Friday, April 25, 2014

Price, Savings, and the Ethics of Business Relationships

I find myself lately on the cusp of a moral quandary about the way that price and savings are presented to prospective customers.  Something just feels wrong, though I can't quite fathom the reason why - which signifies to me a need to jot down some notes in an attempt to sort it out.  

It's also worth noting that this simple issue spun up into a much larger consideration - so be prepared for a sharp turn about halfway through that leads into broader concerns.  (Such things happen in informal writing.)

The Situation

In a competitive environment, many suppliers offer exactly the same product.  For the purpose of argument, let's say there's a discount store and a department store who both buy shirts from the very same factory.   That is to say, the products are identical, no difference in quality.  The department store sells the shirt for $100 whereas the discount store sells it for $50.

The department store has a sales promotion in which loyal customers are offered a 40% discount on the shirt.   It sends out a promotion in which it is advertised "save $40" on this item - and even discloses the regular price, so that the customers are informed and aware that a shirt that normally sells for $100 can be had for $60 during this event.   It's right there in the copy.

The savvy consumer is well aware that the shirt can be had for less at the discount store - their regular price of $50 is still less than the promotional price of $60 being offered by the department store.   The department store marketer knows this, but believes that people like to feel like they are saving money, even though they are spending more.

To begin, the scenario above is not only plausible, but quite common - it happens so frequently in fact that marketing textbooks have a name for it (the "high-low" pricing strategy).   Just because "everyone does it" or "it's an industry standard practice" does not mean it is an ethical practice.


Before tucking into this, I want to take a few distractions off of the table:

First, the department store promotion is not deceptive.   The shirt does in fact sell for $100 normally and is in fact discounted.   The promotion is not a lie because the customer will pay the "normal" price before and after the promotional event (the higher price is not falsely inflated).  So the promotion is entirely honest.

Second, a retailer bears no responsibility to promote its competition.   This may be subject to some debate - but it would be unreasonable to place upon a merchant the task of doing the research to find the best deals for a customer without compensation for the effort of doing so.  Some might argue this point, and they would be wrong for reasons that should be obvious.

The Moral Quandary

The moral quandary, as I see it, is that the department store is knowingly attempting to distract the customer from the high price by emphasizing the discount.  They are not concealing or misrepresenting the facts - but are attempting to draw attention away from something they do not wish the customer to consider:  no matter how much you are "saving" you are still paying $60 for the item.

Consider the stereotype of the person who returns from shopping with arms full of packages and announces to their spouse "I saved $500 at the store today" rather than saying "I spent $1000 at the store today."   The same principal applies: the shopper is being entirely honest, but attempting to get their spouse to ignore one fact (the amount spent) by presenting another (the amount saved).

This doesn't set well with me, and I'm not sure of the reasons it should be so.


I've mulled this over for some time, and the best way I've come up with is to consider the roles of the individuals (or organizations) involved.   Given the nature of the relationship, what does one party have the right to expect from the other - in a manner that is fair to both in the context of the relationship.

The role of a retailer (or any vendor) is to offer a product for a price, and in so doing to be honest about the nature of the product (such that the customer is not swindled into buying something that renders him no benefit) and the amount that he must give the retailer to take possession of the product (so that he is not told later he is obligated to pay more than he was led to expect to obtain the benefits he desired).

In this sense, the retailer has also disclosed all the facts germane to the transaction he is proposing to the customer.   The price of the item at another retailer is not related to the transaction he is proposing - that would be a different transaction, with a different vendor, and the responsibility cannot be assigned to the present vendor who would be a third party to that prospective transaction.   It is not his business, quite literally.

However, it seems to me that the ethics take a sinister turn when the same incident occurs in the situation of the shopper and their spouse - because their responsibility in the context of that relationship is to do what's in the best interest of the household in the long term, and this shopping incident is only one action in the context of an ongoing relationship in which there is, in fact, a duty to act in a way that ensures the resources (budget) of the household are used wisely.

But this can be spun back to the merchant-customer relationship if it is, in fact, perceived as a relationship and not an isolated transaction.   In the context of a one-time deal, the merchant accepts no responsibility for the welfare of a customer outside the context of the immediate transaction - but if it is a relationship, and if he portrays it as such, he must accept the moral obligation of considering the long-term welfare of his customer.   Ideally, he would offer fair pricing most of the time, but would be beholden to disclose when the customer can get a better price or a better product elsewhere - and also ideally, this qould be infrequent.

The Resolution

In the end, my sense is that much depends on the nature of the relationship between a retailer and a consumer - which can be very tricky in the present day, as some firms are evolving from being transactional companies (which view each sale as an isolated and independent event) to relationship companies (which view each sale as an event in the context of an ongoing relationship).

Simply stated, different ethical standards apply.

A transactional company can claim to be fulfilling the obligations of its role if it considers only the immediate transaction as an isolated event - but a relationship company cannot do so, particularly when it has attempted to convey to the customer that it considers their business to be a long-term relationship.  In doing so, it is obliged to consider the welfare of its customers in a broader sense and, on occasion, to send their customers to a different vendor - accepting that they will lose the profit of this transaction for the sake of maintaining a longer relationship.

Naturally, the problem is that a relationship company is a new concept for many retailers who are attempting to evolve from transactional models.   They may be unaware of the moral obligations they must accept to be regarded as a relationship company, and still doing business under the terms of a transactional company.   It is still a violation of moral obligations - but perhaps their ignorance makes the violation forgivable.

A more insidious moral problem is when a firm portrays itself as being interested in a relationship in order to get the customer to commit to giving them repeat business, but is not interested in doing what the customer expects (and has every right to expect) of a long-term partner in return.  That is clearly dishonest, deceptive, and morally reprehensible.

It may take quite some time for firms to fully make the transition, and fully embrace the moral and practical obligations of being a "relationship company" and putting to an end their transactional perspectives and the behaviors that were appropriate to the "old way" but inappropriate to the "new."


This note has meandered greatly from a simple consideration (the ethics of a pricing strategy) to a more complex one (the ethics of a relationship) - but my sense is that there is good value in this, and that there is likely a broader range of ethical differences between transactional firms and relationship firms ... which is grist for the mill.

Monday, April 21, 2014

Evolution of Fashion and Consumer Preferences

Following up on my previous post about fashion and consumer preferences, I've put a bit more thought into the manner in which they evolve.   I'll do a quick recap (and will try to keep it minimal) before moving on to the topic of evolution.


The previous post considered that fashion, like practical behavior, is based on the desire to achieve a result that exceeds the effort put into achieving it.  Because the goal of fashion is esteem (to be admired, or to avoid ridicule) there is not an objective measurement of its effectiveness - each person decides from himself what is fashionable.  However, because the goal is to make an impression on others, our prediction of the opinions of others figures highly into the choices we make in regard to fashion.   This makes fashion both imprecise and unpredictable.

Evolution as Rebellion

When considering practical tasks, the goal of evolution is to improve the quality of results, reduce the amount of effort, or some combination of the two.   The amount of effort is largely moot to fashion (bargain shoppers place fashion firmly in the back seat), but the quality of results is key: the fashionable shopper wants to achieve a favorable impression on others.

The safest way to achieve a favorable impression is merely to imitate what others are doing, and this is the behavior of most consumers who are not attempting to stand out, but merely to fit in.   These individuals do not cause fashion to evolve, and in many ways their behavior results in preventing evolution - anyone who does anything different to the rest of the herd is to be ridiculed, and their rebellion against tradition is to be put down simply because it is different.

The fashion-forward individual who means to create a positive impression by standing out from the crowd, thereby getting attention and earning esteem, is in a very basic sense a rebel against tradition and standards.   They are not merely a nonconformist, who is indifferent to the opinion of others, but a rebel who means to change the opinion of others by their behavior.   The rebel becomes a revolutionary when his campaign succeeds and his change is accepted ... and then becomes a champion of conformity if he chooses to defend the change once it has been implemented.

The Risk of Rebellion

An individual who consciously defies tradition, whether as a nonconformist or a rebel, takes on a risk: he may be attacked or at least ridiculed by conformists for undermining their standard.   This threat is balanced against the reward of succeeding in his rebellion and unseating the conformists, becoming the new champion of fashion, and gaining the esteem of that position.

In general, to take the lead one must move fashion forward - to depart from what is the present normal and enter new territory, which is generally truly novel in that it is a break from the immediate present and the recent past.  (Granted, there is a "retro" tendency in fashion to reach back to a previous time and recycle trends and tastes - but the reach must be significant.  A person who imitates fashions of last year or the year before isn't "retro" but merely "outdated.")

Again, the difference between the nonconformist and the rebel is that the nonconformist is indifferent to the opinions of others, whereas the rebel means to change them: the rebel wants followers.  The first step in gaining followers is in choosing a change that other people will follow rather than ridicule - and this may be the reason fashions evolve slowly, as a radical departure from the norm is dramatic and threatening, and easier to ridicule than consider for adoption.   Very few rebels have the influence and charisma to sell a radical change.

The Evolution of Fashion

In practical concerns, the acceptance of change is based on visible results: others workers recognize that a rebel who has changed his behavior is achieving better results, incurring less cost, or both.   The problem with predicting fashion is that there is much subjectivity as to whether a change is "better" and its outcome is not known until it meets with approval.

This makes evolution difficult: the rebel must risk his esteem in practice in order to determine whether he has sufficient esteem to get others to adopt the changes he proposes.   It is in that sense a gamble, and one that will result in a loss if it is not successful, as there is little forgiveness for an earnest effort that leads in failure - any failure diminishes esteem.

And so the rebel takes the risk of making a change with little certainty that the change will be respected and adopted by others.   If the risk meets with the acceptance of some - the few informal leaders with influence - then it will likely be accepted by others.

Predicting Evolution

It follows that the first step in predicting the evolution of fashion is to keep an eye on the nonconformists - to determine if they are rebels or mere nonconformists.

The second step in predicting evolution is to assess whether the nature of change that a rebel is proposing will be amenable to others, specifically those who hold unusual influence.

The third step is to witness whether others actually adopt the change proposed by the rebel.   This is "arguable" is because at this point, it is no longer an act of prediction, but one of observation, and it may already be too late to intervene or capitalize on the knowledge of where fashion is headed.

The fourth step, also arguable, is to determine whether a fashion is spreading from the small number of individuals to the mass market.   One who uses this method is very likely to be well behind the curve and unable to react swiftly enough to capitalize.

The fifth step is a repetition of the first, which is to recognize that the change has become a new norm, and that it is time to look to signals of nonconformity to recognize the "next thing" given that the present one has run its course.

Fashion and Practicality

At the onset of this meditation, I sought to differentiate fashion from practical concerns - but it seems to be that having considered the evolution, it would be worthwhile to move back from fashion to practicality.

Practical changes, intended to achieve functional and measurable results, likely follow the exact same pattern - but are based on standards that are more rational and easier to observe.  Given that, an individual or firm who wishes to keep pace, or even to take the lead, would do well to consider the evolution of fashion.

Wednesday, April 16, 2014

Leading Smart, Creative People

I recently read Clever, buy Goffee and Jones, which speaks to some of the dramatic differences between managing laborers and knowledge-workers.   Their central argument is that the nature of work in the present day has undergone a dramatic change from previous generations, and an equally dramatic change is needed in organizational structures and management practices if we are to leverage the full benefits of the intelligence and creativity of the modern workforce.

Essentially, personnel management from the dawn of civilization (or even the dawn of cooperation in tribal societies) reflected the model of "one mind many hands" - that is, one person decided what was to be done and many people contributed their effort to executing on the leader's ideas, with minimal problem-solving taking place on the front lines of an organization.

One architect designed a pyramid and made all the essential decisions, and legions of drudges carried out his plans, with supervision by a large hierarchy of overseers.  Some decisions might need to have been made when the stones didn't fit together quite right, but these were minor adjustments and workers for the most part toiled away mindlessly to execute on the leader's plan.

But in the modern age, problem-solving and even strategic decision-making is done on the front lines of an organization.   They are still guided by the goal set by a leader, but they are not merely following orders but applying their knowledge and skills to defining the solution.   In such an organization, "one mind many hands" has ceded to "one goal many minds."

It's most obvious in industries that have long relied on the expertise of workers:  a hospital administrator who has a business degree and knows nothing of medicine must manage a staff of surgeons, or a venture capitalist with an idea for a web site but no web development skills must manage a staff of programmers, designers, and other specialized personnel.   In such situation the leader can describe the conditions of success, but cannot instruct them in the work that must be done to achieve it, and must often rely upon their expertise to modify his vision to make it better and more feasible.

While there is still a place for drudge-workers to carry out orders mindlessly and without questioning or modifying the orders they receive, this work is increasingly being sent overseas, and the real value creation is not in the hands-on tasks but in the mental work to determine what tasks ought to be done.   And yet, the knowledge workers are being managed by the same techniques that common laborers are managed - which effectively prevents them from doing what they do best: to think and solve problems.

This is fairly obvious in the way in which companies pay lip-service to being "innovative" or even demand it of their workers, but at the same time fail to create a culture in which innovation is possible, and often cling to old command-and-control models that discourage and punish innovation.    The firms that understand innovation and genuinely desire it understand this, and have made some radical changes.  The firms that do not understand innovation but cover its results merely imitate the innovators in superficial ways, and do not seem to understand where they are going wrong.

My sense is the Goffee and Jones provide at least a partial answer.   In many instances, their focus falters, or they have a great sense of what should be done but not how to do it.   But at the most basic level, they seem to be onto something fundamental that has significant potential that has broad implications for businesses, their employees, and their customers.

Thursday, April 10, 2014

The Eventual Utility of Silly Information

One of the criticisms of social media is that most of the information people post is frivolous and narcissistic - and there's little argument that it is so.   It's comforting to keep in touch with old friends and to know what they're up to, but the brevity, ease, and frequency of updates means that a lot of very silly information is shared.

I acknowledge that narcissistic expression fills valid emotional needs: to believe that you matter and that you are accepted sometimes requires testing the waters - so tossing out a scrap of trivial nonsense about your own humdrum life solicits comments, or at least acknowledgements that someone cares enough about you to pay attention to your havering.

However, pause to consider that every so often, a bit of information that seems silly and useless actually proves to be useful: the comment from someone who found a store that sells only lampshades has a definite "so-what" quality until you need a lampshade and discover how few retail outlets sell them.

Unfortunately, that value is largely inaccessible: Facebook's search function will not enable you to find posts by friends about lampshades - it just doesn't work that way.  Twitter's search engine will do so, but it does not restrict the search to just friends, so any tweet by anyone that contains that word will come up, and the search isn't very smart.

So it seems that social media is presently no better than human memory in terms of finding useful information - you have to remember who said something, scan through the record of all their past posts, and try to find it - which is highly time-consuming and inefficient.

If the social media services ever fix their search capabilities, or if search engines gain the ability to adequately search social media content, perhaps that will change, enabling users to sift through piles of posts and comments that were useless at the time, but have become potentially useful when the need arises.

Sunday, April 6, 2014

Utility, Effort, and Sales

On April Fools' Day I published a rather tedious post that arrived at a conclusion that common sense should have yielded in the first place - that customers consider the benefit they will derive from a product (utility) in comparison to all the costs and tasks required (effort) to derive that utility in determining whether the purchase is desirable to them.  And further, the factors involved in assessing these qualities are non-quantifiable with any degree of precision.

The degree to which the utility and effort compare yields a general sense of the level of effort that will be required to sell a product to a customer.   I'd like to get a bit more granular about that correlation, though not quite as granular as before, to derive some general observations.

It is likely worth mentioning that this comparison deals with actualities rather than perceptions - the level of effort that is actually required and the amount of utility that will actually be derived as perceived by an informed and objective prospect - rather than the misconceptions a prospect may have, whether through his own delusion or a salesman's deception.   That is an entirely separate matter.

The Soft Sale: High Utility, Low Effort

Where a purchase proposes to offer high utility in exchange for a low level of effort, it is very appealing to the prospect by virtue of that comparison.  To sell such a product to the user often requires little more than making them aware of the item's availability because no further motivation is needed.

No further elaboration should be necessary here: the product that offers a lot for a little requires no salesmanship, and practically sells itself.

The Hard Sale: High Utility, High Effort

The hard sale occurs when the purchase proposes high utility but requires a high investment of effort.  In such instances, prospects are often indecisive, and will deliberate over whether the utility is actually as high as they believe it to be or whether their resources might be more efficiently directed to other utilities that come at a lower price.

A sale of this nature requires ethical hard-selling tactics (and it is necessary to mention ethics, as many hard-selling tactics are misused to make unethical sales, documented later) that involve convincing the prospect that the high value is worth the high effort, such that even when his perception of utility and effort are rectified (and not distorted) he will be willing to undertake the effort to obtain the value.

In other instances, it may require the salesman to address the proposition itself - to take practical measures to increase the utility or decrease the effort so that the balance shifts to a positive assessment.

The Impulse Sale: Low Utility, Low Effort

An impulse sale occurs when a purchase has little value to offer, but requires little effort to effect.   In general, customers are indifferent to these purchases: they are not very important, and there are likely better uses for capital and time, but they are "fair" propositions given that the effort-for-utility is balanced.

A sale of this nature generally requires making a proposition at the right time - when the prospect is unconcerned with more serious matters and is in a congenial enough mood to entertain the idea of taking a little effort to gain a little utility.

Arguably, adjusting the proposition to require less effort or deliver more utility can be effective in shifting the prospect's assessment - though it would likely be difficult to accomplish: because the effort is already perceived as low, making it marginally lower would be unlikely to succeed, and because the utility is low, making it marginally higher would also fail to have an adequate impact.

The Unethical Sale: Low Utility, High Effort

Customers are simply not inclined to enter into transactions in which the utility they receive is far outweighed by the effort required - this is a losing proposition and no marginal adjustment can overcome it.   It would, in fact, be highly unethical to attempt to sell a customer a product that offered him little benefit in comparison to its price ... not that ethics are much of an impediment for firms that think only to their own motives.

In such situations, a sale can only be effective if the prospect can be deceived or manipulated into grossly miscalculating the utility or effort involved.   There are tactics fro doing so, but I do not consider them worth exploring - as the only acceptable solution is to walk away: find a prospect for whom the product delivers genuine value, decrease the effort to match the existing low level of value, or improve the value of the product or service offering.


It likely needs to be considered that the assessment of utility and effort are highly idiosyncratic.  To apply these observations in an overly generalized manner is likely, and almost certainly, a mistake.   That is, a sales proposition for a given product does not have the same utility and effort for all customers in all situations, but must be approached with specific needs and circumstances of the customer in mind, aggregated into target markets that are well defined by their needs rather than by their demographic qualities (though demographics may correlate to a need).

A person's need for a product correlates to their need for a solution to a problem or their need to achieve an objective.   This will differ from person to person and time to time.   There is also the matter of the anticipation of need, which may derive from the unpleasant memory of a past event or the hope for a future event more so than the actual conditions of the realistic present.

This, however, would lead to a separate consideration in which general observations are even less applicable.

Tuesday, April 1, 2014

ROI for Consumer Purchasing

I've been doing some thinking on a discussion about customer return on investment that came unraveled - the premises seemed to be valid, and my sense is that the thesis fell apart because concepts were not translated to the customer situation.   So what follows here is likely gratuitous, but seems foundational to evaluations of consumer motivation.

The concepts of investment and return in considerations of return on investment for a commercial operation are similar to those of effort and utility for consumers - but not identical.   Unless these differences are accounted for, the model fails on translation.   So to be a bit tedious ...

Investment becomes Effort

In commerce, investment takes into account the monetary cost necessary to effect an outcome.   The short-sighted businessman will consider only the cost of goods (the money price they pay for possession of an item), but wiser ones will account for the full cost (shipping, storage, and any expense occurred in the process of obtaining and handling the item to produce the return) with all things being reduced to money, and anything that cannot be quantified is discarded from the calculation (which can sometimes lead to bad decisions).

The consumer considers the same factors in evaluating the effort involved to obtain and employ something to achieve a benefit.  In much the same way, his total effort includes more than the money-price to obtain the necessary goods or services, but also includes the effort of obtaining them.    For example, the money price of an item may be cheaper at a store that is 200 miles away, but the time and cost of making the journey to that store make the total effort of obtaining the item greater.

Return becomes Utility

In commerce, the return that will be generated by an investment is often measured in the revenue that will be generated for the outlay of investment.   In the retail sense, items are purchased for resale and the only considerations are the price they will fetch and the number of units that will be sold.  In the manufacturing sense, an investment will increase revenue or decrease cost resulting in a higher profit.

Consumers do not purchase items for resale, nor generally use them to manufacture items for resale.   In the role of "consumer" they simply consume them, without producing any income as a result, and the utility they gain is in the satisfaction of need.     Goods and services are purchased because the consumer wishes to gain the benefit of consuming them - to alleviate pain or achieve pleasure.   But this is highly arbitrary and individualized: how much pain or pleasure will be achieved does not lend itself to quantification, which leads to the next point.

Quantitative becomes Qualitative

The commercial consideration of return on investment is by necessity a financial calculation, which considers all things to be quantifiable and monetized - and often does so in a very haphazard and erroneous manner.   But because money is the primary concern of a commercial enterprise, it does the best it can to consider the financial impact, and is not concerned about qualitative matters.   Even questions such as "how will selling this item impact our reputation" are translated sloppily into a calculation of how reputation will impact future income.   Much more can be said of the errors and of quantification, but the present point is that it is done and that it is the primary, if not sole, motivator for a commercial undertaking.

The consumer consideration is largely non-quantifiable and not subject to mathematical calculation, but instead on the vague sense of attractiveness of a proposition.   Attempting to quantify or monetize attractiveness is even more problematic, so much so that it is generally not attempted,   For example, the question of "how much is it worth to you to be cured of your headache?" cannot be answered with any level of certainty or consistency.   In arrears, it can be said it was "worth" the price of the cure, but when attempting to determine how to price the cure, there can be no answer.

Transporting ROI to Consumption

In the end, I have the sense that attempting to apply ROI to consumption in a specific and quantifiable way is likely a fruitless undertaking because matters of consumption defy quantification.   But at the same time, it does not seem altogether pointless.

While we cannot specify consumer ROI as percentage, it may be sufficient to proceed on the vague sense that the customer considers the utility they will gain and the effort they must expend to gain it - to arrive at a general conclusion of whether the utility exceeds the effort and the undertaking is therefore worthwhile. So we can expect that customers will be motivated to purchase when utility exceeds effort and unmotivated to purchase when it does not.

It also occurs to me that this should be common sense, and can be taken for granted without all this mental meandering and fussiness - but then, that's what a blog is for, and further, it would not have occurred to me to spend so much time brooding over this if someone else hadn't raised the issue, so there likely is some utility in having undertaken the effort ... though it's so much sunk cost at this point.   And, if nothing else, publishing this it should suffice as a rather subtle "April Fools Day" prank.