In "Profit + the Psychology of Choice: The Influence of A Customer's Perceived Value", Michelle Guiles looks at a common profit strategy and the customer’s perspective.
Last issue, in the article, “Are You Confusing Your Customers? Finding Clarity by Seeing Your Business from Your Customer’s Point of View,” we explored a case study, my personal coffee shop experience, to demonstrate the importance of giving potential customers a clear first impression of your business—bringing them from the outside in with a consistent message and a clear path to purchase. In this issue, we'll be exploring the relationship between profit and consumer psychology relating to choice and how one commonly used strategy for increasing profit might not yield the desired result.
A Seemingly Sound Strategy
Several factors come into play when a business develops a strategy for increasing profit. This list of factors includes, but is not limited to, product sales volume, average purchase total per customer, product profit margins, base business expenses, and alternate revenue streams. Still, one of the simpler concepts for increasing profit for a product sales-based business is to experience an increased sales volume—sell more product, retain more profit.
If you’re a business owner who is looking to increase net profit by increasing sales volume, your first strategy might be to add more products to what you already have available or to create more variations of an existing product (e.g., adding flavor, color, or size options) in order to net more sales by attracting more customers. The assumption being that if you have more diversity in your products, you’re more likely to carry the exact item that an individual customer wants to buy, i.e. that you'll have something for everyone. In my experience with clients from the dessert industry, and the food industry in general, many expected that employing this strategy would, in fact, yield the increase in profit they were seeking.
When looking at the basic nature of sales, one might assume that there is a linear correlation between the number of product types for sale and the total number of sales, wherein increasing the variety of items available would result in a higher percentage of sales and therefore profit, but the relationship is not that simple and, perhaps, counter to what one might expect.
The Plight of Too Many Choices
In the often referenced 1995 study by Sheena Iyengar, professor of business at Columbia University, researchers performed a social buying experiment in a California grocery store involving an in-store display and Wilkin & Sons jams (for more information, see The Art of Choosing (2010) by Sheena Iyengar). In the experiment, the team offered samples to shoppers from alternating setups— one setup offered 24 different varieties of jam (Display A) and the other setup offered a selection of only six different varieties of jam (Display B). The group alternated between each display in intervals of a few hours. Once the experiment was complete, the metrics showed that while Display A attracted a higher percentage of shoppers, Display B, with its fewer varieties, had significantly more sales in proportion to the number of samplers it attracted. The researchers had not anticipated this result. They had expected that offering more flavors of jam would yield a greater number of sales. The analysis, however, does shine some light on the plight of too many choices. Though more variations may get you more views, an increase in views does not necessarily convert to more purchases. To be more specific, if a bakery increases its offering of croissants from five different varieties to 10 different varieties, the bakery will not likely experience an increase in the total number of croissants sold over a given period of time. Since research indicates that expansion of product lines might not result in more net sales, employing this strategy purely for profit sake without considering other factors might not prove to be the success one hopes for.
Understanding the Psychology of Choice
When an increase in sales is the goal, as a business owner, you have to discern what it is that leads your customers to buy more and give them that incentive. Ultimately, most consumers look for the best value in a product that meets their needs. Anticipating those consumer needs and assessing the most common definition of best value is the continuous challenge of any consumer-based business. When making a purchase, a customer determines the product or service of best value among a selection of similar alternatives. Best value, in this case, refers to the highest perceived value, where perceived value is the value that an individual attributes to a product after weighing many factors, such as the cost of purchase compared to other retailers, the speed of purchase and/or delivery, company policies, company reputation, and general accessibility and convenience. The value of a purchase extends past the product itself to include the perceived value of the retailer. When a consumer makes a purchase from your store, they are also buying into a relationship, however long or short, with your business.
A Better Strategy—Make the Choice Easy for Your Customers
Consumers have an underlying fear that the other choice would have been a better one, and that fear prevents them from making the commitment to purchase. To secure a sale, your total value (value of product plus value of retailer) must be great enough for a consumer to overcome the fear of making the “wrong” choice. Consumers need assurance that their selection is the best selection, not only in the choice of product, but also in their choice of retailer. Exercise caution when considering expanding your catalog or menu to include new items, especially if those products deviate from your original business model or brand message unintentionally. Overcomplicating your product or service offerings and/or menu and straying in any way from the core purpose of your business creates confusion, and confusion will always decrease the consumer's perceived value of your business. Instead of expanding product lines in hopes of achieving an increased sales volume, your energy and time might be better spent focusing on how to better reach and cater to your target demographic and how to establish your business as the one that provides the best value to customers.