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Note: The following post is a revised and expanded version of an earlier one on the paycheck cycle.

On the eve of each new month, a consumer ritual unfolds at Walmarts around the country.

At around 11 p.m. “customers start to come in and shop,” Walmart’s CEO of U.S. Business Bill Simon told a conference of investors last year (pdf of transcript here). Shoppers fill their carts with staples. Baby formula, milk, bread, and eggs. They browse until midnight when their government electronic benefits cards activate. Walmart’s dead-of-night sales zoom well above its daily average over the month.

Retailers have long known about this phenomenon, commonly called the “paycheck cycle,” in which cash-strapped consumers make big purchases when they get paid and are forced to cut back to the bone later in the cycle until the next paycheck arrives. In this tough economy, said Simon, the paycheck cycle is “extreme.” It can affect Americans at all income levels, but at the end of the month, that extremity is most crushing to the poor and the working class.

Continue reading here.

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How does an online retailer spur impulse purchases? After all, there is no physical store to design in ways that pry open pocketbooks. Amazon uses technology, primarily its one-click purchase button. Meanwhile, Zappos (a company that understands customer behavior as well as any) uses psychology. Namely, it offers free two-way shipping. Free one-way shipping is nice, but it usually costs money to return a product. Zappos eats that cost in order to promote more “maybe” purchases. After all, it’s easier to return than at a store. Thanks to a status quo bias, more “emotionally unready” customers likely keep their impulse dresses than return them.

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Assorted links

1) Nudging rules for charities.
2) Exercise meets commerce.
3) Just buy this one – a site that radically simplifies shopping (and requires a lot of trust in its consumer ratings). Hat tip: Rory Sutherland.
4) Washington State posts surgical infection rates at all state hospitals online. Hat tip: Maria Kovell.
5) Electronic prescriptions lead to higher non-adherence? Strange. Hat tip: Gilad Buchman.
6) A version of RECAP for bank loan fees in India. Hat tip: Mostly Economics.
7) What’s the secret to marketing the McRib? Artificial scarcity.

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We’ve been getting a few emails about the recent CalTech study (gated here) that finds that consumers are willing to pay as much as 50 percent more for goods they can see and touch versus ones they can only look at with pictures or imagine with words. It’s an interesting study, but the Nudge blog is cautious about extrapolating too much from it. For example, it doesn’t warrant drawing clear implications about online vs. brick-and-mortar retailers, specifically why the latter can automatically charge higher prices.

For one, the study uses an auction process to determine consumers’ willingness to pay for a good. In other words, the value they put on them. That’s of course not how consumers buy products in the real world. The role of the price tag is a key variable that’s left unexplored. Why should anyone expect perceived value to be unaffected by price? The behavioral economic lesson is that consumers obtain a utility from the good and a separate utility from the transaction. This second form of utility is critical to a purchase decision, but is not part of these experiments.

An interesting side note that doesn’t seem problematic for interpreting this study is made by consumer behavior researcher Andrea Morales.

Shoppers do feel more connected with products after touching them, but usually dig deep into the sweater pile to avoid buying one that’s been touched by strangers.

“Even though they want to touch them, they really don’t want other people to touch them,” Morales said. “This is one application of disgust at work.”

It’s pretty easy to keep most of the inventory in the back.

The study’s authors do highlight one place where the findings have clearer implications. If you work at a restaurant, at the end of a meal always bring out a dessert cart.

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From the Chicago Tribune:

“There’s a reason why produce and often the bakery are the first sections you hit,” Underhill explained. “First of all, the produce section tends to be lit theatrically, so that everything looks better in the store than it ever will when you get it home. Almost every supermarket knows that if they can get your saliva glands working, you will tend to buy more. So there’s a reason why the bakery is up front, or the flowers are up front.”

The dairy case is usually way in the back as a way to pull the shopper as deeply into the store as possible.

“The dairy section has both the highest number of … shoppers and historically has the highest conversion rate,” Underhill said. “There are very few people that go look at milk and not buy it.”

So on your way to getting the milk, you walk through the middle of the store 5 — historically where the tougher-to-sell items are displayed — past jumbo olives and potato chips that you had no intention of buying. But seeing them on the shelves …

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The Nudge blog has never bought anything off Gilt Groupe, but does agree with Virginia Heffernan that it is “brilliant and insidious.” As far as successful businesses go, it mines lots of powerful behavioral insights. It taps into aspiration by exclusively selling luxury goods, a lot from brands that are so exclusive you hadn’t heard of them before logging onto Gilt. By offering deep discounts it uses anchoring to give buyers super high reference utility (ie. the feeling that you’re getting a great bargain). It taps into two types of scarcity–products and time–to overcome procrastination. A new sale starts every day but there’s only a few luxury goods actually in stock so you have to hurry up and buy them NOW! because they aren’t going to be around in 15 minutes. It taps into competitiveness. Demand does way outstrip supply so you have to be quick on the click to get your order in.

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Toys “R” Us is counting on an Eisenhower-era tactic to get consumers to spend this Christmas. The toy retailer will begin offering a “Christmas Savers Club” on Wednesday that allows shoppers to put money away with the company for holiday gifts. Participants will receive a card similar to a gift card, and can contribute funds to it through cash or credit card payments. As an incentive Toys “R” Us will add 3 percent interest on the balance.

Full story in NYT.

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More amusing signs collected by NYT readers here. Hat tip: Christopher Daggett.

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Reader Ted Unnikumaran writes in to say he recently realized he’s been staring at this nudge (and more) from Aldi Grocery stores for years:

One of the first things you realize when you shop at Aldi’s is that in order to get a shopping cart you need to deposit a quarter into the shopping cart and this releases the shopping cart from the other carts. When you are done shopping, you can get your quarter back by sliding the shopping cart back into the back of the other carts at the front of the store. What this does is it forces customers to return the shopping carts, and Aldi’s doesn’t have to hire anyone to go through the parking lot gathering all the carts.

Its also created a small market for people who want to return your carts for you. I shop at the store in Langley Park, MD and there usually one or two gentlemen who will politely ask you if you would like help unloading your groceries. In return, they will return your carts for you and keep the quarter as tip. If you politely say “No thanks” they leave you alone.

The company’s web site says “this expense-saving tradition (no rolling carts to chase and no damaged cars!) has become a legendary part of the ALDI culture.”

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There’s a marketing case study in here:

(Dr. Kivetz, of the Columbia Business School and Anat Keinan of Harvard) managed to change consumers’ behavior simply by asking a few questions to bus riders going to outlet stores and to other shoppers shortly before Black Friday.

The people who were asked to imagine how they would feel the following week about their purchases proceeded to shop thriftily for basic necessities, like underwear and socks. But people who were asked to imagine how they’d feel about their purchases in the distant future responded by spending more money and concentrating on indulgences like jewelry and designer jeans.

From John Tierney’s piece on oversaving.

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