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

Blackberry Crumble

On Monday Blackberry announced it had provisionally accepted a bid from the Canadian private equity firm Fairfax Financial Holdings worth $9 (U.S.) a share, only 6% of the peak share price recorded in June 2008. Why has Blackberry, a firm with operations in 175 countries, $2.8bn in cash and whose corporate clients amount to 90% of the Fortune 500 been forced to accept such an offer?

Fundamentally, Blackberry misread market trends and did not follow consumer demand. It stood still while competitors HTC, Samsung and most notably Apple reshaped the mobile handset market. Blackberry isn't the only firm which failed to adapt (remember Nokia?) but its decline is swift and coming to a head. So why did Blackberry become so big in the first place?

Blackberry rapidly gained market share by doing two things really well. It had the best security and the best instant messaging system (BBM). This made it the favourite of both governments and corporate IT departments across the globe, whilst also appealing to young people who quickly became attached to BBM. However, Blackberry neglected three key trends in consumer demand.

Firstly, Blackberry ignored the fact that consumers want something fun, not just functional. It dismissed touch screens as unnecessary, not grasping that people found them alluring and  engaging enough to pay for. Blackberry has now brought out some touch screen models, but they have performed poorly and are too little too late. Blackberry continued catering for those few who saw buttons as indispensible while ignoring the direction of the rest of the market.

Secondly, Blackberry handsets are not sufficiently App friendly. Handsets were incapable of hosting Apps as recent as 2009, and even now there is a greatly reduced variety of available Apps. It almost goes without saying that fans of Apps do not buy Blackberry handsets. Again Blackberry found itself forgetting that consumers expect to enjoy using their phones. Ironically, one of the few Apps available on the Blackberry operating system is WhatsApp, an App that has done more than any other to erode the status of BBM as the best instant messaging service.

Thirdly, the recent trend of bring your own device (BYOD) has wrong-footed the Blackberry business model of appealing to IT departments. With employees often deciding which handset they use, security is no longer king in the corporate handset market leaving Blackberry out in the cold.

In summary, Blackberry had a winning formula but refused to adapt the formula in the face of significant trends in demand. Blackberry is now about to be taken into private ownership where it can be reshaped with less public scrutiny. This reshaping is widely predicted to involve turning Blackberry into a niche handset maker for the corporate world, and with large reserves of cash and intellectual property, there is an opportunity here. If Blackberry can adapt to key consumer demand trends, once again the future could be bright.

Book Review: Basic Instincts

 Basic Instincts by Pete Lunn is an interesting take on behavioural economics that's gets better as it goes on, with applications to marketing and pricing being the highlights. It is not the best introduction to behavioural economics. It is not the best introduction to the psychology of decision making. But it is useful. (It is also full of incredibly interesting meta economics which I lay out in a seperate post.)

Here are some of the most useful highlights regarding marketing:

• Relationship marketing, where companies intentionally build relationships with consumers, is built on an accurate understanding of both the "perceptions and behaviours of existing and potential consumers". Also part of relationship marketing is the importance of likeability - brands try to be funny or irreverent in an attempt to get consumers to like them.
• The intrinsic desire for familiarity is why people are more likely to choose what they feel they already know. This manifests itself in marketing with firms trying to make their products familiar with consumers. Amongst other things, this explains why household names are used to voice commercials.
• The desire to belong manifests itself in marketing too. For example, car adverts portray ownership as membership of an exclusive club, reinforced by paraphernalia proudly bearing the logo or slogan. To summarise, "it's what your says about you..." 

 
Regarding pricing:

• Firms should beware price hikes as "People think a price should fairly reflect costs of production, not an equilibrium between supply and demand." (p.199)
• Fairness is highly valued by consumers, and woe betide any firm that is perceived to be acting unfairly. For example, in July 2007 Apple released a new iPhone for $599. In September 2007 they reduced the price to $399. This is just a textbook example of price discrimination - making those who were desperate for the iPhone pay more - but it was judged by many to be unfair. After a public backlash Apple offered the original customers $100 back, but the damage to their reputation had been done.
• People care more about the present than the future. Thus the Gillette pricing model is genius: a small upfront cost followed by regular expensive payments. Once you've bought the razor you're unlikely to change, despite the expensive blades which you probably didn't think too much about when you first bought the razor.

And a nugget of wisdom regarding management:

"Human organisation is based on our unique ability to trade favours. Effective organisations create a good climate for such social exchanges. This is the defining characteristic of successful organisations, just as it is of successful human societies." (p.164)
 
But I leave you with some political economy that succinctly details a good reason to doubt free market economics:

"Markets are not deterministic and efficient allocation machines. They behave differently according to levels of trust, common identity, the availability of information, perceptions of fair prices, and uncertainty about value and about the future." (p.268)

Genre: Behavioural Economics
Accessibility: 7/10
Accuracy: 7/10
Readability: 7/10
Usefulness: 9/10
Verdict: A Useful Read

Food Shopping Survey Results

The results are back from the survey that I carried out last week (after analysis on Stata).

(For a more technical critique please see here)

Headline result:

• The more often people shop for food, the more likely they are to think that they buy items of food out of habit. I think the most likely explanation for this is that people who shop more often have more opportunity to create habits - the reinforcement mechanism is stronger if you buy food twice a week compared to fortnightly. However, it was only significant at the 10% level and so it is not conclusive evidence.

Other notable results:

• There is no connection between whether people consider themselves a 'creature of habit' and whether they think they buy items of food out of habit. I find this surprising. I suggest that this might be because creature of habit could be seen as a positive character trait, while buying food our of habit could be seen as lazy. Thus the result could be because people are trying to present themselves in a positive light (even if only to themselves).
• There is no connection between the extent to which people think they consider the price of food and whether they think they buy items of food out of habit. I find this surprising. I expected a negative relationship. At the very least I expected that asking people about whether they looked at prices might prompt them into saying they bought less out of habit, but no significant effect was found.
• There is no systematic difference between male and female respondents.

In conclusion, none of my hypothesised variables affected whether people think they buy items of food out of habit (apart from how often they go shopping). Obviously, I find this surprising.

Book Review: The Power of Habit

The Power of Habit by Charles Duhigg is all about the psychology of habit formation and change. Why then, you may well ask, am I reviewing it here on a blog about behavioural economics? The answer is nudges. Behavioural economists are often interested in things that will change behaviour, and habits are a big part of behaviour. Three examples in the book...

Firstly, an American army major who wanted to stop regular riots in the small Iraqi city of Kufa. People would slowly gather over the course of a few hours in the central plazas and after a while violence would break out. The major had an idea of how to nudge a crowd into staying peaceful: Stop food vendors entering the plazas. The usual practice was for food sellers to enter the crowd, but by stopping them from doing so the crowd got hungry, and so started to dissipate. There were no riots after the food vendors were stopped from supplying food to angry crowds.

Secondly, McDonald's in their attempts to get people to buy their food out of habit. One of the key insights into habit formation is that each habit has a specific cue. McDonald's realised that they needed to keep the same cues across outlets. Thus each McDonald's looks the same, smells the same and sells exactly the same food. Whatever sparks your habit of buying McDonald's, the same cue will exist at all outlets. Thus your habit is mobile - you don't need to be near your local McDonald's to feed your Big Mac habit.

Thirdly, retailers in their highly successful bid to understand consumers better. Big shops have been collecting data on their customers for decades, but recently they've made a breakthrough: consumer habits (and thus purchasing patterns) change in predictable ways as people face major life events. Retailers realised that if a woman started to buy baby clothes and pregnancy drugs she was likely to be pregnant. Having a baby is a big life event (apparently). Having a baby considerably alters purchasing habits, meaning that marketing at this eventful time is likely to be more successful. The result: shops target (likely) new parents with adverts for products like nappies. They nudge people into buying their products.

My one complaint with The Power of Habit is that not all human behaviour can be called a 'habit'. You cannot explain everything through habits. Having said that, even the non-habits covered by Duhigg are incredibly interesting. In conclusion, I thoroughly recommend The Power of Habit (whether you be an addict or just interested in behavioural economics) but I do not necessarily buy into the book's central argument.

Genre: Psychology
Accessibility: 10/10
Accuracy: 6/10
Readability: 10/10
Usefulness: 8/10
Verdict: A Very Good Read

Market Research

Ever wondered why you were called by a market research firm?

One explanation involves behavioural economics...

Apparently (according to the book Supercrunchers by Ian Ayres) credit companies have discovered that people are more likely to respond positively to their marketing if they were recently asked by a market research firm if they are planning any big purchases.

People are being prompted to think about big purchases they would like. Thus when credit cards come along later that week promising such items... Well, it's a no-brainer. People are being nudged.

And thus we conclude...

Companies: think about how you can indirectly encourage people to think positively about your product...

Consumers: be aware of this kind of thing when considering how best to spend your money!

(Oh, and don't let the picture of a red telephone influence your choice of insurer...)

Book Review - Priceless

I have a huge amount of affection for Priceless by William Poundstone because it was the book that first introduced me to behavioural economics. It prompted me to study all things behavioural at university, and I haven't looked back. For this reason I may be a little biased in favour of Priceless but the bias is, at root, caused by the book being brilliant.

William Poundstone expertly explores how shops constantly use behavioural economics to encourage you to buy their goods, while simultaneously telling the story of how behavioural economics came to be. It is an utterly gripping read, written by an accomplished journalist who knows how to keep you hooked. It will have you doing little experiments on your friends all the time (as my housemates at the time can testify).

Priceless lifts the lid on the art of pricing, advertising and marketing. You will finish it a wiser consumer, potentially less like a hapless wave; driven and tossed by the winds of capitalism.

My favourite example that he uses is of the free 72 ounce steak. Some American burger joints are famous for offering 72 ounce  steaks for $72 unless you can finish it in one sitting, in which case there is no charge. People travel miles to take the challenge, and when they do they are placed on a high table, with all their friends looking on from the rest of the restaurant. Poundstone reveals that the way these burger joints make their money is not from people failing the challenge (which is most of the time), but from their friends paying over the odds for a normal steak. Their friends' perception of value is anchored on the $72 steak, and so the $19.99 steak seems cheap, even though it might only be $9.99 elsewhere. The moral of the story is don't buy a normal steak at one of these places!

My one gripe with Priceless is that it focuses on the psychologists at the cost of behavioural economists. The two groups do not always agree and in some cases the story is rather one-sided. This, however, is a minor complaint; Priceless has so many outstanding features that make it just fantastic.

It is A Very Good Read. I can't remember what the price was, but I know how much it's worth; quite simply...

Priceless by William Poundstone
Genre: Psychology/Behavioural Economics
Accessibility: 10/10
Accuracy: 7/10
Readability: 10/10
Usefulness: 8/10
Verdict: A Very Good Read

Best Before End

Just a quick thought that occurred to me as I ate pudding earlier... Best Before End is brilliant wording.

It communicates the fact that the food in question will go mouldy and disgusting if left too long, but in a positive way. It will lose its taste. It will become horrible. It may go green. But what you're thinking about is that it will be Best, and for another 18 months at that. Will Go Mouldy After just doesn't quite have the same ring to it.

In conclusion, when it comes to packaging, a lot of thought has gone into even the smallest of details.

Blu-tack Signals

Picture the scene...

You are an inventor. You have just invented an amazing new type of blu-tack; twice as sticky as normal blu-tack. How do you communicate the awesome stickiness of this new blu-tack to consumers?

You could launch adverts with the slogan "twice as sticky". You could put "twice as sticky" on the packaging.

One of the most powerful ways to signal quality is price. If something is expensive it must be good. If it is cheap, well, you get what you pay for.

If I were the blu-tack inventor I would attempt to signal the greater stickiness by charging more.

This kind of thinking is contrary to the idea that lower prices increases demand. Why? Because consumers like you and me do not know the quality before purchase. We do not have perfect information. We respond to signals, even about blu-tack.

And the power of price doesn't end there. If we expect the blu-tack to be twice as good, we are more likely to think it is after using it, regardless of whether it actually is. Paradoxically, if we pay more for a product our enjoyment of said product may increase. Funny old world.

Beyond Own Brand

As we perused the soup section of my local Tesco recently, it was obvious to my friend and I that Tesco were pushing their own brand soup (Tesco Everyday Value). A lot of shelf space close to other cheap soups was dedicated to it. However, the vast majority of the soup category was taken up by Heinz - a brand known mainly for its quality rather than price. It would appear that Tesco was not directly competing with Heinz, especially as Tesco Everyday Value soup was not placed directly next to the Heinz soups.

We were wrong.

Upon closer inspection (and a little light research) we discovered that Crosse & Blackwell, a high end brand placed next to Heinz, is owned by Tesco.

So what?

Tesco is clearly wanting to gain market share in the world of quality soup (who wouldn't?). However, they've realised that consumers see Tesco Everyday Value as an inferior option to brands like Heinz. If you wanted a really nice soup, you would look at Heinz, Campells or Baxters. Not Tesco Everyday Value.

People are very good at creating rules of thumb; seeing Tesco on the packaging usually means low price, not high quality. Thus when we quickly (and we're always in a rush) scan shelf after shelf of similar looking soups, we narrow down the options using rules of thumb. (This isn't a criticism of consumer behaviour; rules of thumb are necessary to survive in this complicated world.) We quickly rule out Tesco own brand soup as inferior (correctly or not).

So what do Tesco do?

They create (or buy) a brand that consumers will not immediately write off as low quality. Crosse & Blackwell are the method Tesco are using to squeeze market share out of Heinz. Instead of fighting the rule of thumb and re-branding Tesco Everyday Value, they simply create a new brand. Simples.

Tesco Nappies

Own brand products are ubiquitous in supermarkets. Why are they there? How do the supermarkets convince us to buy them?

As I walked around Tesco earlier today I noticed the huge similarity between Tesco own brand goods and branded items (made by a separate supplier).

Let's take the example of nappies. Here Pampers (owned by Proctor and Gamble) is the leading brand. They occupied about 60% of the shelf space in the nappy category. Approximately 20% were Huggies and a further 20% were own brand; Tesco. (This is a rough guide of market share).

The first question is why were Tesco competing with P&G in the nappy market anyway?

The answer lies in the profit margin. By selling their own goods, supermarkets cut out the middleman. They make more money selling their own brand goods than branded ones. However, each individual product space, or 'facing', is at a premium. The rate of sale is important. This leads us onto the second question.

How does Tesco convince us to buy their own brand products?

When an own brand product is in direct competition with a branded one, like the nappies pictured, the supermarket will try to convince us that their (usually) cheaper product does "just as good a job". It uses tricks such as the following to promote similarity between the different products:

• Placement. Own brand goods are often placed right next to branded ones, and often in the best position ("eye-level is buy-level").
• Colour. The pictures of the nappies above are a textbook example of a supermarket copying the colour of the market leader. Colour is of huge importance in our brains, and colour schemes are nicked wholesale from the branded goods.
• Emotional intent. There is a picture of a smiling baby on every pack of nappies in the store (the one exception is a line of uber-cheap Tesco nappies, occupying a tiny section of the bottom shelf).
• General aspects of design. For example, the number of nappies is on the bottom right corner.
• Packaging. Both types of nappies come in similar plastic packaging, and are of similar size.

Thus supermarkets use psychology and behavioural economics in an attempt to persuade that their product is just as good.

Does that make us fools for buying own brand goods??

No. Well, not necessarily. The own brand stuff may genuinely be just as good, or even better. Remember, branded goods are constantly trying to keep you loyal. They do not like it when you try out the competitors - they might be better!

Conclusion?

Be rational.

Realistic conclusion?

At least try to be aware of what shops and suppliers are trying to make you feel, think and do.

How??

Know some behavioural economics!

Salt And Oats - Fire Coming Out Of The Monkey's Head

Sailing on the Norfolk Broads is both a wonderful and totally unique experience. We cruise around beautiful rivers and lakes in 1930s yachts, enjoying getting away from the world. Every now and then, however, we have to stop at outposts of civilisation for supplies. Ludham Bridge Stores is one such outpost. It is almost the dictionary definition of a monopoly; the nearest competitor is at least half a day by sail. So improving their shop using behavioural economics probably isn't a high priority for the owners, but I humbly suggest that they might be able to increase their profitability somewhat...

The first thing you see as you enter the front door is salt and oats. Right in your face. At eye-level. About 50cm from your face.

Now, I'm fairly confident when I say that salt and oats are the exact opposite of 'impulse buys'. No-one ever in the history of humanity has ever walked into a shop, seen some salt, and thought to themselves:

"Oooh... That might nice..."

Why? Because people know whether they need salt or not. They have either run out of salt, in which case they will buy it wherever you put in the shop, or they have not run out of salt, in which case they will not buy it.

It's a fairly similar story with oats.

And, worse than wasting the prime spot in the shop to get people to buy something on an impulse (like, say, an ice-cream) you have, in one fell swoop, changed the consumer journey. They will now be thinking:

"Oh, I don't need salt... What do I need?"

By getting people to think about what they need rather than what they would like, Ludham Bridge Stores probably sells fewer ice-creams and other such-like impulse items.

After saying all this as I stood with friends at the entrance to the shop a few weeks ago, I was told to shut-up, hurry-up and just buy something by my mates. Such is the life of a behavioural economist.

Ludham Bridge

Recommended listening:
Fire Coming Out Of The Monkey's Head by Gorillaz

How Much Would You Pay For Facebook? - Time Will Tell

In the first quarter of 2012 the average UK house price was £226,887 (BBC)

How much would you pay for Facebook?

• £1000 a year
• £500 a year
• £100 a year
• £10 a year
• £1 a year
• Nothing

Just £2 a week for one year is enough to equip two African villagers with the skills to work their way out of poverty (Tearfund).

How much would you pay for Facebook?

• £1000 a year
• £500 a year
• £100 a year
• £10 a year
• £1 a year
• Nothing

Now I'm guessing that as you're reading a blog about behavioural economics you're probably on your toes, but similar techniques are used by shops all the time. The next time you go shopping try looking out for them...

Recommended listening:
Time Will Tell by Bob Marley