Making money from certainty

How does a business make money from certainty? there are several studies into buying behaviour that can be applied to business but perhaps lets use an example we have all probably experienced.

We buy a new car and pondered why it looses so much value in the first few months. It’s under warranty, it’s only got a few miles on it , undamaged and yet its worth 20-25% less? no one can surely think it has something wrong with it and if they did they have warranty.

But yet we accept this intrinsic discounting of an asset which really shouldn’t be discounted save for the fact you weren’t the first one to sit in it so why do we.

The answer is uncertainty.

Buyers and sellers subliminal exchange information on the risk of the purchase in the price they are prepared to sell and buy at. There is an active disconnection between the actual value of the item [ life time cost of vehicle / divided by miles = cost per mile] and the real value of the asset. Bolstered by an industry ” myth” that this is how it’s done , in reality increasing traders margins.

Author and expert in Neuroeconomics , Daniel Kahneman carried out ground breaking experiment which demonstrated pricing behaviour can and is influenced by how the item is presented, and an emotional relationship with the item. Ask 100 people in the street what they would pay for an item , e.g. a bottle of wine , the spread of answers changes as a “suggested price” is offered. Nothing to do with the item itself by definition. they haven’t consumed it , how could they know.

They bring their perceived understanding of value to the decision along with the suggested value.

Much of the value of information vs. applying a premium or discount for what we don’t know has much to do with confidence. The extra data we gather merely supports our gut feel this is right item at the right price

A wonderful example of using this perceived knowledge is how Amazon show a range of prices giving the “impression” these are all the prices and you are choosing wisely… try and look generally at an Amazon item elsewhere… not always the best value. Great piece of marketing playing on the perception of value mind you.

John Lewis are more blunt, never knowingly undersold… how many people do you think actually complain and ask for a refund? not many..

If you apply this across other areas [ customer pricing] the same play can be made. Let me explain with an experiment carried out in child care.

Parents collecting children late at a nursery was a problem for the mangers of the unit. Solution ? fine parents for being late. Surely this would discourage lateness.

Nope.. it increased it

Reason – parents compared the price of the fine [ known ] with their own salaries / value of time [known] and made the decision it was worth it. Might not have been the case if the fine was very high of course.

Had no penalty been applied the value comparison could not be made and we are left with emotional levers .. don’t want to be late…. child distressed …so on and so forth. An emotional downward force on lateness as a metric.

When applied to business [ and I have put this in place with of our clients] what would normally be a business throughput challenge becomes a 100% profit margin opportunity. It can be applied in many different ways and guises.

Conversely to offer a more prompt service to those time bound can be at a premium .. you got it.. they compare their time to their time value and often opt for the premium.

One client now charges storage for late collection of bespoke products , at a premium level customer seem to accept. Another, a premium for delivery and collection to home – again the your time vs. mine equation is an opportunity for revenue and profit growth.

A really easy value lever that puts the decision in the hands of your customers.

Give it some thought , consider where this might work for you.

Till next week have a great weekend

Carol

 

 

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