Why Store Brands Don't Work

One of the prevalent anxieties of the day is inflation, that the prices of products and services, especially basic foods and household products, will spiral out of control. Having spent this lunar new year in my home town of Johor Baru, I heard on the radio that the prime minister of our neighbour Singapore had this bit of advice in his new year message for his fellow citizens – choose house brand products over branded products in order to reduce the cost of daily expenditures. A follow up survey of lower- to middle-class consumers, however, reported that only 5 out of 10 people would purchase house brand items, and of that, predominantly only non-food items, even in the face of inflation.

We learn, therefore 2 things: one is that socio-economic micro-management is still alive and well amongst the leaders of our neighbour down south! More relevant to this column, however, is another insight: that pricing and the human psyche have a more complex relationship than given credit for.

Nobody knows their wine

A recent study by academics at the California Institute of Technology highlights this. In the experiment, 20 volunteers were given 5 sips of wine each. The volunteers were told that the 5 sips of wine corresponded to 5 different wines at 5 different price levels, from $10 to $90 a bottle. However, what the volunteers did not know was that they were actually only being served 3 wines – and that 2 of the wines were being served twice, once with a fake price and another time with its true price.

While sipping their wines, the volunteers also had their brains scanned to monitor the neural activity in the medial orbitofrontal cortex - an area of the brain believed to encode pleasure related to taste, odors and music.

The result was simple and stark: inflating the price of the bottle enhanced a volunteer’s pleasure at drinking it, as shown by the neural activity from the brain scanners. When the experiment was repeated without price information to the volunteers, they reported differences in ratings in line with the 3 “real” wines and no difference between the ones served twice – which means pricing was the key variable which affected their pleasure cortices.

And if you still think that’s because lay people don’t know their wines, the experiment was duplicated with volunteers from the Stanford University Wine Club with similar results.

Evolutionary explanations

Most media reporting on this research have basically homed in on the simple extrapolation: in certain products, you can make your customers enjoy them more, simply by increasing the price. The Economist, however, probes deeper into the question of why this occurs, drawing from evolutionary perspectives. In conversations with Dr. Antonio Rangel from the research team, it is postulated that pricing is an efficient mechanism for learning quickly from the collective wisdom of the community: what is good is in higher demand and therefore has a higher price; in the case of what is bad, the opposite is true.

This is the same mechanism which explains why queues that form around eating outlets, whether they be humble rojak vans or high-priced doughnut stores, tend to lead to even longer and longer queues. “If there are so many people eating there, then it must be good,” goes the collective wisdom.

Another possible explanation is that higher priced, exclusive products provide avenues to show off, projecting a higher status and, of course, increased mating opportunities – the “power and sex” argument. This would explain how certain establishments can get away with charging exorbitant figures for set meals, especially on Valentine’s Day, with customers still claiming to have enjoyed the experience.

Marketing implications

Either or both of these explanations may be true. The Economist’s review of the research ends on a coy note: “[this] research also has implications for retailers, marketing firms and luxury-goods producers. It suggests that a successful marketing campaign can not only make people more interested in a product, but also, truly, make them enjoy it more.”

BMW owners out there can certainly attest to the cerebral pleasure of seeing a well-produced BMW ad on TV, complementing the visceral pleasure of actually driving one. But since this column started with the house brand discussion, let us end with 2 somewhat rhetorical questions on their effectiveness:

1) If a retailer chooses to sell house brand items (such as tissues, canned food, water and other necessities), is it pursuing the best strategy by packaging it in bland, plain, boring colours which signal “cheap, cheap, cheap” to customers, therefore robbing them of any sensory pleasure or confidence in the product, no matter how small?

2) In this era of food scares, lead and cadmium contamination, does a retailer have any business selling anything that is unbranded and brought in by a margin-hungry purchasing department buying directly from China manufacturers without a quality program in place? The bottom end of the market is sometimes as dangerous a place to be as the top end.

Retailers out there, good luck. Solving this problem may boost your profits while serving the greater good of reducing inflation.

As appeared in "The Sun", 15th February 2008. PDF version here.

Pricing Your Service Optimally

The following is a transcript of an interview with Professor Irene C. L. Ng, Associate Professor of Marketing, Director of the Centre for Service Research and Head of Postgraduate Studies at the School of Business and Economics, University of Exeter, UK, who is back in her native Malaysia for regional conferences and lectures.

Gabriel Ng (GN)
Thank you for taking the time to speak with me, Professor.

Professor Ng
(Prof Ng)
My pleasure.

GN
We’re here to discuss your new book, “The Pricing and Revenue Management of Services: A Strategic Approach”, recently published by Routledge in their ‘Advances in Management and Business Studies’ series.

Prof Ng
Done your homework, I see.

GN
Always. Let me get right to the point: your research in this book is exclusively about services. Why? What makes services so different from products, that you want to highlight them in your book?

Prof Ng
There is very little understanding of pricing generally and even less for services as they are usually intangible, perished upon production, simultaneous in consumption and production and often inconsistent in delivery. Services that exhibit such characteristics pose a huge challenge to pricing.

GN
Your book features 11 service strategies for higher revenues through pricing and revenue management, probably of most interest to marketing practitioners. Care to take us through a few of them?

Prof Ng
That’s quite a bit to go through and I’m afraid we won’t be able to fit all that needs to be said. Suffice to say that they provide managers with innovative ways of pricing. The book is part of the Routledge ‘Advances’ series so you would expect cutting edge service strategies to help companies get ahead.

GN
Hmm. And here I thought that “First world services at Third world prices” was all one needed to know about a service strategy here in Malaysia.

Prof Ng
Only if you want to be less profitable! Services have a big potential to increase their revenues. Some of the companies whom I work with, and who have traditionally been in manufacturing, are now earning greater revenues from services. For example, Rolls Royce revenues are 54% from service, and BAE Systems are also 50% service. What they, as well as other companies, hope to understand is how to price based on value and how to grow their revenues from service.

GN
So who do you think in Malaysia would have the most to benefit from reading your book? Don’t be shy, now, you could be identifying potential customers.

Prof Ng
Any company interested in value-based pricing and innovating in service.

GN
Not rising to the bait, I see. Fine, then. Why is it so difficult for service firms to price optimally?

Prof Ng
Unlike goods, services are often sold before production/consumption, so it’s often sold in advance. This implies that risk and uncertainty is always associated with the pricing of services, and having to price while taking into account customer perception of risks in purchasing services makes it even more difficult. Marketers still think that cost-based pricing is still the way to go. In services, cost is meaningless – almost all of it has been sunk and are fixed costs and marginal costs are negligible. The way to price services is based on value, moderated by the capacity of the service.

GN
Like Air Asia? The ticket prices increase as the capacity fills up?

Prof Ng
That’s only the capacity half of the story. The other half (value-based) is still not well understood which is a large part of the 11 strategies in the book

GN
Sometimes, when I’m on an Air Asia flight that’s full, I feel like standing up and asking everyone what they paid for their flight, just to compare and see. What do you think about that?

Prof Ng
The power of value-based pricing is that customers are willing to pay different prices. No one is holding a gun to their heads. In the end, they buy at the price they are willing to buy, whether at $5 or $100. Understanding how to price a service from a value perspective helps firms increase revenues and make customers happy too. It might sound like its too good to be true but the book will explain why and how.

GN
Last question: I’m a columnist and therefore a service provider. How do you think I should increase my revenues?

Prof Ng
You have a limited capacity to write, time-wise. If you have 4 publishers vying for your time, your revenues should increase as your capacity reduces, if you price it right. However, you also can choose what you wish to write about, and if your content contributes value to the publisher, you will also be able to increase your revenues. Capacity-based and value-based pricing have tensions, and you should know how to manage the tension optimally for your own benefit!

GN
Hmm. I was thinking, “Ask for more money”, but I guess that’ll do! Well, that’s all the space we have for this week. Thanks for your time, Prof!

Disclosure: Gabriel Ng has worked in consumer marketing for 8 years, but has been Professor Irene Ng’s brother for much longer. Find out more about Professor Ng’s new book, her research and her consulting work at the University of Exeter at http://www.ireneng.com.

Unedited version of column that appeared in "The Sun", 23rd January 2008. Edited PDF version here.

Spoil Market!

Title says it all, doesn’t it? Surely in one’s working life, one has heard the phrase, “Don’t spoil market, lah”. According to the lexicologists at a satirical Singapore website, this refers to the actions of “someone who does his work so well, he makes his colleagues look bad.” However, that is surely only one way to interpret it, and so let’s bring some intellectual rigour to this diaphanous, oft-used phrase.

Market “spoiling” on 2 fronts
The most obvious way the phrase can be alternatively used is when you buy something and are deemed by others to have overpaid for it. This often happens for services since there can be more ambiguity in how services are priced. (“I went to Ah Yap yesterday for a massage. It was sooooo good I tipped her RM10.” “What? You really spoil market lah!”). We can call this demand-side market spoiling.

The implication seems to be that you are spoiling the market for others who are less willing to pay the price that you paid, and that the supplier of the service may increase price and seek out other high-paying customers like yourself while ignoring low-paying customers like them completely.

Similarly, in the labour market, an employer can also be deemed to spoil the market when he overpays or provides extraneous benefits to pampered employees. (e.g. overheard at HR offices around town: “Did you see those pictures of Digi’s corporate office? It’s like the Google campus! Got waterfalls and free food! Really spoil market!”)

The second type is supply-side market spoiling. Like the example of the overeager worker above, companies can also do the same when they supply their goods and services. No one can ignore the market spoiling power of such brands as Wal-Mart, Air Asia and Dell when they first brought their low-cost wares to market.

“Spoiling” their day
When people say “you spoil market”, it is often passed off as a joke, but also as a scolding. In this sense, it is important to be clear on the reason for your “spoilage”.

Dumping is often the suspected motive behind supply-side market spoiling. Companies that are overstocked or want to aggressively gain market share often muscle in by offering ultra-low prices. This grouse is probably legitimate, but it should be noted that there is a very fine line between this category of firms and those who are actually able to sell their wares at a cheaper price and book a decent profit, such as the low cost leaders mentioned above.

Poor information is often an accusation for demand-side market spoiling – you overpay because you don’t know better. But what if you do? Are the kinds of benefits purportedly lavished on Digi employees a result of corporate vanity or because, at half the headcount of rivals Celcom and Maxis, Digi staff are simply more productive and therefore can be treated better? Would one say other companies with exemplary service records like Shangri-La, Direct Access and Singapore Airlines are “overpaying” their staff?

The ugly side
As a marketer, beholden to your bosses/shareholders, your justifications for “market spoiling” are your own and usually subject to financial inspection – your bottom line will be your conscience. However, I have a personal observation on why the phrase “spoil market” persists to this day in popular usage. It actually reveals 2 ugly sides to our behaviour.

Demand side accusations of “spoil market” are really a reflection of our unwillingness to reward good services rendered. For instance, there is a poor tipping culture here in Malaysia, since most people assume it is covered by the standard service charge of 10%. However, in more developed countries, where services form a larger part of the economy, service charges are usually unstandardised and tipping is wholly discretionary, ranging from 10% to 25% or more depending on how pleased the customer is.

On a larger scale, corporate clients often balk at firms who price their services accurately and deliver on-time and on-budget, thinking they will be guilty of “market-spoiling”. Instead, they prefer to go for less responsible firms who throw attractive lowball prices but who hide behind “unforeseen” future overruns which end up costing the same or more. Sound familiar?

Supply side accusations of “spoil market” are a reflection of our tendency to collude. It is no secret that Malaysian companies in similar industries, even “fierce” competitors, like to gather together for regular meetings to catch up, share news on the market, shop talk. I’m not saying that anything bad goes on at these meetings (picture eyes rolling here), but let’s just say that in many developed countries, such regular interaction between competitors would inevitably lead to a visit from investigators in the domestic trade ministry.

For marketers, this poses a two-pronged challenge: first, should you focus on what your rivals are doing or on what your customers want from you?; and second, especially for those in service industries wanting to climb up the quality ladder, it can be supremely difficult searching out customers who are able to recognise and reward quality when they purchase it, instead of those customers on the endless look-out for the chimera known as the “cheap and good”.

Which way should your firm go? Now, telling you would really be spoiling the market!

(reprinted from The Sun, December 5th 2007. e-paper link here.)

To G1 or to G2, that is the question.

I’ve just become a father. It’s usually one of the biggest steps in a person’s life, becoming a parent, but lately, what has been troubling me (other than preparing the checklist of things you need to buy) is whether I should raise my daughter as a G1 or G2.

Oops. Maybe I need to backtrack a little.

About a month ago, an opinion piece in The Star from members of INSAP, the MCA’s think-tank, introduced the concept of 2 distinct groups of Malaysian Chinese, the G1 and G2. According to the article, the G1 are Chinese-speaking, Chinese-schooled and comprise about 85% of the Chinese population, while the G2 are English-speaking, English-schooled and comprise 15% of the same. The G1 subscribe to the notion of the three pillars of Chinese society – namely Chinese schools, Chinese associations and Chinese media, whereas the G2, well, they are the Christians, peranakans and “part of the Lions and Rotary Club set”.

The article was unusual in its candour, doubtless expressing a widespread stereotype latent amongst many Malaysian Chinese. From a demographic standpoint, it is interesting that one’s preferred language is being endorsed by the MCA as a form of social delineation.

G1, G2 or G1½?

Talk to Malaysian Chinese and you’ll often find that they are comfortable with BM and their dialect, but they then lean heavily towards either English or Mandarin/ Cantonese/ Hokkien. G1’s do read Chinese papers and want the government to leave them alone, while G2’s do read English papers and tend to vote Gerakan (their words, not mine!). This was the basis of INSAP’s argument for the delineation.

Stereotyping, however, is a blunt instrument, in the sense that it often hides as much as it reveals. A respondent to the commentary took issue with the G1/G2 profiling, claiming he had written 2 Chinese books, married a Chinese-speaking wife but was English-educated and spoke English at home, and therefore called himself a ‘G1½’.

Life in a G1½ household

I’m probably G1½ myself. I think and write in English. However, Mandarin is my ‘primal’ language since I was brought up speaking it in my home and I often slip into it unconsciously when speaking. In our ‘rojak’ society, it is almost impossible to be monolingual during the course of the day, anyway.

I also married a G1½. My wife speaks better Mandarin than I, and has a more natural aptitude given her family is Mandarin-speaking. Still, she studied the humanities in school and talking to her, you would not think she aced English Literature and History during her ‘A’ levels

Our household consumption is a hodge-podge of Eastern and Western brands. Chinese herbs sit beside our stash of Nurofen. Birds’ Nest from Eu Yan Sang. Illy Coffee. ‘Shin’ Korean noodles. The TV we tune in to runs the entire gamut of English and Chinese offerings available on Astro from Wah Lai Toi to the History Channel to Channel ‘E’.

Defying Stereotyping

Concentrating so much on the G1/G2 divide may lead one to miss the trends affecting our society, which is that there are more and more G1½’s every day. The younger generation is largely more clued in to what is needed to succeed in today’s world, and you will find effective trilingualism, or even quadrilingualism, amongst the best and brightest of the young. For instance, a foreign visitor that I entertained recently observed that the average Chinese executive speaks 4 languages during the day: a) BM to Malay colleagues; b) Mandarin to Chinese colleagues; c) English to the boss; and finally d) dialect (Hokkien/Cantonese etc.) at home with the family.

The smartest are able to weather this cacophony of languages in their head with ease. Usually, these are children of far-sighted parents who are compensating for an in-built bias – either they deliberately stressed Chinese education because they spoke English at home, or vice versa. INSAP’s dismissal of G2 parents sending children to Chinese schools simply because of a perceived higher quality of education misses this point, and misses also the increasing number of G1 parents sending their children to ‘international’ schools. Parents like these want to make sure that the best possible choices are available for their children when they grow up, and that means an inclusive, broad-minded and multilingual education. When it comes to marketing in Malaysia, there is no such divide: you’re either multilingual or you’re not in marketing.

I confess I would want my daughter to be like that. But then again, I’d also want her to critique Plato and Confucius with equanimity, to know how to spot a fake Louis Vuitton from 30 metres, and to know how to steam a ‘soon hock’ for her father when she grows up. All very reasonable, I think.

(reprinted from The Sun, 14th November 2007. e-Paper link here.)

*Update. INSAP's reply here. More on INSAP here.

Marketing in the Facebook Age

To paraphrase a book review of Lord of the Rings, the English-speaking world is now divided into two – those who are part of Facebook and those who will be. If you’ve been wondering what the fuss is all about, Facebook is essentially social networking done right. The developers have cleverly isolated the key elements that people want from such a website – re-connecting with old friends, keeping in touch and interaction – and pioneered a unique approach to satisfying those needs in such a way that surpasses previous attempts from Friendster, LinkedIn or Myspace.

One may sniff at such an incremental improvement, but one should remember that Google “only” improved upon Yahoo’s search capabilities and look where it is today. Facebook’s global membership has grown exponentially since opening its doors and has reached a roster of 43 million active users after 3 years of operation. Locally, the statistics are also impressive: from virtually zero in the 1st half of the year, the ‘Malaysia’ network of Facebook has grown to 70,000-odd members, and is growing at the rate of roughly 30% every week.

Why Facebook is better

Virtually every Facebook joiner has the same experience – you are bugged by friends to register, you do so, you find a few friends, but soon you are inundated by other friends who have somehow found you and then you spend copious amounts of time “catching up” by reading other people’s profiles. Such is the genius of their profile layouts that a friend you have on Friendster suddenly seems more interesting when he’s on Facebook!

Secondly, Facebook is an uncluttered environment which emphasises what its membership base most wants to do – stay in touch. It consistently strikes a satisfying balance between privacy for oneself and curiosity about others. In Facebook, a member’s home page is a veritable news feed of all the important things happening to his community, and similarly every significant action or comment you make on Facebook is reported to your community. Are you getting engaged? Got a new job? Having a tough day? Or just simply going some place tonight? One brief update and *click* all of your friends will know.

Thirdly, Facebook structures interaction through the sharing of hobbies, games and interests. It has cleverly outsourced this to 3rd party developers who create applications on the Facebook platform that integrate well into the user’s profile page.. Whether its music, games, hobbies, religion or others, all have applications which automatically seek out those friends with the same interests. The combination of such applications, on top of Facebook’s already potent user-generated content, creates a compellingly “sticky” environment where half of all registered users log on daily or more just to see what is going on in their world of friends.

Marketing Implications

But what does this mean for marketers? Google rewrote the book on web advertising with its AdSense application and its promise of targeted advertising leveraging on its ubiquitous search engine. What about Facebook?

In its current embryonic stage, Facebook may best be understood as word-of-mouth writ large. Any campaign with a viral marketing component has to consider Facebook for efficiency reasons. Case in point: an expatriate’s leaving do was recently held at a Mexican restaurant on Jln Semantan. I know this because I was notified in my community news feed that a friend of mine attended it. The point is, its not just the invitees, but all the friends of the invitees that now know there’s a Mexican restaurant on Jln Semantan. Do they serve grilled fish tacos there? I don’t know, but I’m certainly going to find out.

Furthermore, Facebook aspires to bring some demographic order to web advertising. Although as a user it is possible to have a blank profile up, half the fun is actually sharing what your interests are and what you do. That translates on a massive scale to a potentially powerful meta-database for larger advertisers. Facebook is holding out the promise of targeted Internet advertising that does not rely on search for the targeting but rather location and demographics – a long-held dream for advertisers who want a more active campaign rather than a passive keyword-based one such as Google’s.

Finally, Facebook is being seen as a poster boy for Web 2.0 with its infrastructure for shared web applications, and is in fact being spoken in the same breath as Yahoo or Google when it comes to that coveted ‘portal’ status. With the 6th most trafficked website currently in the USA, it is no wonder, then, that the shareholders were offered US$1.6 billion for the company by Yahoo and still had the gall to turn it down. Its early days yet but the future of web advertising may again be turned on its head by the Internet’s newest kid on the block.

(reprinted from The Sun, 10th October 2007. e-Paper link here.)

Dealing with Fear and Greed in Marketing

A very senior sales professional once wrote to me, when I was a wee trainee fresh out of school, “Fear and greed motivates almost all buying behaviour. No, wait, that’s wrong. Take away that word ‘almost’.”

Many of you must have heard one variation or another of that old saw before. Fear and greed are indeed two of the most powerful human emotions, motivators of our actions since caveman days to avoid risk and acquire what looks rewarding. The literature on these two emotional drivers in decision-making is quite lengthy, but it is commonly discussed in the world of investments, less so in marketing and consumer buying behaviour.

Is it true?

Do we truly buy things only out of greed or fear? Throw all kinds of products up in the air and you do find that they fit… if you stretch the concepts of fear and greed a little (ok, a lot). Rice, bread, cooking oil, milk and other necessities? Yes, we buy such necessities out of fear of running out of them. Computers, handphones and laptops? Sure, we buy them out of ‘greed’ for the latest gadgets and what they can do for us. Luxury cars, yachts and planes? Classic greed. Insurance, home alarms and vitamin supplements? Classic fear. The list goes on and on. Try it with the product or product category your company operates in, and you will find fear and/or ‘greed’ is around the corner in some guise or another as a simplification of the buyer motive. (perhaps ‘acquisitiveness’ would be more euphemistic instead of ‘greed’?)

New perspectives on Fear and Greed

If you accept that these two primal emotions play a huge part in consumer buying behaviour, a new book taking a neuroscientific look at fear and greed and their effects on investing may have some valuable lessons for marketers. Jason Zweig’s “Your Money and Your Brain” (Simon and Schuster 2007) highlights several important facets of our brains’ reaction to fear and greed, but for the purposes of this column, I’ll mention two.

First, anticipating a reward is much more powerful than actually getting one. This is the ‘thrill of the chase’ which we are all so familiar with, and this thrill is actually much more powerful than the pleasure received when the quarry is ‘caught’. Functional magnetic resonance imaging (fMRI) scans of experimental subjects show that neuron signals fire more significantly during expectations of payouts than they do when the payouts are actually received. This partly explains why lottery ticket sales increase dramatically when the jackpot rolls over week after week – millions of people become excited at the prospect of winning hundreds of millions (as opposed to mere millions) and the lottery ticket sales skyrocket.

Secondly, another insight with regards to fear is our brain’s inability to measure risk in proportion to probability. Instead, explains psychologist Daniel Kahneman, "we tend to judge the probability of an event by the ease with which we can call it to mind." Hence, people tend to fear nuclear reactors much more than sunlight, even though the worst nuclear accident in history, Chernobyl, killed fewer than 100 people, whereas 8,000 people a year die of sun-related skin cancer.

Local lessons

Brain scans and new books are one thing, but experienced business practitioners probably know these things intuitively through experience. What are some examples of local marketing which address these 2 issues of anticipated reward and fear of the improbable?

A recent buka puasa trip to a well-known local restaurant at Mid Valley Megamall was an interesting experience. Mounted around the restaurant were LCD TV’s displaying mouth-watering videos of the preparation and garnishing of the restaurant’s signature dishes, which no doubt helped customers to decide what to order but also definitely whetted their appetites as they waited for their food. Overall, this provided a much more enhanced dining experience.

As for fear of the improbable, you may notice around KL billboards which advertise the services of a cord blood bank. A cord blood bank stores the cord blood of a newborn baby, as it is rich in stem-cells and can be used for life-saving transfusions in the future in case of diseases such as leukaemia and other blood or autoimmune disorders.

The advertisement features a butterfly on the nose of a cute baby boy, with the words: “Don’t let it fly away, mom!” This single picture succinctly draws attention to the ultimate beneficiary of the service (the baby), the fear of letting something potentially precious and life-saving slip away, and, allegorically, the comparative low cost of making sure that precious thing is saved (just catch that butterfly…).

The approaches of both these companies also illustrate that appealing to the emotions of fear and ‘greed’ is not straightforward, and requires subtlety and creativity in today’s consumer market. For instance, in the case of the cord blood bank, the fear of letting something precious slip away was highlighted, which is something everyone can relate to, instead of the fear of the diseases which might strike our children, which would be much too negative in a nationwide advertising campaign.

Interesting? Effective? A final disclosure: I’m both a customer of that cord blood bank and a regular at that local restaurant, so the strategies must have worked on me!

(reprinted from The Sun, 19th September 2007. e-Paper link here.)