$329 delivers $550 and $3000 delivers $1000

forget conventional wisdom and apply intuition after the data is in

No-one in business wants to spend any more than is absolutely necessary on marketing. At the same time, everyone in business wants to maximise sales and, ultimately, profitability. Sometimes, these objectives appear to conflict with the aim of reducing marketing and advertising expenditure. They may even be seen as a sure way of reducing sales.This is the fourth in a series of 5 thoughts examining this perceived conflict and outlining action that can be taken to reduce marketing and advertising expenditure without impacting sales.

Two pricing strategies were tested by a billiard table vendor. The fist involved directing customers to tables FROM $329 with tables ranging in price up to $3000. The second strategy involved directing customers to the $3000 table first. Over the trial period, the vendor monitored the impact on the average sale. The results follow:

  • Starting at $329 – the average sale was $550
  • Starting at $3000 – the average sale was $1000
Many, including this writer, would find this finding counter intuitive, and it is.
Behavioural economist Dan Ariely tested the sales of one of his many books online with three pricing models:
  • Model 1 – Book $20 and delivery free
  • Model 2 – Book $10 and delivery $10
  • Model 3 – Book free and delivery $20
Despite the total cost being identical, the first model generated 60% more sales than the other two.
While the reasons might be clear enough after the event, this outcome is counter-intuitive.Dan Ariely carried out another study and found that increasing the number of product choices in each category above 3 actually reduced sales rather than increasing them.

Many would view this as counterintuitive. The study has, however, been replicated many times.
In 2017, Proctor and Gamble sacked 50 advertising agencies and reduced its advertising budget by US$750 million. Despite this, sales increased by 3%.

This is counter intuitive.

Behavioural economist Daniel Kahneman tested two insurance policies in California:

  • Earthquake only insurance
  • Comprehensive insurance including earthquake cover

Both policies were offered at the same price, with the first being a subset of the second. Despite this, the limited earthquake only policy significantly outsold the comprehensive policy.

While in retrospect we might see reasons for this, the finding is counter intuitive.

The are entire books written on the dangers of using intuition to predict the behaviour of human beings who, despite being the only animal with a neo-cortex (cognitive), make 80% of their decisions in the limbic system (emotional brain) or brain stem (reptilian brain).

Books like Predictably Irrational by Daniel Ariely highlight the dangers of intuitive thinking when making marketing decisions.

RECOMMENDATION

Only apply intuition to the interpretation of reliable data. Never apply intuition ahead of data collection or instead of gathering data.

If you want to minimise marketing costs and, in particular, advertising costs, stop relying on intuition as a cheaper alternative to undertaking research.

Intuition will contribute to mistakes and result in higher marketing costs.

Put the facts ahead of gut feelings, habit and guesswork.

SOURCES OF THIS WEEK’S STATISTICS

CNBC, ReachForce, Single Grain, Business Know How, DDE, The British Psychological Society, UDC Sauder, Small Business Trends, Quora, Business Town, Thrive-Hive, My Customer, TallyFy, The Daily Egg, Forbes and E-Star

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