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Delivering Winning Experiences for the Recessionary Customer Mindset

Layout 1I just received an interesting advertisement from Mimi’s Café.  Mimi’s is a 115-store chain of upscale casual dining establishments known for generous portions of predictably high quality entrees.  In an unusual twist, Mimi’s is promoting a “Just Enough Menu” focused on smaller portions at prices that range from $7-9 for lunch and $8-12 for dinner.  While most advertisements you see promote “more for less,” this advertisement promotes “less for less.”   Although this may be surprising, I believe it’s an astute move.  Not only does it provide a low price incentive but the “less for less” approach strikes a chord with a recessionary mindset that has been taking hold.

The National Bureau of Economic Research (NBER) announced yesterday that the United States has officially been in a recession since December 2007.  I don’t think many people were surprised.  “I think that we’ve got a ways to go, that this is going to be probably a deep and long recession,” said Jeffrey Frankel, a Harvard University economist who sits on the NBER.

Over the past year or so, the focus of our work on customer experience design has transitioned from the strategic to the urgent.  We’ve spent more time helping clients focus attention and investment on collaborating with and retaining their best customers, surfacing and quickly addressing the reasons for customer attrition, and on continually reinforcing that, although everyone seems to have become more conservative,…

Customers are NOT NOT spending!  They are just changing how and why they spend.

Customers are continuing to opt for and engage in experiences that are designed to meet their needs.  It’s just that their needs and priorities are changing significantly.  Organizations that understand and quickly adapt to these changes can not only preserve but enhance revenue in the short term.  Organizations that hang onto outdated beliefs regarding their customers’ priorities will not only lose revenue but will ultimately be seen as out of touch and irrelevant.

While every industry and situation has its own unique behavioral shift to understand, we’re seeing a few overarching patterns that represent a solid starting place.  Increasingly, customers are:

1. Rejecting Conspicuous Consumption

The recession may just provide a cure for a wicked case of Affluenza!  In light of the current conditions, our past consumer behavior looks a little embarrassing; like our evolutionary predisposition to acquire has been running amuck.  The Times of London columnist, India Knight wrote, “I am happy to observe that the decades of vulgar excess are finally over… There is a strong collective sense of us all coming back down to earth. It’s like a huge national reality check and, unwelcome as it may be, there is a possibility that it will result in us straightening out our priorities.”   (See:  Dear Prudence: Recession May Bring Return of Traditional Values).

blingwater_1We’re seeing early indications that there may be an aggressive backlash against indulgent and conspicuous consumption.  Think about it.  How many families need a 5,000+ square foot house other than to store all the stuff they buy to fill it to the rafters?  Is it really necessary to spend between $40… and even $400… for a case of 12 liter bottles of water?  Have I got a deal for you?  A case of Bling H20 (water corked in frosted glass bottles adorned with Swarovski crystals) is currently on special for less than $400/case.  Even at this discounted price, it still makes the EvianPalace” water seem cheap at $15-$20 a bottle.  Similarly, is it necessary to spend three times as much on Renova’s designer toilet paper, $200 jeans, or a $690 on a Porsche baby stroller?

We’re starting to see a return to the more reasonable basics.  In the fashion industry, “the dress, which has enjoyed a lengthy reign over the market, is losing ground to more conservative, versatile, basic pieces that can blend and carry their owners through several seasons. Retailers report excellent sales in practical items such as blazers, denim, basic separates, and trousers.”  (http://www.slate.com/id/2191398/)

It’s starting to look more and more socially unacceptable to buy upscale goods.  A recent investment blog post provides an indicator of some of the sentiment we’re seeing.   “One company that will be hurt by the eating retrenchment is Whole Foods (NASDAQ: WFMI), a favorite of the upper middle class who wants to look down their noses at people who go to regular grocery stores.”  (My emphasis added).  The point isn’t whether Whole Foods shoppers believe in the health and environmental benefits of organic and natural foods; the point is that non-Whole Foods shoppers perceive the Whole Foods shoppers as “looking down their noses at them.”

As I mentioned in a previous post (When the Going Gets Tough… The Tough Get Closer to Their Customers), as customers that are struggling will buy up in order to keep up appearances, the ones that aren’t will tone it down.  I expect we’ll see an echo of the “grunge” music, fashion, and lifestyle movement that arose out of the recession of the early ’90s.  This will create opportunity for new products, entertainment, fashion, and retain outlets.

As we head into the holiday season, we’re starting to see an increased tendency to give “practical” gifts rather than the more luxurious and exotic gifts.  Look for high end companies to jump on opportunities to introduce more discreet chic alternatives.

2. Making Value-Focused Tradeoffs

As the recession has taken hold, most customers are more willing to postpone purchases, trade down, or buy less.  For many customers, yesterday’s “must haves” are becoming today’s “can do with outs.

In the course of making these tradeoffs, customers are buying more quality non-branded or store-branded alternatives.  Michael Barbaro and Eric Dash wrote in the New York Times “Recession Diet Just One Way to Tighten Belt” that, “Over the last year, purchases of brand name cookies and crackers have fallen, according to Information Resources, which tracks retail sales.  Sales of Nabisco graham crackers have dropped 7.5 percent, and Keebler Fudge Shoppe cookies have slipped by 12.3 percent.  Not even beer is immune.  Sales of inexpensive domestic beers, like Keystone Light, are up; sales of higher-price imports, like Corona Extra, are down, the firm said.”

Customers are also making tradeoffs in convenience for price.  This includes shifting from the Marriott to the Fairfield Inn and looking for cheaper flights at off peak times, such as mid afternoon and late evening rather than early morning.  As Barbaro and Dash write, “Spending data and interviews around the country show that middle- and working-class consumers are starting to switch from name brands to cheaper alternatives, to eat in instead of dining out and to fly at unusual hours to shave dollars off airfares.”

In a great article, “Dollar’s fall forces new standard of frugality,” San Francisco Chronicle writer Sam Zuckerman writes, “Now, that shop-till-you-drop, I-want-it-all-and-I-want-it-now era may be coming to an end. It couldn’t last because it was built on a mountain of money borrowed from overseas.”  Zuckerman goes on to summarize some of the ways that customers are throttling back:

IN OUT
Saving Borrowing
Cooking at home Eating out
Fixing the old car New car
Staying at home Foreign vacations
20 percent down No down payment
Debit cards Credit cards
Working past 65 Early retirement
Library Bookstore
Tap water Bottled water
BART Bay Bridge
Patching Remodeling
Public park Theme park
Eyeglasses Lasik surgery
Poker night Weekend in Vegas

We’re also finding that business customers want to see products and services unbundled and priced separately.  Customers want and need to evaluate the individual contribution of each component and are placing a premium on reliability, predictability, and performance.  New products and services that address new customer priorities and put pressure on competitors can be effective but advertising and sales efforts must stress differentiated value and superior price performance.

3. Smaller Scale, Do it Yourself Alternatives

During more optimistic economic times, customers often find I easier to justify making investments in major projects.  For example, homeowners might invest in renovating their home with the expectation that it’ll have a positive impact on their home’s value.   However, as home values are shrinking, homeowners are opting for smaller scale and more focused and necessary improvements driven by livability and value preservation rather than economic gain.  For example, at Home Depot, sinks, faucets, and bath accessories are selling briskly as consumers switch from full makeovers to more focused refreshes.

Barbaro and Dash go on to cite an NPD study that provides another example:  “Carl Hall, a retired construction worker in Detroit, wants to buy a fence for his backyard. But he decided not to buy a finished product at Lowe’s, the home improvement chain where he was shopping recently. With money tight, “I am looking to put it together myself,” he said, adding that he hoped to save $200.”

We’re also seeing anecdotal evidence of a similar pattern with business buyers.   It seems like more companies are breaking consulting and business services projects into smaller pieces and looking for parts that they can do themselves.

Agile companies will create offerings and experiences that provide customers both smaller scale and “do it yourself” alternatives… in addition to offering fully integrated options for those who may continue to prefer that.

4. Regaining Control

People experience an emotional loss of control during unpredictable times.  As a result, we typically see people acting in idiosyncratic ways driven by a deep psychological need to regain control.  For example, people often engage more in collecting hobbies when they feel out of control in their lives.  Depending on their individual interests, they’ll collect figurines, CD, DVDS, coins… just about anything.  Conway’s Vintage Treasures blog, stated, ” “Collecting is a passion and a distraction to a better place, a better quality of life then we can get from say for example, following stock prices everyday…”   Our research points to a deeper reason that has to do with control.  The more people feel their situation is out of control, the more they compensate by engaging in behavior that helps them regain their sense of control.  Collecting is one of those things.   What’s the benefit of collecting another figurine when you already have 200 of them?  Well, it makes them feel like they’re on top of their collection and making progress in small steps towards improving it.

Aside from these deeper control issues, we also see more obvious ways of regaining control.  For example, programmable thermostats and insulation which help gain control over fuel bills are another top seller at home improvement stores.

Another way that customers regain control is by taking advantage of packaged offerings that reduce the actual or perceived costs or level of uncertainty.  These bundled offerings can provide the comfort of “no surprises at a set price.”   For example, while travel agencies report that although overall demand for travel is down, there has been a shift to U.S. and even local destinations, with a rise in popularity of “all-inclusive” stays.  (See:  Americans Flee Looming Recession).  The opportunity for a local bed-and-breakfast might be:  they could offer a package that included dinner at a local restaurant; bicycle rental, horse carriage tour or the like; and tickets to a local attraction or museum.  Those establishments could provide the goods and services at a discount to the B&B (as a “cost” of marketing for the increased business), and the B&B could offer the full package below the retail cost of the individual items while guaranteeing the usage of their rooms.  A win-win situation for all of the businesses!

5. Cocooning, Insperiences, and Staycations

As hard times loom, we tend to retreat to the comfort of our friends and family.  We connect with cozy hearth-and-home scenes in advertisements rather than images of extreme sports, adventure, and rugged individualism.   As we cocoon, insperiences tend to boom.  According to trendwatching.com, Insperiences represent “consumers’ desire to bring top-level experiences into their domestic domain.” This can include high-end entertainment systems, in-home spas, exercise facilities, etc…

As a result, telephone use and discretionary spending on home furnishings and home entertainment should continue to hold up well, as uncertainty leads us to stay at home but also stay connected with family and friends.   Sales of big-ticket electronics, like $1,000 flat-panel televisions and $300 video game systems, are on the rise, according to retailers and research firms. Falling prices for such devices and a looming government deadline to convert to digital television have helped. So has the view, sensible or not, that the technology is a good investment.

Staycations often replace vacations.  Vacations at or around home rather than traveling can be significantly less costly since there are no lodging costs and minimal travel expenses.  Costs may be limited to gasoline for local trips, dining, and local attractions.   In addition, Staycations do not have the stress associated with travel, such as packing, long drives, or waits at airports.  They may also appeal to people who are stressed about being away from work.  (However, it also leads to the downside of working on your vacation.)

6. Small Understated Indulgences

In parallel with reverting to the practical, customers will look for small understated indulgences.  They seek diversionary yet affordable experiences that can make them temporarily forget their worries.   This includes things like going to the movies.  During the height of the great depression, when 25% of families had no income and unemployed labor reached 40%, movie receipts still increased by 22%.

Big indulgences like higher-end restaurant chains, including Ruth’s Chris and Morton’s, will be off since they are either actually too expensive or appear to be extravagant.  In addition, frequently small indulgences that have become habits, like Starbucks, will also take a hit since the total expenditures on those items tends to add up.

There are also a range of interesting anti-recessionary small indulgences.  Chocolates and alcohol generally sell well during a recession.  Another interesting affordable luxury that generally performs well during a recession is lipstick.  The “Lipstick Index” is the result of a time-series analysis that suggests that lipstick sales are inversely related to the strength of the economy.

7. Looking for Empathy

Customers are looking for companies that understand what they’re going through and are ready to help.  In the outstanding New York Times article, “Thriftiness on Special in Aisle 5,” authors  Stephanie Rosenbloom and Andrew Martin write:

“While it might seem counterintuitive for stores to teach shoppers to cut their spending, several chains have concluded that providing such knowledge can spur loyalty and keep customers from trading down to cheaper competitors.

So the Stop & Shop grocery chain is offering “affordable food summits” where consumers are taught how to lower their grocery bills. Home Depot offers classes on how to cut energy bills. And Wal-Mart Stores hired a “family financial expert” who has used online chats to teach several thousand shoppers how to save money for college, whittle away debt and sell a house.”

Whole Foods has redesigned their customer experience around the “Whole Deal” theme targeted at customers who remain committed to natural and organic foods but are feeling a heightened attention to cost.  This experience includes several creative elements that match customers’ shifting priorities : an expanded selection of lower-priced alternatives marketed under their “365″ store brand,  “Money Saving Meal Plans” and “Budget Friendly Recipes” that provide advice for containing costs while maintaining a focus healthy natural and organic foods.   They are even offering “Value Tours” through the store in order to help customers find the most cost-effective solutions.

Another way customers are looking for understanding is pricing.  Astute providers do not necessarily have to cut list prices but they may need to offer more temporary price promotions, reduce the thresholds for discounts, extend credit to long-standing customers and price smaller sizes more aggressively.

Rosenbloom and Martin very eloquently summarize that…

“The golden trend tip for brands in a downturn? Care about your customers. Deliver. Sympathize. Surprise them. Talk to them.”

These seven patterns provide a solid starting place for identifying the specific shifts in customer needs, priorities, and behaviors that may be relevant to your industry and situation.  In the end, companies that focus attention and investment on collaborating with and retaining their best customers, surface and quickly address the reasons for customer attrition, and remember that…

Customers are NOT NOT spending!  They are just changing how and why they spend.

Those companies will be in the best position to deliver winning experiences that resonate with their customers’ changing needs and priorities… and, maybe even, turn a downturn into an upturn.

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Choice Architecture: Designing Experiences that Influence Behavior

Well-designed experiences influence behavior.   A well-designed customer experience can influence customers to return for additional purchases, spend more money during each purchase, and tell lots of other potential customers about the experiences they’ve had with your business, etc…    In addition, a well-designed customer experience can influence customer behavior in a way that decreases the cost of service.   For example, the experience can be designed to increase the likelihood the customer will place an order or look for service on the web rather than calling the call center.  Additionally, I’m doing an increasing amount of work with energy companies who traditionally haven’t paid much attention to customer experience.  However, many of those companies are now focused on designing services and experiences that influence customers’ conservation and consumption behavior.

In order to keep things simple, classical economics has always assumed that people act based on a relatively stable set of preferences.  However, in real life, this is far from true.  People typically don’t know what they want until they see it… they construct their preferences and work through decisions as they understand their alternatives in context.  Subtle differences in the design of that context can have a significant impact on the decisions customers make.  In fact, research in the areas of cognitive psychology and behavioral economics has shown that…

…small and seemingly insignificant contextual details have a major impact on people’s behavior.

For Example….

…How Including an Irrelevant Choice Can Influence Customers to Spend More?

One of my favorite recent examples comes from MIT Professor Dan Ariely.  (See Dan’s great book:  Predictably Irrational)  Dan came across the following advertisement for The Economist:

The Economist Subscription Options

The Economist Subscription Options

The ad offered three subscription options:

  • Electronic Only: $59
  • Print Only: $125
  • Electronic and Print: $125

Which of these options do you think people would choose?  Why would anyone choose the “Print Only” option rather than opting for the additional “FREE!” electronic subscription?  It seems very unlikely!  In fact, Ariely conducted a test with 100 Sloan School students and only 16 chose “Electronic Only” while 84 chose the “Electronic and Print” option.  No one chose the “Print Only” option! On the surface, this option seems totally irrelevant.  Why would you even offer it?   It turns out that something very interesting happens when this seemingly irrelevant option is eliminated.  When another 100 students were offered only two choices: “Electronic Only” and “Electronic and Print”, 68 chose “Electronic Only” while only 32 chose “Electronic and Print.”   

The presence of an irrelevant option influenced a more than 250% increase in customers choosing the more expensive alternative!!!

Ariely observed the following, “Thinking is difficult and sometimes unpleasant.” Cues that allow us to establish the relative value of various offerings, then, reduce the cognitive load or effort required to think about your options.  What the Economist offered was a no-brainer; while we can’t be certain that the print subscription is worth more than twice the electronic version, the combination of the two was clearly worth more that the print version alone.

Choice Architecture:  Designing Choices that Influence Customer Behavior

Customers always have choices.  Choice architecture is the deliberate design of both the choices and the context for those choices in order to influence a person’s behavior.  The most obvious, classic examples of choice architecture come from the design of retail stores and merchandise displays, restaurant menus and buffet lines, print and online catalogues, etc…  I got my start in customer experience 25 years ago designing store layouts, merchandise displays, signage, and promotions that increased customer profitability.   I’ve learned that there are three components that need to be addressed: 1) the Choice Design (the customer options including the information provided about those options), 2) the Choice Pathways… the sequence or placement of those choices in time and space, and 3) the Choice Environment including peripheral cues like signage, lighting, other people in privacy/public space, etc…

Let’s look at a simple illustrative case.  A well-designed restaurant menu can be a great example of choice architecture based on sophisticated menu psychology.   It turns out that there is a predictable Visual Choice Pathway people typically follow when they read a menu.  For example, when most people open a four page menu, their eyes go first to the top of the page on the right side.  A smart menu designer generally places one of the highest profitability items at the top of this page.  Then, most people’s eyes will move down towards the center of that same page.  An even smart(er) menu designer will put the most expensive item towards the center of the page… not because they think the customer will order it… but because it will tend to prime the customers’ expectations about what they’re likely to spend.  In most cases, customers will then look at the items immediately above and below the most expensive item.  Those two items immediately above and below the most expensive item are deliberately two of the most compelling selections on the menu… and are the most commonly ordered items designed to generate the most profit on the menu.  There have been numerous examples of restaurants that have been able to significantly shift their average ticket size based on the design of the menu.  (See:  Reading Between the Lines: The Psychology of Menu Design or Basics of Menu Psychology).

A similar thing happens in high end retail boutiques.  The sight of those $295 jeans (I still can’t believe it!) subtly prime the customer to feel that $125 jeans are a bargain.   The $295 jeans sell a lot more $125 jeans.  We’ve seen the same sort of thing in jewelry stores, hospitality companies, and many other diverse situations.

Although these examples are intriguing, it’s important to recognize that examples of choice architecture are literally everywhere.   For example:

  • The design of an election ballot is an example of choice architecture. Experiments have shown, if a candidate is listed first on the ballot, he may well get a 4% increase in votes.
  • When a doctor describes alternative treatments available to a patient, it is also an example of choice architecture. Research has shown that if a doctor says 90% of patients are alive five years after a certain procedure, far more people opt for that procedure than if the doctor says 10% of patients are dead five years after having it.

Choice architecture applies just about any product or service company that offers alternatives to their customers.   This can be anything from insurance companies that offer coverage options, banks that offer different financing or deposit products, business services firms that propose alternative approaches to their clients, etc…

Unfortunately, most companies don’t think about choice architecture effectively… actually in most cases, they don’t think about it at all.  Often a company will just throw a bunch of alternatives at their customers and count on the customers to sort it out.  As a result, they miss significant opportunities to drive additional revenue and profit.  The most important starting place is to understand much clearer how customers make decisions and design an experience that fits the way customers think (i.e.,  Design from the Mental Model of the Customer).  See:  Optimizing the Most Critical Elements of the Customer Experience: Customer Choices and Cognitive Ergonomics: Framing and Priming the Customer Experience.

This is an area that is getting an increasing amount of academic attention. Richard Thaler, Director of the Center for Decision Research at the University of Chicago Graduate School of Business, and Cass R. Sunstein are authors of the excellent book, Nudge: Improving Decisions About Health, Wealth, and Happiness (see also:  Designing Better Choices (LA Times Commentary) by Richard H. Thaler and Cass R. Sunstein).  Thaler and Sunstein provide several interesting examples of how organizations can improve the decision making effectiveness for their customers and employees.  This includes:

  • If we want to increase savings by employees, employers might … enroll them automatically in a 401k plan, unless they specifically choose otherwise.
  • If we want to increase the supply of transplant organs in the United States, we could assume that people want to donate, rather than treating non-donation as the default.
  • If we want to increase charitable giving, we could give people the opportunity to join a plan, in which some percentage of their future wage increases are automatically given to charities.
  • If we want to respond to the recent problems in the credit markets, we could design disclosure policies that ensure consumers can see exactly what they are paying and make easy comparisons amongst their possible options.

Thaler and Sunstein describe three key elements that are important to designing a choice architecture that leads to better results for individuals and society:

  1. Default Design. Whatever you chose as the default option has the highest likelihood of being selected.  For example, the states that have organ donation as the default option when individuals get a drivers license have a much higher acceptance rate.  In fast food restaurants, highly profitable combo meals have become the default option… customers often need to explicitly ask for just the burger. Design architects need to pay careful attention to the default option.
  2. Providing Feedback. People respond to feedback about their decisions.  For example, in some markets electric utilities are starting to provide specially designed bulbs (called orbs) that glow red as homes use higher levels of energy.  These devices have influences customers consumption behavior and have proven to reduce energy use during peak periods by 40% in Southern California. (find reference and make sure I’m using the right terminology)
  3. Anticipating Errors. People make mistakes and it’s possible to design a choice architecture which anticipates these mistakes and thus leads to better outcomes.  Thaler and Sunstein have been promoting the example of “Save More Tomorrow” programs, which help employees set aside future pay hikes for retirement. “Save More Tomorrow is based on the same principle of expecting error,” he said. “We ask people if they want to commit now to saving more later, because all of us have more self-control in the future. The first company that adopted it tripled savings rates, and the program is now spreading.”  They also use the example of the Paris subway card, which allows users to insert it into an electronic turnstile in any of four ways to gain entrance to the subway.  Compared that to most payment kiosks in which there are 4 possible ways to insert your credit card… only one of which will work.

This is a topic with a lot of subtlety and power… if you’re looking for additional practical insights, feel free to post a reply or get in touch.  In summary…

If you offer customers options and you don’t think about choice architecture…

…you are almost certainly missing significant opportunities to improve profitability.