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Lisbiz Strategies: Use behavioral economics to your advantage

December 19/26, 2016: Volume 31, Issue 14

By Lisbeth Calandrino

Screen Shot 2016-08-29 at 3.56.12 PMSimply put, behavioral economics provides a framework to understand the real-world, decision-making process. We’d like to believe we are all rational human beings and, therefore, make logical decisions. In reality, nothing could be farther from the truth.

So how can behavioral economics help you improve your profit margin? A better understanding of how and why consumers spend their money can help you persuade them to spend it on your products or service.

Everyone loves the word “free” (even though everyone knows nothing is really free). Have you noticed how consumers react to the prospect of “free carpet installation” or how quickly they walk out the door when they learn it’s not offered? It’s a fact that dopamine levels in our brain are actually measurably enhanced by the word free. When dopamine levels are raised, we feel good and tend to act irrationally. This could be why consumers flock to take advantage of free items no matter how ridiculous the actual purchase terms seem to be.

For many people, instant gratification is more important than their own future. Feeling good now is more important than paying attention to their budget or actual cost vs. value. People overspend when they are feeling depressed, i.e., “This will make me feel better.”

Following are some key points about behavioral economics to remember:

  1. Not all money is equal. This explains why 70% of lottery winners go broke in seven years. Since they didn’t work to earn the money and never actually felt the money in their hands, they are willing to spend frivolously. This may also explain why people are apt to spend their income tax rebate checks on unneeded items. It’s not really “free” money; it’s actually their own hard-earned dollars.
  2. Financing takes the sting out of the price. In fact, consumers are willing to pay more money for items when they can delay the pain. Financing may actually increase costs in the long run, but consumers tend to not worry about the future when they can have the pleasure of using the merchandise now.
  3. We gain more pleasure from a loss than a gain. Consumers give more weight to a cell phone carrier’s plan that states “unused minutes will be lost” vs. a plan with “unlimited minutes” available.
  4. Each of us has a price we will pay. Why did JC Penney lose market share when it changed to whole dollar pricing? The brain encodes numbers so quickly it rarely includes the second number. The number 2.99 is actually registered as “2” and 3.00 is encoded as 3. While it is true the actual difference is only one cent, the brain translates it as a difference of one dollar.
  5. Higher prices usually signify higher quality. If you are selling better merchandise, show the products first and then the price. Tiffany’s displays items with large photos and uses very small fonts for pricing.
  6. Remove the comma and the price becomes less expensive. Phonetic length of your price actually affects buyer perception of cost. For example, $1,499: one-thousand four hundred and ninety-nine (10 syllables) vs. 1499: fourteen ninety-nine (5 syllables).
  7. We prefer bundling to individual pricing even if it costs more. Car dealers offer packages to new car buyers. Adding $300 for leather seats is considered frivolous when compared to dealer packages—even when those packages include less-desirable options.
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My take: The trials and tribulations of a furniture shopper

December 5/12, 2016; Volume 31, Number 13         

By Steven Feldman
Screen Shot 2016-07-15 at 3.46.11 PMEver wonder what goes through your customers’ heads when they walk into your store? I’m not talking about those who may have logged days and months on the Internet and have some knowledge about what they want. I’m talking about those who become dazed and confused within five minutes, a percentage I believe is greater than you think.

If you ever want a full understanding of what they are experiencing, try walking into a furniture store. I recently gained a newfound appreciation for your customers’ plights—because I became one of them. Sort of.

Let’s start from the beginning. I decided to finally grow up and take an apartment in Manhattan. That was the easy part. The hard part was furnishing it. Here’s what I knew: I needed bedroom furniture (because every once in while I am not traveling on business), a living room (because I need something on which to park my rear when watching the game) and something to eat on (in case I decide to cook someday). And of course the essentials: TVs and surround sound.

Now here’s a little secret: I’m in my 50s and have never bought furniture alone. I’m sure a percentage of your flooring customers find themselves in the same boat. The thought of this was daunting, if not overwhelming. What was a reasonable budget? Where do I shop? How many stores do I visit? Sound familiar?

I have to tell you, it’s a horrendous experience. Where to shop? I asked people (word of mouth) and had a few stores in mind that I may have driven or walked past over the years. I knew I wanted modern/contemporary, so that eliminated places like Ethan Allen. I had always been a fan of Restoration Hardware, but when they told me I’d have to wait 10 to 12 weeks for anything to arrive, I was out the door in 10 to 12 seconds.

Speaking of which, that’s probably the most frustrating part of the process. I’m not ordering a $20,000 custom piece from Italy. I found nobody stocks anything except a few large chains. Everything else is simply a showroom and you have to wait months for delivery. It’s like the days where your customers had to wait eight weeks for ceramic tile because it had to be ordered from Spain or Italy.

One store was not too fond of me. When they told me I needed to wait eight weeks, I told them I would just take the floor sample and they could give me a discount. They declined because they said they would then have no sample to demo for customers. I suggested they wait eight weeks for their new sample to arrive.

Another store told me the furniture was manufactured in Texas, but it wouldn’t ship until they could fill a truck. I asked if they ever heard of UPS or FedEx Ground. That wasn’t an option. Why not? Policy. I asked if the policy to which they were referring had anything to do with the $200 delivery charge slapped onto every order. That store wasn’t too fond of me either.

My favorite line quickly became, “What do you have in your warehouse that I can have next week?”

But probably the most frustrating part of the process is I couldn’t set a budget because I had no idea what anything was supposed to cost. Is a couch $1,000 or $5,000. How much for a sectional? What about a sleeper? Is that an additional $500 or $1,000? And is a better mattress worth $500 or $1,000? And when you tell me about all the add-ons, do I really need them or are you putting me on the elevator?

Throughout the process, I had not encountered one salesperson who I would recommend for your store. I’m hoping this industry is better. Actually, I know it is doing a better job.

So here is my city apartment that contains nothing but a dining room table and chairs, a couple of oversized TVs with surround sound and a great view. I’m spending my free time these days, what little I have of it, in furniture showrooms with that same dumb look on my face. And not making many friends.

 

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Making friends out of technological foes

The way we do business is changing because the customer is inarguably different and the detail retailers seem most intimidated by lately is the cell phone. Shoppers everywhere are glued to their mobiles; walking down the street, driving in the car, even texting while carrying a conversation with a live person. Continue reading Making friends out of technological foes

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Al’s column

by FCNews Staff

CRI VISITS D.C.: The economy has certainly exposed the exodus of American business and those still around are starting to fight back. As proof earlier this month, a record delegation of carpet industry representatives traveled to the nation’s capital. The trek was part of the Carpet & Rug Institute’s (CRI) “Annual Capitol Hill Visits and Salute to the Georgia Delegation Legislative Reception.” This is the eighth year CRI has hosted such an event. Over the course of a day and a half, the group of 11 participants—working in two teams—met with 25 Congressional representatives and staff from Georgia, Tennessee, Louisiana, North Carolina, Alabama, Florida, South Carolina and California to discuss issues of interest to the carpet industry and north Georgia region. Continue reading Al’s column