The Economic Value of Leisure Activity

In an article about economics, the author briefly mentioned hobbies, sports, and other leisure activities and dismissed them abruptly as having no significance to economics.   I disagree, and wish to elaborate on the reasons, hence this note.  The author didn't elaborate on the statement, so I can't be sure of what he truly intended - just tossed it out there as if it were an incontrovertible truth - but my sense is that he dismissed leisure activity from the economic world because it has no effect on the market.   But I would argue that it does.


Economics is Not (Just) About Money

First, and this is likely a bit esoteric but nonetheless important, economics is not about money.   Many laymen make the error of thinking so, but economics is about the manner in which human needs and desires are satisfied and money is merely a tool by which people obtain the goods and services that satisfy their needs and desires.   Even in a market in which there is no money and people barter for goods, that constitutes economic activity - and I sense this frustrates economists because they are unable to reduce the activity to readily-digested number, so rather than admit their embarrassing impotence, they want to dismiss any non-quantifiable activity from the world of economics.

I would go further to assert that economics is not even about trade.   Trading your products (or labor, for most) with others to get things that you desire more is one way of satisfying your needs.   If you choose to catch your own fish rather than purchasing one at a supermarket, you are still acting in a way that satisfies your needs.   It is true that your activity means you do not have to trade, but it would be a misleading distortion to therefore exclude it from economic activity.   It decreases trade because you have done something for yourself, but it has not decreased economic activity because it is, by definition, an economic activity.


Economics is about the Satisfaction of Need

Second, consider a different part of the definition of economics - that it is a way to satisfy both needs and desires.   The separation of need from desire is tenuous at best because it is generally accepted that there are psychological needs that constitute a very fuzzy borderline between needed and desired.   In more concrete terms, leisure activities satisfy a need (or desire) for mental stimulation and entertainment - and as such it fits the definition of economic activity because it is action in pursuit of satisfaction of need.

As such, a person who is engaging in an activity for his own entertainment (or mental stimulation, which is a form of entertainment).   In concrete terms, some people fish just to enjoy the activity of fishing - they release rather than consume the fish that they catch.   But this is not wasteful activity because it is a form of entertainment.   This further decreases trade because such a person does not amuse himself by engaging in trade - rather than purchasing a ticket to a play, he spends a leisurely afternoon entertaining himself by fishing.   And again, while this decreases trade it is still an economic activity.


Leisure Activities Influence Trade

Third, it's also worth mentioning that leisure activity does in fact have a positive impact on trade - entertainment alone constitutes billions of dollars in trade, as does the trade required to engage in a leisure activity.   There are some activities that require no goods or servicers to undertake, but I would suggest that such activities are very rare - for the most part, leisure activity necessitates trade.

Going back to the example of the fisherman: even if he consumes the fish he catches, they were not "free" by any means.   He still had to purchase a rod and reel, tackle, bait, equipment, supplies, and other things necessary to the activity - and he may even have taken a fishing vacation and hired a boat or rented a cabin for the purpose.   In this manner, leisure activities actually creates trade as well as economic activity.  Moreover, I would also estimate that when it comes to leisure interest, much more is often spent on the activity than would be spent in purchasing a finished item - the cost of the fisherman's tackle and equipment are more than he would have spent just buying a fish.  And so, it is likely that leisure activities increase the amount of trade in a market.

There is the matter of the fisherman's "labor" - and one might argue that his time might have been better spent doing more productive things.   In the material and monetary sense, that may be true.  But again, the fisherman produces entertainment for himself - and given that many material goods are purchased for the purpose of having entertainment (you do not purchase a concert ticket to have a scrap of paper), then the time that such a man spends at fishing are entirely productive.

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Perhaps this argument seems a bit finicky, but I have the strong sense that money is a tool of trade and trade is only a subset of economics - such that dismissing anything that is not readily fungible or quantifiable is a serious mistake that makes economics less accurate and less useful than it ought to be.

Imaprted and Experienced Impressions

I wrote an article on brand basics for another blog, in which I touched on the notion that people who have never experienced a product often have a strong impression of the characteristics of a brand (boys too young to drive have ideas about automotive brands, middle-class people have ideas about luxury brands, etc.) – and I’d like to spend a little more time meditating on that notion.

In brief, there are  “imparted impressions” that arise from learning about a brand, “experienced impressions” that arise from interacting with a brand, and some interplay between the two.   These are terms I’m using in this meditation – if they happen to correspond or conflict with any existing terminology, that’s entirely coincidental.    I’m unaware much thought has been put into this.

Imparted Impressions

Imparted impressions are ideas that an individual has accumulated about a brand or product with which he is experienced.   Consider my opening example of boys who are too young to drive, and yet who still have very decided opinions about automotive brands.   The impressions they have formed are likely to be highly influential in the consumer choices they will make when they get old enough to actually need the product, and in that regard they are important.

Imparted impressions are received from a myriad of sources, but it generally comes down to media depictions or word-of-mouth descriptions of a brand experience.    Such impressions may come from those who have experience of the brand, as well as from the many who don’t.   It is highly unlikely that the copywriter at an advertising firm has driven the precise vehicle that he is describing to potential buyers, or that when middle-class people who about luxury brands have any experience whatsoever of owning or using them (and may never have seen them).  Each is creating a fictional account, which others are expected to accept as fact (though there’s some argument over what percentage of the audience grants credibility to such accounts).

Because an imparted impression is a fiction, it can be anything so long as it does not exceed the limits of the willing suspension of disbelief.   And it is likely that even the most ludicrously improbably qualities can be attributed to a brand if the information is coherent among sources … if five people you know and trust all use the same adjectives to describe a brand, it becomes credible regardless of the fact that all five of them learned those adjectives from an advertisement written by a copywriter who had no experience of the brand.

Experienced Impressions

Experienced impressions, as the name implies, derive from actual experience of interacting with a product.   My expectation is that these impressions are much stronger and more credible than imparted expressions, as no matter how much we are willing to believe in a second-hand account, hands-on experience is far more credible.

There may be some gray area between imparted and experienced impressions in this regard:  a boy who has ridden in a car or has seen one on the road develops an impression based on experience – and his experience is valid (he actually did see the car).  Though this is experience is still considerably shallower than that of a driver or an owner, it is still valid experience, in that it is perceived of real objects and received as sensory data, and as such it is not entirely fabricated or conceptualized from nothing.

The gray area is further extended by cognition, as it has been shown that we have perceptual filters that seek to accentuate or deemphasize elements of real experience that do not match our preconceptions – such that we experience what we expected to experience in spite of some negligible evidence to the contrary.   Human memory also likely dulls experienced impressions, as we may not remember correctly – or we may doubt a valid impression if we suspect that our memory may be hazy, even if it is accurate.

That said, our experienced impressions of a brand are generally the most accurate and credible ones – such that once we have experienced a brand, it creates a strong impression that is extremely difficult to change.

Interplay between Experienced and Imparted Impressions

I’ve already mentioned selective perception – which is one method by which imparted impressions may mar experienced ones.   If we have been subjected to repeated accounts, from advertisers or from credible individuals, that a given product “tastes sweeter” than a competing brand, we are somewhat likely to perceive the brand to have a sweeter taste than we would if we had not been primed to believe so.

However, my sense is that the potential for an imparted impression to override sensory experience is greatly exaggerated.   We might fool ourselves into thinking something tastes sweeter than it actually does, but it is highly unlikely that the imparted impression of sweetness will maintain in the face of an experience impression of a product that is not sweet at all, but may be bitter.

I would expect that the degree of difference between imparted and experienced impressions may be influential – if the difference is but slight we will give our imparted impressions the benefit of the doubt – but also that the degree to which the difference is critical to the fulfillment of core benefits.  That is a, person who values “sweetness” in a product will be less likely to be mislead by imparted impressions than a person who values other qualities and for whom the sweetness is incidental.  He will simply not be paying close enough attention to that attribute to notice.

And so, for the most part, our experience impressions will override the imparted impressions – and the difference between the two will create a sense of delight (when something is better than promised) or disappointment (when something is worse than promised).  It could be argued that the best outcome of all would occur when there is no difference, and experience is exactly as promised – though while I have a sense this would impart a sense of comfort, I would also be inclined to think that the lack of difference would go unnoticed.   Of course this product tastes sweet to a customer who already believed that it would – so it’s no surprise, neither better nor worse, and hence unremarkable.

Implications for Marketers

In all, my sense is the implication for marketers contradicts the long-standing tradition in marketing to depict a brand as being far better than it actually is.   When this level of expectations is set, dissonance is likely because the eventual experienced impression that will be conveyed is going to be far worse than the imparted impression that marketing succeeded in creating – and in the end, it’s their own fault.

If a brand is to create delight in the consumer, marketing and other sources must have an imparted impression that is worse than their experience will eventually bear out.   It is only in this way that customers are impressed by the quality of the brand when they discover the experience to be better than expected – and the greater the difference, the stronger the delight.

At the same time, it is unlikely a product will be appealing at all if marketing sets expectations too low.   It is likely that advertising should seek to create an accurate impression in most regards, but to choose some elements to understate to leave room for customer delight to develop.

It also occurs to me that the ability of imparted impression to override experienced impression is generational.    The Silent and Boomer generations desperately wanted to blend in and be like everyone else, and to be compliant to authority – such that if “television said” something they might be doubtful of their own experience when the two are out of joint.  Generation X and the Millennial are far more individualistic, and are more sophisticated when it comes to the media (and particularly advertising) –hence less likely to be doubt themselves and go along with what “everyone else says” when their genuine experience proves to be different.

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As with many of the pages on my online notebook, this has been quite a ramble – but I have the sense that the key ideas are worth closer consideration and comparison to research findings.   I have the sense they will bear out, and that the implication is a need to adjust marketing to support a more positive customer experience.

Realistic Expectations about Conversion

In a discussion about ecommerce conversion rates, someone dragged out a list of statistics on shopping cart abandonment.    The list included various research studies on the topic, and cited rates of 55% to 72% around an average of 67.45% - which is a little surprising because that figure hasn't changed much in nearly twenty years.  

I recall hearing 70% back in 1995, at which time ecommerce was new and it was generally assumed that the number would plummet once consumers became comfortable enough with the security of Web sites to provide a credit card number online.   But in the present age, most members of the Silent generation, for whom the Internet was something new and scary, have largely exited the market and even the Baby Boomers are becoming less relevant in many consumer goods categories.   So I don't expect that fear of electronic bogeymen is the reason that conversion rates online are so dramatically low.

Instead, I speculate that there is a much less emotional and much more insidious problem: that of customers who shop multiple places before they purchase.   I expect that even as comfort with the online medium has increased, so has shopping behavior.  Given the recent financial crisis, and also given the steadily eroding consumer purchasing power over the last two decades (annual pay increases have been less than consumer inflation, so people have more dollars but less spending power), people are living leaner and investing more time in comparison shopping and deliberating optional purchases.

Consider a different statistic: the number of Web sites that a shopper typically visits before making a purchase.   If I recall correctly, this has generally hovered around seven though the range is much greater depending on the nature and cost of the specific product in question.   So even if a site gets an immediate purchase from a statistically average number of consumers, it would mean that only one in seven of individuals who visit will purchase ... a maximum conversion rate of 14.3% and a corresponding abandonment rate of 85.7%.

Admittedly, this figure would be the web site abandonment rate, and not merely the shopping cart abandonment rate.  The latter should be lower because it excludes visitors who bounced out of the site before interacting to the point where a cart was created at all.   So it's not strictly an apples-to-apples comparison, but should suffice for a theoretical musing such as this one.

A different statistic also shows that customers visit a web site an average of 3.5 times before making a purchase - and while I haven't seen a breakdown by product type or cost, I would expect there is also a broad range around that average as well.  But taking it as given, that would mean the even if every potential customer would eventually purchase from a site, its per-visit conversion rate would be 28.6% and its abandonment rate for a single session would therefore be 71.4%

Putting the two statistics together, what if we assume that 14.3% of customers will purchase from a given retailer - but each of those customers will visit the site 3.5 times before purchasing?   The result is that the site will have a 4.1% conversion rate and a whopping 95.9% abandonment rate.   And looking at some of the research into ecommerce in general, that is well within the calculated range for web site conversion.

But more importantly, a look at these facts should quell the tone of panic over the low online conversion rates for ecommerce sites.  Considering the shopping behavior of consumers, it seems to make perfect sense, and a firm with a 67.45% abandonment rate (32.55% conversion rate) would be doing amazingly well.

Secrets of Selling Services

I've recently read Stephan Schiffman's book on the secret of selling services.  The author's premise is that selling services is different to selling goods because the lack of a tangible artifact makes it difficult for customers to understand and take interest in the purchase - but as I read it occurred to me that there really isn't a difference between the two, and what is a "secret" in selling services is merely something that has been ignored by those who sell physical goods, and greatly to their detriment.

The reason I take issue with the author's premise is this: even when a good is being sold, the customer is still buying a benefit.   That is to say that whether I choose to purchase a lawnmower to cut my own grass or contract a lawn care service to do the job, I am ultimately seeking the same benefit.  The trust I put in a person to perform the task well is essentially no different to the trust I must place in a product to which I would contribute my own labor.

This has been incorrectly ignored for many years by manufacturers of consumer goods, but I don't think it has been ignored by customers.   The price paid for an item far exceeds the cost of the components and materials from which it is made, and even the labor of fabricating it, because what the customer is seeking is the solution to a problem and considers the degree to which he values the problem being solved.

When a product fails to accomplish its intended end, there is the sense that some part of its failure may be attributable to the way in which it is used, and it does seem to be a common attitude among manufacturers that the customer is to blame when the product fails to deliver its benefit.    But I have the sense, just from my overall impression of the way that people talk about products that fail, that the tendency of the customer to accept personal responsibility is fading - to which I would add, rightly so.

Another facet of the author's premise is that a service is bought and paid for on an ongoing basis, and that any failure of a service to deliver the expected benefit will lead the customer to refuse to renew the contract, and even seek to cancel the existing one.    I cannot disagree, but again do not sense that this is unique to services.

Customers will return goods that "don't work" and will certainly consider other alternatives when the good has been consumed or reaches the end of its lifespan if they are not satisfied with the outcome.   A seller of goods who considers each sale to be a one-time purchase, rather than one purchase in a continual chain of purchases, is very short-sighted.  So again, the necessity of customer satisfaction to ensure the continuation of business relations with them is not at all unique to the services sector.

All this considered, I do not have the sense that the author is teaching anyone the secrets of selling services, so much as mulling over aspects of selling services that are reasonably well known, but may indeed be secret to those who are selling goods and who take too shallow a perception of the value that customers seek by purchasing goods, which further blinds them to the reasons customers return merchandise and fail to develop loyalty to them.

Resistance to Parasitic Change

In a case-study I was reading on scientific management, it was mentioned in passing that the cost-savings of an efficiency improvement was split three ways: a third of the cost-savings was kept by the company as profit, a third was returned to the workers in increased wages, and a third was passed on to the customer as a price reduction.   It dawned on me that this is not at all the typical arrangement in the current age.

In the current day, virtually all of the cost-savings are pocketed by the company, and the workers and customers are offered no reward for having made the change to the company's benefit.   And I say "virtually all" as a concession to the few and rare occasions in which this might occur - though no example comes readily to mind.

With this in mind, the reason that customers and employees are so resistant to change is that there's nothing in it for them.   In their various roles, people are generally motivated to take action when they perceive a benefit to themselves.  That's not to say individuals are entirely self-serving - as people some some willingness to accept inconvenience and individual effort for the benefit of others - but when the relationship becomes entirely parasitic, with one party constantly demanding accommodations from another for its own benefit while offering nothing in return, even the most charitable individual becomes irritated and disinterested in continuing to be fed upon my an ever-hungry mouth.

People are most sorely neglected in their role as employees, constantly demanded to make changes to their working patterns without compensation because the arrangement will be better for the company.   The word "bonus" is like the word "bigfoot" - a creature allegedly seen by someone else - and salary increases have for over two decades lagged well behind the rate of consumer price inflation.  And yet, corporations speak highly of their "productivity," dollars in revenue per dollar in expense, and take pride in claiming for themselves a greater and greater share of the revenues that employees create.

On the consumer side, customers have experienced steadily diminishing quality of product and service, all in the name of keeping prices low - but there seldom if ever is a return to the customer for accepting less.   The supermarket is a prime example: you cannot find a pint-sized can of anything, as the original 16 ounces was reduced to 14 or 12.5 and customers are being asked to perform the duties of a checkout clerk, scanning and bagging their own purchases.  The cost-savings is not passed along, and the reply that prices are not being increased has been so overused that it is no longer fooling anyone.

It occurs to me that this likely sounds like the ranting of a socialist, but there is some thread of truth that cannot be denied: companies want for themselves ever-increasing profits, and rare is the firm that sets as a goal to keep profits steady, or even accept a small decrease, for the sake of taking better care of their employees or customers.   It is entirely a one-sided relationship - so if customers and employees seem fed up, their reaction is entirely understandable.

And it is likely for this reason that the scientific revolution in management has failed entirely to accomplish its goal of a better and more productive society for all - in that one group have hoarded the rewards of change and improvement to themselves, and the other two groups have largely lost interest in accepting changes and compromises that offer them no benefit, but are entirely parasitic.  There are some broader cultural implications to be considered - the manner in which this sort of parasitism has degraded society in a broader sense - but that is likely a separate topic.

And likely the only way to end this meditation on a positive note is to observe that, in some regards, competition in the marketplace is nudging the relationship back toward a more healthy and sustainable balance, at least insofar as consumers are concerned - as it is becoming necessary for firms that wish to be competitive to consider the customer's experience and their perception of value in the relationship. In terms of the relationship between firms and employees, that will likely remain much neglected while unemployment statistics are unfavorable and employees are disempowered to negotiate for a fair share - but this too is likely to change over time, as it has in the past when there was a greater demand than supply of labor.  Perhaps it is unrealistic to expect the pendulum will ever come to rest.