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Sketch Guy: A Sweet Lesson in Price Perceptions

August 26, 2013 by

I have a confession to make: I love Talenti gelato. I often stop at Whole Foods to get a pint of Sea Salt Caramel. I consider it a guilty pleasure for two reasons:

• I often eat the whole pint before I get home.

• It’s $4.99 for ONE pint.

That’s almost $40 a gallon, and just about every time I buy it, I think about how crazy it feels to spend that much on a pint of gelato. Then a few weeks ago, things changed.

As I opened the freezer section, there was something new sitting next to my Talenti: Jeni’s Splendid Ice Creams. Jeni’s offers a Salty Caramel flavor!

Then my eyes landed on the price: $11.99 a pint!

At that precise moment, I noticed a shift in my thinking. Somehow the appearance of an $11.99 pint of gelato made me feel much better about my purchase of the $4.99 one. I smugly grabbed my regular Talenti and walked to the checkout counter feeling as if I had saved $7.

At that moment, I anchored to a number. The price of the gelato I normally buy didn’t change. It was still $4.99 a pint. What changed was how I thought about that price compared with the new option at $11.99 a pint.

Now, I have to confess that I tried Jeni’s Salty Caramel, and I can make a strong argument that it’s worth every penny. But as this experience shows, anchoring to a number can change the way we think about our financial decisions. I went from thinking it was crazy to spend $4.99 on a pint of gelato to convincing myself I was “saving” $7.

Anchoring is a well-known financial problem, and my gelato buying captures a simple version that doesn’t cost me much in the big scheme of things. But it can become a problem when making big financial decisions, like buying a house or a car and selling stocks.

1. Buying a House

In May, the Journal of Economic Behavior Organization posed the question: What happens when someone selling a house sets a high asking price? The researchers determined that a higher asking price (10 to 20 percent over the actual value of the house) led to a higher selling price.

Buyers weren’t stopping to ask the obvious question, “What’s the actual value of a particular house?” Instead they were focused on the asking price, anchoring to the higher number, and bidding more than they needed to. The ultimate price made them feel as if they were getting a deal.

2. Buying a Car

Next to buying a house, a car is usually one of the biggest financial decisions we make. It’s also heavily influenced by anchoring. For instance, when you go to the dealership, it’s not unusual for the discussion about price to become a discussion about the monthly payment you can afford. “Don’t worry about the sticker price,” the salesman says. “I can get you that monthly payment.”

By anchoring the big price of the car against the smaller monthly payment, we miss asking important questions like, “How much will I pay in interest?” If the monthly payments seem reasonable when compared with the price of the car, it can seem like we’ve made a good decision when in reality it may end up costing us more than we ever planned to spend.

3. Selling Stocks

I discussed this issue a few years ago, but it’s worth pointing out again that anchoring isn’t limited to buying stuff. We do it when we’re selling, too. The classic example is the stock you bought last year for $50 a share. Today, it’s worth $30 a share.

Instead of assessing whether it’s a stock you should own based on your goals, you’re looking at the number. You tell yourself you’ll sell when it gets back to $50. By anchoring to the bigger number, you’re ignoring the other reasons that it may be time to sell, including opportunities to make investments that better fit your goals. It’s a decision that may end up costing you more than $20 a share.

Knowing that we’re inclined to anchor, the smartest thing we can do is take the time to figure out our real numbers. If you’re going to anchor, anchor on a number that’s relevant to you and your decision. Don’t let someone else set the number that determines if you buy or sell.

By taking the time to know which numbers really matter, like the actual value of a house or how much interest you’re paying, you’ll avoid this classic behavioral mistake. And if you’re really lucky, you’ll have saved enough so you can try Talenti’s or Jeni’s for yourself. But be warned: It’s a hard habit to break.

Article source: http://www.nytimes.com/2013/08/26/your-money/a-sweet-lesson-in-price-perceptions.html?partner=rss&emc=rss

Filed Under: Your Money Tagged With: , ,

You’re the Boss Blog: What Big Companies Get From Helping Small Companies

November 27, 2012 by Leave a Comment
The Agenda

How small-business issues are shaping politics and policy.

Jim Koch, Boston Beer Company.Gretchen Ertl for The New York Times Jim Koch, Boston Beer Company.

One question frequently comes up when The Agenda discusses the recent story about how the employees of Boston Beer Company sometimes spend hours helping small companies tackle the myriad problems of managing and building a business. The question is this: Don’t those employees have enough to do in their own jobs? Shouldn’t they be solving Boston Beer’s problems?

Companies that borrow money through the Brewing the American Dream program, which Boston Beer runs in partnership with a microlender, Accion, are presented with an extraordinary opportunity. They often get media exposure, and Boston Beer goes to some length to provide market opportunities, too. Not only does it sometimes become one of its borrowers’ biggest customers, it often works with them to develop new products based on its brews. Carlene O’Garro, for example, incorporated Boston Beer’s seasonal Harvest Pumpkin Ale in a pumpkin bread.

Most important, though, is the intensive, hands-on mentoring that Boston Beer employees undertake. As we described in the story, one staff member helped Ms. O’Garro, a nascent entrepreneur, figure out how to price her products for Whole Foods by actually going to Whole Foods and studying the competition. Then that employee, Mike Cramer, wrote a spreadsheet to report his findings. “Mike has spent hours with me,” Ms. O’Garro said.

So what exactly is in it for Boston Beer, besides good publicity and possibly good karma? The motives of Jim Koch, founder and chief executive, aren’t wholly altruistic. As a law and business school student at Harvard in the 1970s, Mr. Koch wrote a paper arguing that companies that are more socially responsible earn higher profits. “If you’re the only person who benefits from your success, you’re not going to have very much of it,” Mr. Koch said in an interview. “If more people benefit from your success, you’re probably going to have more of it.”

Plus, he said his employees’ often-extensive work with borrowers can have a direct impact on his company as well. “Brewing the American Dream is a way to expose our people to what it’s like to be a very small company struggling to survive,” he said. “Because that is essentially our situation.”

With close to $600 million in sales, Boston Beer is hardly a small business. But its competitors are multinational giants dozens of times larger. “Inside the company, it seems much more stable,” he said, “but from the larger picture it’s not. We are always on the edge of survival. When you’re one percent of the market, dominated by people with global scale, you’ve got to keep that spirit alive.”

All of which raises other interesting questions: At what point is a small business big enough to stop worrying about its own survival? When should it start to give back to its community?

Thoughts?

Article source: http://boss.blogs.nytimes.com/2012/11/26/what-big-companies-get-from-helping-small-companies/?partner=rss&emc=rss

Filed Under: Small Business Tagged With: , ,

As Consumers Cut Spending, ‘Green’ Products Lose Allure

April 22, 2011 by Leave a Comment

Sales that year topped $100 million, and several other major consumer products companies came out with their own “green” cleaning supplies.

But America’s eco-consciousness, it turns out, is fickle. As recession gripped the country, the consumer’s love affair with green products, from recycled toilet paper to organic foods to hybrid cars, faded like a bad infatuation. While farmers’ markets and Prius sales are humming along now, household product makers like Clorox just can’t seem to persuade mainstream customers to buy green again.

Sales of Green Works have fallen to about $60 million a year, and those of other similar products from major brands like Arm Hammer, Windex, Palmolive, Hefty and Scrubbing Bubbles are sputtering. “Every consumer says, ‘I want to help the environment, I’m looking for eco-friendly products,’ ” said David Donnan, a partner in the consumer products practice at the consulting firm A. T. Kearney. “But if it’s one or two pennies higher in price, they’re not going to buy it. There is a discrepancy between what people say and what they do.”

For instance, a 32-oz bottle of Clorox Green Works All-Purpose cleaner is $3.29 at Stop Shop. A 32-ounce bottle of Fantastik cleaner, by contrast, costs $2.89.

Indeed, outside a Whole Foods Market in the Chicago suburb of Evanston, June Shellene, 60, said she did not buy green products as often as she did a few years ago.

“People are so freaked out by what is happening in the world,” she said, before loading her groceries into a Toyota Prius. Of green products, she said, “That’s something you buy and think about when things are going swimmingly.”

Sales in most consumer-products categories dropped off during the recession. But according to an analysis by Sanford C. Bernstein Company, certain green products have fared worse.

“You see disproportionately negative impact from products like Green Works, out of the big blue-chip companies that have tried to layer a green offering on top of their conventional offering, and a relatively better performance from the niche players who remain independent,” said Stephen Powers, an analyst at Bernstein. Using data from the Nielsen company, Bernstein looked at sales for nearly 4,300 items in 22 categories, like cleaning spray, liquid soap, bathroom cleaners and detergents. It studied monthly sales from March 2006 to March 2011, the most recent data available. (Nielsen’s data includes mass market, grocery stores and drugstores but excludes Wal-Mart.)

Bernstein found that the market shares of green products generally were down from their peak — especially those offered by the big consumer-products companies. But the market share of the independent brands, like Method and Seventh Generation, is starting to increase relative to the shares of traditional brands’ green products in categories where they compete.

“In terms of the big players like Clorox, there’s no doubt that they’ve de-emphasized the brands relative to their early aspirations, and that’s reflective of what they are seeing from the consumer,” Mr. Powers said.

Green products are more expensive because the ingredients tend to cost more than their more conventional counterparts, and transportation costs are higher too because they are sold in smaller volumes than the big brands.

Green household products took off in the 1980s, with brands like Seventh Generation and Simple Green, which have gained a loyal following. As retailers like Whole Foods expanded in the 1990s, interest in the environment increased and competitors joined the fray.

Predicting that the market would continue to increase, mainstream manufacturers like S.C. Johnson, Clorox and Church Dwight introduced eco-friendly versions of their products around 2008.

But after an initial lift, sales largely dropped off, and the introduction of products slowed during the recession.

Article source: http://feeds.nytimes.com/click.phdo?i=f9dd192a2ea3cbe2a8a200458c8447a8

Filed Under: Business News Tagged With: , ,