Promotions: The Effect of ‘Labelling’ on Customer Behaviour

I've just had the great pleasure of writing a guest blog for The Marketing Directors (the marketing consultancy) and here it is: Promotions: The Effect of ‘Labelling’ on Customer Behaviour

Winter Fuel Payment

In the UK everyone over the age of 60 is given the Winter Fuel Payment each year by the government. ('Winter Fuel' refers to heating and electricity costs.) Over the last 10 years the Winter Fuel Payment has varied between £200 and £250 per person over 60, with the payment for those over 80 varying between £300 and £400. The Winter Fuel Payment is usually paid in one lump sum in November or December. There are no legal requirements or official guidelines over how the Winter Fuel Payment should be spent by the recipients.

On average, what percentage of the Winter Fuel Payment do you think is spent on fuel? 

Imagine the hypothetical scenario where everything stayed the same, but the Winter Fuel Payment was called 'The Annual Payment'. On average, what percentage of the Winter Fuel Payment (now called The Annual Payment) do you think would be spent on fuel?

The answers are 41% and 3%, respectively! (according to Beatty, Blow, Crossley and O'Dea, 2011) The label 'Winter Fuel' alone causes 38% of the Payment to be spent on fuel. This is called the labelling effect and it is another example of non-fungibility.

Does this information change whether you think pensioners should receive the Winter Fuel Payment?

Does the Child Benefit?

In the UK all parents receive Child Benefit from the government (equivalent to Child Tax Credit in the US). It's worth £20.30 per week for the eldest child and £13.40 per week for other children. The government spends 1% of GNP of Child Benefit. So it seems relevant to ask how Child Benefit is actually used by parents...

a) Parents spend a greater proportion of the Child Benefit on their children than they do with other sources of income
b) Parents spend the same proportion of the Child Benefit on their children as they do with other sources of income
c) Parents spend a lower proportion of the Child Benefit on their children than they do with other sources of income

(This data is accurate for the years previous to the recent change: all parents got the whole Child Benefit regardless of income)

The answer is c!

Blow, Walker and Zhu (2012) found that parents spent less of the Child Benefit on their kids than they do with other sources of income. Does this mean that British parents are uncaring?

Well, it gets worse... Parents typically spend nearly half of the Child Benefit on alcohol!

Oh dear. That's what children drive you to. 

- My Dad

But, in fairness, upon delving into the data Blow et al. discovered that parents have already insured their children's consumption out of primary sources of income. So an alternative explanation of the data is that parents don't count the Child Benefit when doing their budgeting and then treat it as an extra to be spent frivolously, safe in the knowledge that their children are cared for.

This is non-fungibility, but just not in the expected direction. The label 'Child Benefit' has a rather perverse effect. 

So, what do you think, does this prove Child Benefit should be axed?

Putting the Fun into Fungibility

My apologies for my recent silence, I've been working hard on my MSc dissertation (now successfully finished). The topic of my dissertation was 'fungibility'. My next few posts will explore fungibility and why being aware of it may help you make more rational decisions.

Fungibility is the principle whereby economic agents treat all units of money as equal and as perfect
substitutes, regardless of where they came from.

Violations of fungibility occur when individuals use money differently because of the way it was earned, stored or labelled. Violations of fungibility can cause us to make suboptimal decisions and are thus termed irrational.

Take the example of an €8 gift voucher at an expensive restaurant. For some customers the voucher can be spent on beverages (the 'labelled' voucher) while for others the voucher can be spent on either food or beverages (the 'unlabelled' voucher). As almost all customers spend at least €8 on beverages the gift is 'nondistortionary'.

Johannes Abeler and Felix Marklein (2013) ran this field experiment and found that customers who had the labelled voucher spent on average €3.90 more on beverages than those with the unlabelled voucher.

The label attached to the money had changed behaviour (even though, rationally speaking, both groups should have spent the same amount on beverages as the voucher was nondistortionary). This 'labelling effect' violates the principle of fungibility.

So the next time you receive a labelled voucher think to yourself 'Would I have spent that much on ... anyway?' 'How much was I originally prepared to spend on ...?'

It might just help you avoid be more rational in how you spend your money.