WOLFBITES - Issue 42
What small business owners need to know
about consumers who are rightly irrational
Learn why "irrational" behavior by consumers is often more rational than you think.
Consumers are strange beasts. They obsess about little things while ignoring what really matters. They are enraged by price increases measured in pennies, but could care less about another increase that adds dollars to their bill. They obsess about perks when there are far better reasons to choose a retailer.
Sounds irrational, but when you dig below the surface you discover that the average consumer is rightly irrational. They do not think in straight lines. They are easily influenced by the fire hose-like flow of information coming through their "smart" phone. And volatile hot/cold emotions are often bigger drivers of buying decisions than logical thought.
I could tell you the answer, but I think you will learn more by reading about a real case study involving my favorite food outlet, The Village Grocer (VG), a retailer in the municipality of Unionville, an upscale, fast growing community just north of Toronto. This wonderful retailer offers premium food and premium service at premium prices. It's a winning formula even at a time when most grocers in our local market are doing the opposite: non-premium food at low prices. (There is one other participant in the premium food category (Whole Foods), but it is located too far away to be a direct competitor).
On any given day, you will find a few VG items on sale (loss leaders), but on balance you expect to pay a premium of 5-10%, depending on what you are purchasing. Meat products will be closer to 10% higher, fruit and vegetables about 5-7%. There are also many specialty products you won't find anywhere else, all at premium prices.
Nevertheless, VG works on razor thin margins. It's just the nature of the grocery business. This means a significant cost increase needs to be matched by an equally significant increase in revenue.
Just recently there was a major cost increase resulting from the introduction of a higher minimum wage by the Ontario provincial government. Not a big deal in a business that has few, if any, staff at the minimum wage; a big deal for a grocer like VG that has many employees at the salary point.
Something had to be done to make up that increased expense. Regrettably, the good folk who run VG, chose the worst possible option. Actually, they chose two. Each was highly visible. Each would be noticed every time a customer visited the outlet. And perhaps worst of all, each would be noticed at the worst possible time: when the customer checked out.
The first change was the removal of a perk – formerly free plastic grocery bags would now cost 5 cents each. The second change was a 1% surcharge on any purchase made with a credit card.
To assess what that really means, let's do some math, assuming a $50 purchase packed into four grocery bags.
– Cost of the four grocery bags: 4 X 5 cents = 20 cents
– Cost of the credit card surcharge: 1% of $50 = 50 cents
– Total cost of the extra charges = 70 cents
It would be logical and reasonable to assume that customers shopping at a premium grocer would care less about 70 cents. But that would be straight line thinking and it would be very wrong. A significant number of customers were enraged, particularly about the 1% surcharge. They were vocal and they were persistent – the 1% charge had to go. The owner/operator of VG heard the complaints and took the right customer relationship management decision: he ended the surcharge.
What happened? Why did it go so wrong? What was the big deal? It is actually all very understandable, if you take the time to think like a customer. Then you see two key mistakes:
- Making the cost increases highly visible gave the customer something to shoot at. One of the laws of marketing is that if you give the customers something to shoot at, they will shoot.
- Consumers hate anything that makes a credit card more expensive to use and/or diminishes the added value they get by making purchases with a credit card (travel points, cash back). The 1% charge did both.
What would have been better? Almost anything. My recommendation would have been to implement selected minor price increases across all offerings, a change that would not be noticed by the vast majority of VG shoppers because they already expect premium prices and are conditioned to expect occasional variances for any number of reasons.
Still not convinced? Let's put the two scenarios side by side and let you decide what would have gone over better:
A. The original plan, with a charge for the bags and the 1% surcharge (total bill before tax: $50.70).
B. No announced changes, the total bill, before tax is $50.70.
I will always go with Option B because hard experience has taught me two things about customer relationship management:
- some customers are rightly irrational
- whenever possible, stay below the customer's radar
Next time: When "free advertising" costs $60 million – and is a good deal.
|Wolfgang Franke is President & Creative Director of Words at Work Advertising & Marketing, a full service communications company established in 1988. Our growing list of valued clients are found throughout our local market, Markham and the Greater Toronto area, across Canada in cities such as London, Ontario, and Edmonton, Alberta, and an expanding list of international locations ranging from The Big Apple in New York to Kanturk, Ireland.|
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