a colleague who does not have full background information gets your customer in a negative frame of mind when you want them to be thinking "yes!".

Fifteen minutes later his colleague met with me with the latest offer.  Here's how our conversation went;

• Gym rep - "For a commitment-free membership we can offer $22 a week. Otherwise, you can take our special deal of $16.50 per week for 12 months"  (Note nice use of anchoring at higher casual rate before mentioning contract rate)
• Me with puzzled expression - "I'm confused. Your colleague offered me $13"
• Gym rep - "I'm sorry, that deal has expired"
• Me - "I wasn't told it would expire, and had arranged with your colleague to sign up for that"
• Gym rep - "As I say, that deal expired and the best I can offer is $16.50."
• Me - "Ummm. Can I think about it?" (when confused, delay)
• Gym rep - "Well unfortunately I can only offer that price tonight"  (Nice pressure. Tapping into my loss aversion") 
• Me -"I'm going to have to think about it" (preparedness to walk away because I felt that I has been lured to sign through misleading representations, but also because I had previously 'walked away' from $16 by not acting on that deal, so I knew I could live without it.)

 So I walked away. 

The gym almost had me, and had used different anchoring techniques to finally get me to a position of commitment. Spooking me with a more expensive deal was a mistake they could have easily avoided by clarifying the deadline for the $13 offer.  

However, the most surprising part of this is that had they come back and offered me a deal somewhere between $16.50 and $13 I would have signed.  Whilst $14 or $15 was more than their best deal, I could have worn the fact that that offer was for a limited time and I was still doing better than $16.50.  What's going on here?  Think back to sunk cost. By turning up ready to sign, I had psychologically 'spent' $13, so anything that was closer to my end of the pricing spectrum ($13) than the gym's ($16.50), was acceptable. Lesson 8. Just because you've anchored the price low doesn't mean you necessarily have to go there to win the business.

In actual fact they called and honoured the $13 deal so I am now a paid up, committed member. Fair to say there were some bumps and turns in how the local gym influenced my decision to do business with them, and it didn't need to be so clumsy. I trust you will be able to apply these eight lessons to engage your potential customers.

1. Don't ask your customer for a commitment without rewarding them beyond what a 'casual' customer would
2. Whatever deal your customer first sees is vital because it is the offer against which all others will be judged
3. Take the opportunity to broaden your customer's frame of reference with other price anchors to influence how your pricing is perceived 
4. Sunk cost is extremely powerful because your customer's mind will be busy calculating the differential value rather than worrying about the actual cost 
5. Sequencing favourable and less favourable deals can help drive take up
6. Make sure killer offers cut through as special and close the deal
7. Customers hate being bounced and it can jolt them from a future focus to current focus
8. Just because you've anchored the price low doesn't mean you necessarily have to go there to win the business

Image from Foster City, and no it's not me!

Time market research got real: How beer and banking show us how

 I don't drink beer. I don't follow rugby. I am not into gaming.  So why on earth have I become addicted to the Heineken Rugby World Cup iPhone game?

Gap between intended and actual behaviour
Sure, addicted is probably putting it too strongly, but my affair with Heineken got me thinking about the gap between intended and actual behaviour   You see had I been invited to a market research group and asked about my gaming, beer and rugby behaviours, there is absolutely no way I would have predicted my own slavish usage of the final product.  I mean, who has the time or interest in pretending to punt a ball over an imaginary goal post?  I just doesn't make rational sense.

And that's the rub for product marketers. We spend a lot of time researching what our market think of our widget or brand, but we often get results based on intended rather than real behaviour. 

Here's where Behavioural Economics comes in. 

Behavioural Economics gets to the truth of behaviour
Behavioural Economics is based on behavioural studies rather than attitudinal ones, so in my scenario the research would have tested the efficacy of different techniques to stimulate download - from memory, I downloaded from an ad on a newsite, the user flow for download, any inhibitors to sign-up (eg asking for date of birth might have been too sensitive), and so on. Traditional market research would more likely have spent time defining the target market (i.e. not me) and predicted take-up based on reported intent.

As to uncovering what would influence me to download the game, common theories would revolve around the creative's call to action, the perceived value of the user benefit, maybe even personal recommendation.  If I had been asked, I probably would have said a combination of these factors. But what really influenced me? Whilst of course I had to see and understand the ad, I could have ignored it like I have every other.  What made me download the App was that I was looking for examples of how brand's were applying social media to engage their customers.  That's right, a virtuous professional reason!  Behavioural Economics would have used tested techniques to influence downloads - herding (doing what others do) and completion (my willingness to step up and kick for Australia) amongst them. 

How Westpac NZ has used behavioural economics

An example that's fast becoming a classic illustration of closing the gap between intended and real behaviour is the Westpac New Zealand Impulse Saver App. Developed on the insight that people have till now had the mechanisms to impulse buy (money, credit cards), but not impulse save, the App allows customers to add money to their savings at the touch of a button. The bank's objective is to grow the penetration of savings accounts beyond 49% of population.  Did the insight come from discussions with a focus group?  I don't believe so. Whilst market research quantified the volume of savings accounts and no doubt other market sizing elements, the key insight was instead based on observation of actual behaviour.  New Zealanders impulse spend $16.1m every day.

Behavioural Economics can overcome short comings of Market research

So am I bagging market research? No, I think the more time we can spend understanding our market the better. But I do believe market research techniques that concentrate solely on intended and predicted behaviours have serious short comings.  Sophisticated researchers use different techniques to try and dig beneath hyperbole (I particularly like image based metaphors to untap emotional and cognitive associations, and there's some merit in ethnographic observation), but behavioural economics can take it so much further by translating insights about actual behaviour into...well, actual behaviour.  And as a marketer, that's our goal!

For more on Westpac's App check out

http://www.bankingreview.com.au/2011/05/acting-on-impulse.html

 

And for the Heikeken game, http://itunes.apple.com/au/app/heineken-rugby-clubhouse/id450375998?mt=8

It's not me it's you: Dropping a customer who doesn't spend enough

We've all been there. That customer who soaks up an inordinate amount of time and energy without spending enough for you to justify the level of resourcing.  And now it's crunch time - how should you move a customer who had face to face sales representation to a less frequent cycle and/or telesales account management without losing their business?  Here are some pointers from behavioural economics to change your service mix.

You don't know what you've got till it's gone...aka "Endowment effect"
You can be sure that the customer took face to face (F2F) representation for granted when they had it - but now that it might be taken away it's seen as a catastrophe. Endowment effect is our tendency to overvalue what we own - in your customer's case, they "own" the level of service they have been used to.

Tell them they can have F2F representation again...but they need to meet the criteria and to do that they can work with their very smart new telesales account manager who will help them get there. Will they like it? Most possibly not because it will be seen as personal affront. But guess what, you're in business and are entitled to treat customers who spend more differently. 

Business Class vs Economy, it's your choice
Procedural fairness explains our tendency to accept a judgment if it has been fairly considered and you know the rules.  If you've ever flown Business Class and then had to go back to Economy, you will know which you prefer, but you also know what it takes to get back to Business Class - money.  Do your customers know what it takes to get F2F representation?  Share the decision and the objective criteria (eg spend more than $5,000 pa...) to help them understand that they are actually in control of their servicing - all it takes is increased spend. 

But I'm special!  I'm an important account!
This type of change reminds the customer that they are one of many, upsetting their sense of uniqueness. Talk to the customer about what makes their business special and why you see a continuing relationship with them, albeit through a different channel.

Don't think about it as losing something
We hate to lose more than we love to win. In this case, the customer may react badly if they perceive the service mix as losing something so do everything you can to frame the change as a gain. Can they get more frequent attention via the phone for example? Do they get the resourcing support of a whole team rather than one individual? Will shorter appointments save them time?  Mark out potential reasons why F2F may not have been the best method of contact from that customer's perspective and consider how to use it in your justification. A word of caution though, the change will most probably be seen as cost cutting, so don't go too heavy on the "it's better for you" angle unless you can actually prove a better service level.

Quick like a bandaid
With unpleasant news, get it over quickly because we adapt more readily if we are not constantly reminded of what has changed. Handover the accounts (and do this properly by thoroughly briefing the new rep and telling the customer) and move on so the healing can begin. 

Still scared to act?
If you are still procrastinating about making the changes, know that you are falling into the trap of loss aversion - you are more fearful of losing the business of some difficult customers than motivated by the gains you can make by having your F2F sales reps concentrate on the accounts with most potential.  And you may well lose some customers.  So to get over this mental hurdle, do some number crunching. How much does it cost you to service those accounts, what's your margin, and what's the opportunity cost between these accounts and the potential accounts your rep could be growing?  Overcome your reticence with a good dose of fear busting.

By no means is changing service mix an easy thing to do, but it is an important aspect of managing your business. If you want to take it a step further and fire a customer, you may want to check out "Firing a Customer - what holds us back?".  Until next time, happy dropping!

Picture from http://www.officialpsds.com/images/thumbs/Roped-off-psd65892.png

Eftpos ad's unfortunate resemblance to toilet bowl

Not one of my most sophisticated posts, I'll admit, but this Eftpos ad had me perplexed for a moment. I couldn't work out why they were promoting a hygiene strip across the coffee - you know like the sanitation strip you get in hotel bathrooms?

Their beer ad is below.

 

Gender differences in bottle shop behaviour

An article on the gender difference in booze buying behaviour grabbed my attention the other week. "Cheap Booze for him" headlined a story about some Roy Morgan research that identified that blokes were driven by bargains, whereas women sought helpful customer service ("Cheap Booze for him" by Inga Gilchrist, MXNews 4/7/11).  The article quoted bar duty manager David Dearlove as explaining that emotions were the difference, where "females want more from a situation, so they want to be waited on. Whereas guys just say 'Give me my beer' and they're done."  Very hunter-gatherer!

Devising your customer engagement plan
As this snippet of research indicates, businesses have a lot of decisions to make when structuring the optimal customer engagement plan (*refer caveat below).  In this case, "beer on sale" would likely stimulate male foot traffic and you would tend to up-weight staff at the registers.  A promotion on "wine matching" may instead stimulate more female custom, and you would need to ensure you had staff available in the aisles to direct purchase decisions.

At what point can you influence the purchase decision?
The interesting point here I think is that men in this scenario are making the decision before entering the store - indeed it is the reason they visit the store.   Women, on the other hand, visit the store in order to make a decision, and in fact be helped to make it.  This means the retailer has different opportunities to influence what the customer walks away with.

To make the most of male customers, the retailer should place high margin wine or champagne near the beer on special, suggesting the guy keep in sweet with his lady by coming home bearing gifts.  This is a technique used in grocery where nappies sell well with beer!  This opportunity for the retailer centers around the behavioural principles of sunk cost and mental accounting. The guy has already 'spent' the amount of money for the beer before he arrives in store (sunk cost), and that means that it should be easier to up-sell because any other purchase comes out of another mental bank account.

To make the most of female customers, the retailer can of course use direct customer service, but the other opportunity is to help the decision making by noting which wines are most popular, best value, match with particular foods and so on.  You have probably seen these techniques applied on point of sale, like "staff picks" or "popular seller", and these work because they use the behavioural economics principle of herding - we go where others go.  If you know other people like the wine, then there is less chance of making a poor choice.  Use of a rating system can also help to frame the decision, so a rating system for value or taste can help influence customer purchases.

Behavioural Economics can influence both genders
Whilst I do enjoy little snippets on gender differences, more important to your business is how you can influence the behaviour demonstrated by the sexes.  Male or female, your customer can be greatly influenced by strategies to get them in the door, and then again whilst in store so it may be worth you considering what Behavioural Economics can offer at each decision point.  Until next time, happy boozing.

(*Note, whilst the article on the research pointed to some gender differences which I have used in this post, there are doubtless many exceptions and qualifiers that you would need to consider before applying carte blanche to your business. Start with accessing the source research through Roy Morgan if you are interested.)

Image from http://www.bargaineering.com/images/in_posts/wine-shop-aisle.jpg

Why we hide behind big, boring reports

I recently read an interesting piece called "Tell Me Something I Don't Know-Why MR is Comprehensive, Accurate, and Often Boring‏" in which the author Yi Kang laments the dull and contrived nature of most market research.  

"Turns out that big, thick tomes of information do serve a purpose – making people feel good. In a recent survey, business executives were most confident in a decision being “well thought out” when the supporting research was “comprehensive” and “accurate."

But when asked if the supporting research made a difference in the business decision (not feeling good but having impact). A very different picture emerged. “Making a difference” requires market research to do at least one of two things: say something new or say something contrarian."

I think Yi is spot on for a couple of key behavioural reasons;


Status quo bias – comfort in sticking to what we know, and
Loss aversion – being more fearful of losing what we have than risking a gain


There’s a lot of comfort in a big, professional document because that implies safety, thoroughness and, frankly, that someone else has done the thinking so we don’t have to.  (It also helps to justify the expense on the research because quantity still trumps quality a lot of the time in perception management).


Of course it's not just market research that taps into our desire for credibility.  Just think about the business documents and spreadsheets we slave over that your boss may not even read. Executive summaries are there for a reason after all.


The other interesting thing we can draw from behavioural economics is the “not invented here” bias that we are subject to – in this case it explains why a lot of those research findings don’t go anywhere. To get traction, the stakeholders need to be part of the insights generation phase, otherwise the outputs are likely to be filed away in a drawer.


So what's the answer?  How about we take some chances and throw away the templated documents, the proforma Powerpoint presentations, the phone book sized research reports and instead throw some reflections up on a whiteboard to discuss, challenge, laugh about, but ultimately get stimulated enough to take action?  Getting your researchers to evoke insights rather than yawns? Sounds good to me.

Image from http://jameswoodward.files.wordpress.com/2008/08/piles_of_paper_small.jpg?w=200&h=239

Why does retweeted stuff turn me off?

Here's some self-disclosure for you.  I find when I am following particular Twitter topics (for instance "Behavioural Economics"...yes, I am that nerdy) I start to ignore tweets that have been incessantly retweeted.  This is contrary to the Behavioural Economics principle of herding ie we go where others are.  So if my fellow Twitterites are actually helping me sort out which content is of most interest in the marketplace, what on earth is behind my irrational shunning of these tweets?

I think it comes down to hard coded arrogance.  I want to have discovered it myself - the fact that others have retweeted it en masse diminishes my sense of uniqueness, and uniqueness is a central part of our identity. There's a part of us that wants to be the black sheep.  Turning up to a party in the same dress as the host, ordering the same meal at a restaurant as someone else, excitedly telling a friend of an App you've discovered only for them to turn around and say they knew about it days ago, these are things that niggle at our sense of uniqueness. 

I also think I am caught in the old content filtering mindset where you would read the source (eg newspaper article) and from there on, related strands of material would be supplementing that original piece through editorial or review.  With retweets, there is usually no value add beyond distribution and so I find my interest level is subdued rather than activated.  It's dilution rather than illumination.  The related behavioural concept at play here is vividness, where we tune into things that are more striking.  Reweets undermine vividness through their sheer domination of the topic feed.

I'm interested in your reaction to retweeted topics and whether you likewise 'turn off' from reading some content because of its popularity?  Drop me a comment (and I look forward to you retweeting this piece!).

Image from:
http://www.smh.com.au/ffximage/2008/08/28/black_sheep_lead_wideweb__470x308,0.jpg