2 February 2016

Look Beyond What You See! Loosing on One Hand, sometimes, Comes with Larger Gains on the Other

Not very long ago, I wrote a post regarding the not so fortunate habit of small entrepreneurs of focusing on loses on small mental accounts and ignoring the wider picture: Shooting yourself in the foot with loss aversion and mental accounting.

Recently I came across a very interesting article about the psychology of returning products (open in a new tab and read later).

Getting returns can be the worst thing possible for a small-shop keeper because she loses the profit on a previous transaction and, often, has to incur a larger loss due to the impossibility of re-selling the returned product. Moreover, receiving returned products involves some additional costs such as a dedicated employee, shipping etc.

In my country of birth – Romania – for several years after the fall of communist dictatorship, many shop keepers held a no return policy even if the product was faulty. In many cases this happened even after it was illegal to do so. Merchants didn’t want to take any loss on previous transactions.

Yet, according to the article mentioned above, things aren’t as bad as a (psychology naïve) shop keeper might think. Actually, making easier for customers to return a product (even if it has no “technical” fault), is good for business. Longer time spans in which a buyer can return a product and no questions asked policy are, in fact, good for business.

The psychological mechanisms at play are numerous and rather complex:
Endowment effect: the longer I have a product the more I value it because it’s mine,

Managing anticipated regret: because it is easy to change my decision – return the product – I feel less potential future regret with the purchase, thus I go along with it,

The affect heuristic: I don’t feel bad when I return a product, thus I like the merchant more etc.

In a nutshell, adopting more customer friendly return policies will increase the number of occasional transactions that are unprofitable (bring loses), but overall, more people will buy and profits will increase.

On a different line of thought, in Romania (my country of birth) smoking was banned in all public indoor spaces (except for jails). I know that in most civilized countries such bans existed for many years, but we’re a bit behind.

When the bill was still under debate, many restaurant and bar owners complained that if such a ban would be enforced they will lose a lot of business.

While it is very plausible that some smokers will go less frequently to bars and restaurants, there is another side to the story. Many of the 75% of Romanians who don’t smoke avoided going into smoky bars and restaurants. Some of them might go out more often and restaurants and bars can get business from them.  

We don’t know yet how restaurant and bar businesses will be affected by this complete ban on smoking (the law will be enacted starting March), but judging by the base rates – 25% of the population smokes while 75% doesn’t – I think that there is a good chance that the ban will be good for business.

The two situations described in this post: returning products and a complete ban on smoking in restaurants and bars can be seen as unrelated. Yet, there is an underlying commonality: We humans have a (bad) tendency to think that what we see is all there is. When a change takes place, we focus on the immediate imaginable things that will happen.

Both shopkeepers and restaurant owners focus(ed) on the immediate losses their businesses (would) suffer. Only after scientific research and deliberate thinking the opportunities (gains) became visible.

Look beyond what you see!

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