Month: April 2011

In conversations with retail executives about couponing and other customer-specific pricing strategies, a new concern has appeared.

For the longest time, coupons have been one of the primary mechanisms for executing what economists call price discrimination. By identifying price-sensitive customers and sending them coupons, you win/keep their business without giving away discounts to customers who would have bought at the pre-coupon price anyway.

A fundamental assumption behind this approach is that coupon receivers will not share the coupon (or  even just the fact that they got a coupon) to the non-receivers. Clearly, you stand to lose heavily if loyal (but price-insensitive) customers come to know that others are getting discounts but they are not. Regardless of how price-insensitive you are, you are likely to feel that it is unfair when another customer gets a discount and you don’t.

This “no sharing” assumption has been steadily losing its validity with the increasing use of digital coupons since you can effortlessly forward an email coupon to a friend or family member. Furthermore, a number of coupon aggregation sites (example) have emerged to make it even easier to find coupons for products/retailers you are interested in.

In both these cases, however, there is a bit of natural “friction” that somewhat diminishes the negative consequences of coupon sharing. While forwarding email coupons is easy, you are more likely to forward to immediate family members or close friends – you probably won’t do a mass forward to your entire address book. To take advantage of coupon aggregation sites, the customer has to take the trouble of finding them, checking them on a regular basis, or signing up for daily emails. By definition, price-insensitive customers are less likely to take the trouble to do so and hence are less likely to be “exposed” to the problem.

Well, things have gotten a whole lot worse recently, thanks to social media. Apparently, people are increasingly posting coupons they receive to their Facebook page (sharing? bragging? who knows) and as a result, the juicier coupons are spreading virally and the coupon-receiver’s social graph is becoming aware of it very fast.

What does this mean for the retailer?

• Irate emails and calls to the toll-free number from customers demanding why they didn’t get the coupon.
• Discounts to customers who don’t “need” the discount

Note that coupons with unique customer IDs don’t help. If a customer shows up at the store with a coupon that was sent specifically to her sister-in-law, you can’t really tell her that she can’t get the discount since her ID doesn’t match the ID on the coupon. You will have a big customer-service problem in your stores.

So what can the retailer do to address this problem?

One strategy is to segment your price-sensitive customers based on certain parameters and design coupons in line with these parameters so that customers “self select”.  Common examples of this strategy: student/senior-citizen discounts for public transportation and museums etc, airlines requiring a Saturday night stay to segment leisure vs business travelers and so on.

In the retail context, segmenting by age or other customer characteristics (e.g., demographics) is on questionable ethical and legal ground. It may be better to segment based on buying behavior. For example, you can group your price-sensitive customers based on when they shop.  You may find (like many retailers do) that a sizable number of customers tend to shop at lunch-time on weekdays, possibly because their workplace is close to the store.

Now, create a coupon for 30% off purchases made between 11.30am and 1.30pm today and tomorrow and send it to everyone. For most customers, it will be impractical to take advantage of this coupon if they don’t work near a store or if they can’t take off at lunch-time to shop.  And amongst those who do, price-sensitive customers are much more likely to take the trouble to get out of their workplace and make the trek to the store.

Results (hopefully!) : Everyone gets the coupon so social sharing won’t create a customer-service nightmare. Price-insensitive customers are unlikely to take advantage of the coupon since it is too much trouble. Price-sensitive customers are likely to take advantage of the coupon since it matches the way they shop anyway.

Of course, the downside of these segmenting strategies is that since each coupon is targeted to just one segment of price-sensitives rather than all price-sensitives, the impact of each coupon run on the business is smaller. We can’t have everything, I guess.

I am sure there are many other ways to address this problem. Ideas?

 

 

 

I like to think that I have free will.  So it was devastating to read in yesterday’s Wall Street Journal that, thanks in part to analytics, the thing that puts bread on my family’s table, free will is getting busted!

Jonah Lehrer writes:

In recent decades, scientists studying the human brain have steadily eroded traditional notions of free will and autonomy. It turns out that our choices are often circumscribed by mental circuits beyond our control and outside of conscious awareness.

But now, thanks to new forms of data, such as cellphone information, and powerful analytical tools, scientists can see the forces that shape our lives from the outside. They can discover striking correlations and document all of the different ways that the world around us—from our social networks to the neighborhoods in which we live—influences everything we do.

The author goes on to give examples (mostly drawn from research studies on social networks) of how our friends and family affect our behavior.

• If our friends are obese, we are more likely to be obese
• If our friends are happy, we are likely to be happy
• If we have a diverse circle of friends, we are more likely to be creative in our entrepreneurial pursuits

I couldn’t understand how this implied the absence of free will so I kept reading.

Such studies are a reminder that John Donne was right: No man is an island. Although we can’t help but believe in our autonomy—free will is a fiction we need—this latest research suggests we’re not nearly as free as we typically assume.

That’s why, for instance, researchers can make accurate predictions about our eating habits, academic interests and political beliefs based on the trail of data secreted by our smartphones. It’s also why companies such as Amazon and Netflix can develop shopping algorithms that know exactly what we want, even though they know nothing about us. The data generated by the group can be used to decipher the individual.

The author makes two arguments:

1. If the people around you influence your actions, you are showing less free will.
2. If I can predict what you will do next, you are showing less free will.

The people around us constrain our actions, for sure, but they don’t usually narrow them so heavily that there’s only one pre-ordained choice for us to make in every situation.  There’s still plenty of decision-making wiggle room.

Regarding his second point, I don’t see why he needs to bring in “the trail of data secreted by our smartphones” or “powerful analytical tools” to make his case. Here’s an example that is several thousand years old:  I offer you product X (substitute X = goat, yacht, iPad, whatever) either for free or for a thousand Y (Y = ears of corn, shekels, dollars, whatever). Can I predict which option you will choose? I can. Does this mean that you don’t have free will?

Want examples of  the “striking correlations” the author refers to? As price rises, demand tends to go down. On rainy days, you will see more umbrellas. If your kids come home with the flu, you are more likely to catch it.  Yawn.

Perhaps the author means “individuality” when he says “free will”. From that perspective, the article makes much more sense. But it won’t get blogged about as much 🙂

Bottom line: Free will’s existence may well be under attack but there’s no evidence that analytics or smartphone data is to blame. No need to change my comfortable (and possibly wrong) beliefs.