Show your costs to boost sales
tips.ariyh.com
tips.ariyh.com
What people say they would do and what they actually do are 2 very different things.
The conversion rate of actual behavior needs to be tested for this to mean something useful.
Rather I meant that it’s a bit odd that costs are clearly specified, but the consumer has to calculate the profit themselves. In my mind, that actually makes it less transparent as high profit margins are what drive the crazy capitalist market we have today, and associating small values to material and labor doesn’t make me feel better when the profit is the “artificial” portion of my purchase price.
From the study's abstract:
> A preregistered field experiment indicated that diners were 21.1% more likely to buy a bowl of chicken noodle soup when a sign revealing its ingredients also included the cafeteria’s costs to make it.
From the linked article's sub-title:
> Sales of a chicken noodle soup increased 21.1% when people were shown the costs of making it.
The study's abstract mentions that they were more likely to buy a bowl of chicken; it's not mentioned that they actually bought it.
"Sales increased 21.1%" is equivalent as long as the unit price remained the same.
> People said they were 14.2% more likely to buy this chocolate bar when they were shown the version with a cost breakdown
Surely that cannot be correct. Possibly 14.2% of the people who were asked said that they would be "somewhat" more likely to buy X with more data stuck to its label (does any data improve sales? Did they A/B the label by adding random info?). This is very different from them acting upon it though.
You are right regarding the chocolate bar experiment.
That's why the researchers ran multiple experiments, some of which measured actual behavior:
- People were 16.1% more likely to bid for a gift card for an Everlane backpack (vs a J.Crew one) when they saw cost information about it
- Sales of chicken noodle soup bowls ($4.95) in Harvard’s campus canteen increased 21.1% when costs were disclosed
Just a minor comment: I find using decimals places (like 16.1% and 21.1%) in human experiments pretty irritating. It feels like false precision.
After all, these experiments must have confidence intervals. If I had to guess, I’d assume at least a +/- 5 ppts variability in all these numbers.
What’s your view on that?
I agree that the figures can vary for many reasons and we shouldn't expect them to be exactly the same (some things we don't end up controlling for).
At the same time, if we take the experiment of the soup for example:
They measured 9,227 sales of it so the 21.1% increase is quite robust and I'd expect the error margin to be much lower than 5% either way - so in some ways the precision is warranted.
I also feel that if I were to round a 21.4% to 20% I'd be miscommunicating the findings of the research :)
//> we finally have an absolute number of sales measured, but no way of knowing - representing all sales within a period or just cherry picked?
//> for the rest of the population, did it reduced sales?
//> was there any randomised test or not, because in the latter case there could be other biases we're unaware of
//> the increase is compared to what exactly?
//> any WHY is purely speculative as what was measured was WHAT people did. Internal motivation is in this case unproven, there is just a potential correlation.
//> confuses me to hell people taking about error margins and confidence intervals for something measured directly.
Right, but you'd round 21.4% to 21%, not to 20%.
Whether you say 21.1%, 21%, or 20%, you still have a single number. You could make an argument that decimal places like 21.147258% add clutter, but without an actual measure of uncertainty, all you're doing is reporting a summary of the data in the sample with different amounts of arbitrary rounding. That's not particularly helpful as a substitute for the full distribution.
You're also lacking cases where the markup is high, 500-2000% is common among a wide range of products, from Fashion to SaaS.
Edit: I'd also add, in the case of food products, if all vendors adopted the transparency strategy, once consumers see typical margins in that industry are in the 5-10% range, suddenly that not-unreasonably-priced organic chocolate bar looks like a high margin item...
and no one owes the author page views or their time either.
>This is a discussion board
Exactly, we're having a discussion on what the article is missing and why it matters.
It's the idea that this could work.
I want to encourage people to honestly communicate ideas to me and I want to discourage people who would discourage those first people.
I explicitly don't want to restrict only the highest-quality research. I want to permit some amount of scamming me.
The article does cover those cases explicitly:
> Extremely high profit margins (>55%) could trigger a negative reaction, although this was not tested.
Basically they didn't even bother because it's pretty clear that someone selling a commodity for a massive markup is not going to benefit from this approach. Of course, that doesn't mean this hypothesis isn't worth testing...
Disclosing your costs if you have a modest profit margin and also modest absolute costs is good signaling on multiple fronts (as long as you're credible):
- Higher parts/ingredients costs are a signal indicating good quality
- Low profit margins make customers feel like they're getting a good deal
- The appearance of transparency signals your own confidence in all aspects of your business
What sales decreased in relation to this? Would overall sales increase if all food items had costs listed? Or would people gravitate to the meals with the lowest margins, figuring them to be relative bargains?
It's really not simple to draw a conclusion from the limited data set here.
Especially with something relatively novel like this, results are very prone to bias since novelty has the tendency to increase purchase-intent in the short-term.
As far as audience, I'd say the audiences of folks interested in a $115 wallet, Harvard students, Everlane/J Crew shoppers, and craft cocoa buyers are on the more affluent and/or intelligent side, which may compound the novelty effect or at least have the transparency resonate more.
I suspect many consumers wouldn't like to know that the $1500 iPhone they just bought only has $400 worth of actual parts in.
I am too, willing to buy a $300 000 car w/ $100 000 in parts because it has a better user experience than a $30 000 car with $10 000 worth of parts.
https://www.counterpointresearch.com/bom-analysis-iphone-12-...
[1]: https://www.counterpointresearch.com/bom-analysis-iphone-12-...
Heh. Yeah 400 ;)
"Yes Maaam, we'll spend $200 of the money you're about to give us on a fancy campus with hammocks to try to attract good engineers. Oh, and the massive billboard outside that made you walk into the shop in the first place."
I guess what I've noticed is that although if you pressed them, engineers (across a range of fields) understand that businesses need to generate a healthy profit to stay afloat, they still seem to be uncomfortable with the idea of "profit" at all. And they seem to be surprised when you bring up the question of "how will you make money from that?" Whereas the "general public" tends to think of it with an approach of "make as much money from it as you can because it might not last."
I know that's not a very good description but it's the best I can do at the moment.
It was cringeworthy.
A better example might be a luxury brand wallet where they sell the illusion of better quality, but that may or may not be true.
1) They are paying more for quality materials, durability and perhaps a hand-made feel (that may or may not be in line with reality).
2) They are paying more so that they can get something that most others can't only because it's too expensive.
I really can't believe that people who buy $2000 handbags think that the handbag company is doing any R&D into handbags.
But perhaps they do...
This is neglecting software development, maintenance, new features rolled out, etc. Yes, you're overpaying beyond cost, Apple would go out of business if you weren't. The question is are you overpaying for the functionality or value you get out of the product/service and are the margins too fluffy.
In the case of a designer wallet or velben goods in general, you're really paying for the status and symbolism in the inflated margins. This may be true of some iPhone owners who don't use their phone or buy one every quarter but not most, they're getting utility and value out of the devices that's likely worth the cost.
Velben goods get a bit complex as well because of intangible value in social situations. Sure, that designer wallet is a waste of money. My $10 leather wallet does the same thing and is probably more durable (even blocks RFID, yay). There is much theater to life, however, and velben goods can land you in situations surrounded by those will wealth that leads to opportunities you might not otherwise have.
Impression and perception is difficult to assess value (advertising and marketing in business sure think its valuable), but you'll find you may get bumped in lines, have better service, land a job, or something else all because of such social impressions. This is the entire reason people don't wear flip-flops, athletic shorts, and t-shirts into the office or interviews and why some people carry thousands of dollar hand bags around. The question is: what's your ROI on these impressions? It's difficult to measure and frankly to me seems typically like a net loss. I personally think it's crazy and could care less if you waste money to flaunt wealth or play status games, but I've witnessed the effects first hand of success in this realm to not completely discard the intangible value that may exist.
Or indeed, most.
Apple is hardly shy about marketing itself as a purveyor of luxury goods.
And why would they?
Should they instead market themselves as a purveyor of shit goods? Sounds like a sure fire way to increase sales /s
I suspect that you'd find the iPhone purchase motivation is pretty much the same as the luxury wallet.
It's a similar thing with the backpack, but in the other direction - this price isn't low because we cheaped out on manufacturing and materials, it's cheaper than J. Crew because they spend too much on marketing.
The line item cost breakdown is an indicator of honesty and product quality, which of course increase trust. That's not going to work if you're selling $10 shirts for $120
He breaks down their exact costs, why they're currently selling them at a loss and why they'd have to raise prices 50% to make the dish profitable.
A lot of people were angry when they announced the wings were being taken off the menu. Here's his reply, I thought it was absolutely brilliant marketing.
https://www.facebook.com/Saddlebackbbq/videos/94074725667252...
1. Increase the price of wings 50%
2. Cheapen the ingredients
3. Take it off the menu until the price of ingredients drop
After surveying their customers they found demand would drop drastically if they raised prices. They don't want to cheapen the ingredients because it would hurt their brand so the only real choice was to take them off the menu.
They make the claim that they need to price products assuming 30% goes to food / ingredients, 30% goes to labor, 20% goes to fixed costs, and the remaining 20% is kept as profit. Thus, the increase in wing cost means they have to increase the price from $14 to $22.
However, the labor and fixed costs don't increase just because the ingredient cost increased. They list the new price of wings as $6.56. Assuming the $14 price was based on the formula, this is an increase of $2.36. They could keep the wings on the menu for $16.50 and make the same amount of profit as before.
Not about the chicken-wing issue per se... but the fact that a local small business has the wherewithal to make a corporate presentation on facebook for their community to judge.
That's really sweet.
I have some clients I'm extremely open with about team and jobs costs. Usually more experienced people who know we're all here to make a dollar, know a good job isn't the cheapest, know everything looks simpler before you actually do it. Generally operate on my preferred methodology of 'everyone be reasonable'.
With some people, not always but often more junior, I limit detail. Some people want to micro manage quote breakdown pricing, question and screw down individual costs to the bone. Or use your details to improve their job plan and go to the next vendor and see if they can get it a bit cheaper. Etc. So when you know these people or feels like it will be, as few lines as possible is best.
I counted a total of 6 different places where the user is asked to sign up for something or take some sort of action. Good lord.
Roughly every half screen of scrolling, the content formatting changes dramatically (and clearly some of it was subscription info, which is not how I want to start reading), and then I was at the end of the page... I'd failed to identify the "body" of the article and so closed that tab.
It is the same as showing where your ingredients come from. No product will show "made with GMO corn from the most productive industrial farms". If it is shown, it means there is something desirable about it.
Transparency isn't always a good thing. I think JCPenney’s tried it, and it was a huge marketing failure.
> Show your costs to boost sales for honest products
For example set up two companies, company 1 purchases the ingredients for cheap, does some minor amount of work on them, and sells them to company 2 for way too much money. Company 2 then turns them into soup and makes 0 profit. Cost breakdown on the soup makes it look like the ingredients were really expensive, but actually it's just that company 1 is making the profit instead of company 2, and they happen to have the same owners. (Note: Not legal advice... I don't know if this exact scheme would be legal, but I'm pretty sure schemes like it would be).
Across borders, it would be a huge violation of transfer pricing laws and result in huge penalties. But the marketing part of it would still be legal.
What you've described is actually pretty similar to how Coke/Pepsi is sold: Company 1 (Coke/Pepsi) makes the syrup, which they sell for inflated prices to Company 2 (the bottler/distributor), which then sells it to a store (Company 3) for a less-inflated wholesale price, and the store usually sells it at very small markup as a loss-leader.
I worry about companies lying to make numbers more "realistic" to customers or to hide marketing spend.
They did quite well, which probably had a lot to do with coming across as honest. Certainly more honest than the kind of vendor where you have to ask some guy with a really fancy watch for a quote - I've met a couple of those.
> Extremely high profit margins (>55%) could trigger a negative reaction, although this was not tested.
We don't see Google talking much about its costs, for instance.
Also, for "regular" physical goods it's more or less easy to do the cost break down in a clear way, but what about services and software?
And why doesn't the price include things like money paid to shareholders and ceo?
> Extremely high profit margins (>55%) could trigger a negative reaction, although this was not tested. Likewise, suspiciously low margins (e.g. negative or very low) could negatively impact the effect of trust that drives increased sales.
that seems like the important thing to test to be able to make such a broad statement.