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!





14 January 2016

4 Behavioral Science Reasons Why Recently Dead Artists’ Album Sales Sky-Rocket

A couple days ago, David Bowie passed and (apparently) his albums sell like warm bread during a famine. Nothing New! A few years ago, after Michael Jackson’s death the same thing happened (though, then with Michael Jackson albums; Bowie’s albums didn’t sell any better than before MJ’s death).

While from a Normative Economics point of view, this sky-rocketing sales phenomenon might seem irrational or, at least, puzzling, in fact, there are very good reasons (explanations) that come from behavioral science.

1: SALIENCE – Huge Media Exposure. While many music fans knew about David Bowie (read any recently dead musician), his name and music wasn’t in the media all that much in recent times. However, because he was (used to be) famous, the media from the USA to Romania and from the UK to Singapore mentioned his death accompanied by some kind of eulogy on his remarkable career.

When something is (very) salient, people tend to give it attention and even buy it.

2: SCARCITY. We are all suckers for things that are scarce. ONLY 1(2) ticket(s) left! When someone dies, they’re gone forever (famous quote by Captain Obvious), hence people want to not miss out on the last few albums by Bowie (or whoever).

This is particularly interesting. The fact that scarcity (not miss out on the occasion) motivates people to buy is well known for decades. The interesting twist is that music by a certain artist or any kind of information-product cannot run out. David Bowie’s music is already in digital format, which means that it can be multiplied endlessly. It goes the same with music from any other singer, with books, movies etc.

While the death of a singer means that (s)he will not produce more music, it does not mean that existing music will run in short supply. In fact, the music pieces that made someone famous (usually) are quite old by the time of the artist’s death. Thus, what is bought by many people is, in fact, old products.

Just as a note: New music by dead singers was released after their deaths… that is: previously unreleased old recordings (mixes).

3: SOCIAL CONTAGION. When the news gets out that lots of people are doing (buying) something, other people will follow (imitate) and do (buy) the same thing. This is more the case when the others have something in common with the decision maker (buyer). In this case, they are all Bowie fans.

4: STATUS ENHANCING THROUGH (COSTLY) SIGNALING. While owning a Bowie album was rather banal for most music fans, owning one of the (last) albums sold after his death is something worthy of talking about with friends, acquaintances, prospective mates (girlfriends / boyfriends) etc. In a nutshell, buying a Bowie album these days will give the buyer a reason (pretext) to brag (self-advertise) to relevant others.


RIP David Bowie and all other singers & artists who passed away! 


11 January 2016

The More You Buy, The More You Pay

Advertising for retailers often includes phrases such as The More You Buy, The More You Save. Yet the truth isn’t always so. While it is obvious that the more you buy, the more you spend, there is (should be) some truth / sense in the claim made by retailers.

Economic logic says that the more you buy, the less you (should) pay per unit. That is, if you buy 100 units of product X, the price per unit should be smaller than if you would have bought only 2 units of product X. This logic has its foundation in the concept of economies of scale.

Economic jargon aside, for most buyers it makes sense to buy a larger pack of X in order to pay less per ounce (gram) or other type of unit.

Retailers and manufacturers, however, know that most people are willing to buy in bulk (larger package) in order to get a better deal. Moreover, they know that buyers believe that if they buy larger packages, they get a better price per unit (save money!?).

Below are two examples in which buying a larger package, actually leads to paying more per unit of product.

The same trash bags cost more per unit if they are bought in a pack of 35, than in a pack of 20. A pack of 35 trash bags costs $5.49 (15.7¢ / bag), while a pack of 20 trash bags costs $1.69 (8.4¢ / bag).

It is the same product, same brand. You can take my word for it.





Going into a more appealing product category: beer, we find that Corona beer is cheaper in price per fluid ounce (ml) if bought in a pack of 18 cans (10.5¢ / Fl. Oz.) than in a pack of 24 bottles (10.7¢ / Fl. Oz.)









29 December 2015

No! You Will Not …

On King Street (main commercial street) in Alexandria VA there was a promotional booth for a (fancy) gym last weekend. The two men promoting the gym’s services approached passers-by and explained how each training program is designed by I don’t know what specialist.

Being in a rather bad mood at the time, my gut-reaction was: You Suckers!

Late December is a fantastic time to sell annual gym memberships at a premium. It is the perfect time to charge a lot for something that will not be used that much. This time of year lots of people make resolutions for the New Year to come, including going to the gym (more often). Coupling this wishful thinking and over-optimism with the large amount of money spent on Christmas festivities, paying 1000$ on a one year gym membership (discounted from 1200$, of course) makes all the sense in the world.

Gyms are full in January and virtually unpopulated starting mid-February.

The filled with optimism final days of any year are a fabulous time to sell, among others, the most expensive clothes racks and dust gatherers. I’m talking about home-gym appliances.

If you wish to get back in shape and restore the look you had in your early 20s, I strongly advise to become realistic. The early 20s look is long gone and will forever be so.

However, the over-inflated optimism can be put to good use for yourself, not for the marketers who sell you things that you’ll probably not use much.

If there’s one useful lesson from behavioral science, that is:

Who controls the context controls the behavior.  

Are you controlling the context? Because for sure the context controls you to a very large extent.

If you want to get in shape, buying 100 gym subscriptions and 10.000 home gym appliances won’t do much good as long as your context is the same as last year. Making changes in your daily context will help you.

Begin by rearranging your kitchen and eating space (Slim by Design by Brian Wansink is a great source of inspiration).

Join a food delivery service such as Hello Fresh and cook!

Walk! And take the long way home, literally! Get one of those activity monitoring devices such as fitbit to motivate you to make a few more steps. You could also try moving to a different home, though that is a bit difficult.

Discover where the stairs are in the building you live or work… use them, they will not bite even if you climb them.

Probably the most effective way of getting back in shape is to go back on the mating market - start dating, fall in love etc. While highly effective, this approach is a bit difficult for people in committed relationships.   


I wish you a good and down to Earth 2016.  

21 December 2015

How to sell a 5¢ product for 1$

You probably know those machines that (allegedly) allow you to win something by grabbing the prize with a mechanical claw. They usually make money by reducing the probability of winning thus for every N plays that cost 1$ they give a prize worth N/Z $ (where Z is always smaller than N).

Last weekend I came across a variant of such a machine that guarantees winning the prize. Only, in this case, the prize is a rubber duck worth probably 5¢ (manufactured in China for probably less than 1¢ per piece).


The nice twist is that the machine charges 1$ and allows the person to play till they win… reframing it, it for 1$ is sells a 5¢ rubber duck + the thrill of winning + making the player work for it, thus making her/ him value the rubber duck more.


Not a bad business idea … 

14 December 2015

How to Overcharge by Giving Discounts Indiscriminately

While Discounts are generally used to increase sales’ volume by decreasing prices and creating “buzz”, I encountered an interesting way in which discounts are used to overcharge one-time-buyers.




Usually promo codes and discounts are used to attract referral clients or in cross-selling. In the pictures above, however, this is clearly not the case. These pictures were taken in a Metro train in Washington DC. Since the promo code is publicly advertised, anyone who buys a ticket can use it to get a 10% discount.

Quite interestingly, anyone can, but not everyone will use the promo code to get the discount. This way, the seller is overcharging some of the buyers.

Assuming you want to sell something for $99, you can say that the price is $110 and then advertise 10% with promo-code XYZ… The bulk of buyers will use the promo code and get 10% of $110 off ($11) discount, thus buying for $99 which was the intended sale price. There will be other (forgetful?) buyers who will not use the promo code and pay the price of $110.

In addition, such spoof discounts might actually increase sales (in volume) because they generate transaction utility. While the term transaction utility might seem too pretentious, it actually means making the purchase seem like a good deal.

Such pricing (marketing) techniques are specific to one time purchases since they strongly rely on people not knowing what the right price is for the item.


www.naumof.com

7 December 2015

The Self-Defeating Fight against Vaccination Refusal

In reaction to the persisting decrease of vaccination rates in developed countries, public authorities, the media and non-profits counteract with information campaigns. In my opinion, this approach is self-defeating because it ignores the phenomenon’s behavioral realities.

1. Raising awareness is typical for information campaigns.

Articles with headlines such as Wealthy L.A. Schools' Vaccination Rates Are as Low as South Sudan's are well intended, but ignore the effect of social proof. When unsure what to do, people use others’ behaviors as cues for their own behavior. When faced with information on the increasing number of parents who refuse vaccination, others might interpret the message as: it’s OK not to vaccinate your children since others are doing this.

In many developed countries the overall situation is not as dramatic as some headlines indicate. The ideal vaccination rate is 95%+ which ensures herd immunity. The actual vaccination rates are somewhere in the 80-90% range. Healthcare professionals are worried mainly because of the trend and because of the real danger of losing the herd immunity.  As I understand the societal benefits of vaccination are not linear. Simply put, the societal benefit of improving vaccination rates from 80% to 85% is smaller than getting it from 90% to 95% (where heard immunity is achieved).

While from an epidemiological point of view a vaccination rate of 80% is worrisome news, from a behavioral science perspective things aren’t as dramatic. While most news focus on the increasing number of children who are not vaccinated, the upside is that the very large majority of children (in the USA) are vaccinated.

Saying that 20% of children are not vaccinated can be reframed as 80% are getting vaccines!   

In other similar situations, this type of simple reframing proved extremely effective in achieving behavioral change. Just as an example, many people have no problem buying a ham that is 97% fat free, but they would be very reluctant to purchase ham that is 3% pure fat.

Couple this reframing with social proof and you have a nice tool for reaching the goal of increasing vaccination rates.

Whereas headlines need to be dramatic in order to get clicks (or sell newspapers), public information campaigns need to be effective in achieving behavioral change – in this case get more children vaccinated.

Instead of relying on alarmist messages, why not simply say that the great majority (80%) of parents (in USA) do vaccinate their children.

Social proof and reframing of information can be used in even less favorable circumstances. A few months ago, I heard on the radio a commercial aimed at increasing the flu-vaccination rate. Unfortunately, the commercial said something like: “If you are one of the 65% of Americans who don’t get the shot, you can get the flu”.

Beyond the obvious errors in communication (from a behavioral science perspective), the reality of the numbers seems discouraging. When only (approx.) 35% of people get a vaccine, it is hard to leverage social proof – the great majority of people is not doing what is desired.

There is, however, a silver lining: 35% of the US population (311 million) is roughly 100 million people. Very likely, saying that over 100 million people (fellow Americans) get the flu shot is more convincing than 65% of Americans don’t get the flu shot.
   

2. Doctors are spokespeople in pro-vaccination campaigns.

The use of medical doctors as authority figures (recommenders) in communication has a long history. Doctors (or actors dressed as doctors) have recommended anything from detergent to cigarettes and from pharmaceutic drugs to diets.

While in many commercials using medical doctors as recommenders proved to increase the communication’s effectiveness, in the case of pro-vaccination (or anti anti-vaccination) campaigns is not exactly appropriate.  

Doctors’ presence and messages are reassuring for people who favor vaccination. However, those who are reluctant to vaccination don’t perceive doctors as authority figures, thus the message’s impact is severely diminished.

Simply put, in the eyes of (some) people who refuse vaccination, regular medicine is not trustworthy and so are medical doctors. Maybe herbalists, alternative healers etc. would be more credible.  


3. The rational message favoring vaccination is inadequate for tackling highly-emotional (false) concerns.

Strongly related to using medical doctors as advocates for vaccination is the messaging of pro-vaccination endeavors. Doctors dressed in their uniforms speak about the scientifically proven benefits of vaccination and talk about the serious dangers of not using this simple and effective prevention tool.

Although correct, this rational message is highly ineffective for those who oppose vaccination. Many anti-vaccination arguments have a high emotional load. Nobody (falsely) claims vaccines to cause kidney-failure – a serious condition with a low emotional load / fear-factor. Yet, all anti-vaccination advocates mention that vaccines can cause autism – a condition that has a high emotional component or fear-factor. By the way, vaccines don’t cause autism, but at one point someone made a false claim they did and the research has been proven to rely on faked data and the paper was later retracted. Yet, the legacy of fear left by that paper stands.


4. Vaccination’s benefits are Non-Events & the Availability Heuristic

The benefit of vaccination is very difficult to observe because it is a non-event – something that doesn’t happen. We humans are terrible at understanding non-events and in the case of vaccination things are even worse than in other situations.

Taking a step side-ways, I think we can all agree that a fire-fighter who goes into a burning building and saves a person (or cute puppy) is a hero worthy of public praise.

At the same time, the huge majority ignores other people who (indirectly) save many more lives from fires – the fire-safety inspectors: The bureaucrats who come with checklists and regulations, who generally are grumpy and somehow annoying because they keep insisting on even small features of compliance to fire-safety regulations.

These people save lives not by entering burning buildings, but by ensuring the conditions to prevent fires altogether and / or decrease the damage caused by fires.

The vaccination situation is somehow similar. Preventing a disease is not the same with curing one. A doctor who cured a patient with smallpox will receive many thankyou notes and will be held in high regard, but the nurse who gave thousands of anti-smallpox vaccines, thus preventing the disease, is still anonymous.

Earlier I mentioned that the situation is somehow similar. The high effectiveness of mass vaccination in preventing diseases, in fact, makes it more difficult to see the benefits of vaccination.

Let’s go back to the firefighter – fire-safety inspector illustration. The (paradoxical) reason for complying with fire-safety regulation is that there are enough (?!) fires to make the danger salient in our minds. Either in real life or in movies, fires are frequent enough to remind us that preventive action is needed.

In the case of vaccination things are a bit different. In developed countries recent cases of smallpox, poliomyelitis etc. are extremely rare. Mass vaccination led to having two-three generations free of such diseases and their devastating consequences. While during our (great-) grandparents’ childhood it was common for families to lose one or more children to diseases such as poliomyelitis, nowadays such instances are (almost) inexistent.

This is when the availability heuristic comes into play and distorts decision making on accepting vaccination.

The availability heuristic means that we judge the probability of an event based on the salience and frequency of memories of that event. We know of a lot of killings by firearms and very few suicides by guns, thus we perceive that there are more killings than suicides by firearms. The reality, however, is different: there are more suicides than killings by guns (at least in the US).

Because instances of terrible diseases that are prevented by vaccines are extremely rare and inconspicuous, we erroneously perceive the risk of not vaccinating a lot smaller than it actually is.

Here’s where movie makers can lend a hand. Instead (alongside) of scaring people with terrorist plots, doomsday scenarios etc. they could include more instances of people suffering and dying from poliomyelitis, smallpox etc.


5. Costs are in the present and benefits are in the future
   
Most people prefer 100$ now over 110$ in one year from now. This is an illustration of a psychological phenomenon called discounting future outcomes.

Vaccinations’ (non-event) benefits occur in the future (1-20 years) and, subsequently, are discounted in the present. The discomforts of vaccination– parents have to take their child to the clinic to get the shot, normal minor side-effects (fever, local swelling etc.) – are in the present.

The false dangers of vaccination allegedly occur very soon after getting the shot (in the present, not in the distant future).  

While it is impossible to change the nature of non-events and to eliminate the discounting of future outcomes, there are several things that can be done.

First, to tackle time discounting we can bring the benefits in the present. Naturally, vaccination’s benefits cannot be brought in the present (more so since they are non-events), but decreasing costs (hassle) in the present could be a great approach. In addition, although it might seem unethical, we could offer incentives in the present for getting vaccinated.

Second, to tackle the issue of non-events, we could try to make the immediate benefit more concrete by offering tangible rewards. As mentioned earlier, we could increase the frequency and salience of the dangers of non-vaccination and movies are the best way (at least in my view).