A Retail Designers approach to customer purchasing economics. By Vic Kass

Hand in Hand with retailers it is possible to build a more strategic approach to unlocking Profit by Design.“Three for two” offers and extended-payment layaway plans are widespread because they work! This is not simply because people prefer free incentives to an equivalent price discount or that people often behave irrationally when thinking about future consequences. Incentivised purchases build brand loyalty that transcends mere discount. This provides the perfect tool for increasing margin, the definition of hero products and the ability to trade up. However, few companies use this knowledge in a systematic way, ignoring the abilities for trading up for more pedestrian options of price comparison and marked down produce that, in isolation does little to build loyalty, but actively invites competition.

In considering this concept I’ve thrown out a few ideas on practical techniques that should be part of the strategic approach between retailer and designer.

Below are just 3 of the many favourite 'Profit by Design' Techniques.

1. Positioning of Margin products
The 3 “P’s” - Power Product Positioning explains why marketers often benefit from offering a few clearly inferior options. Even thought these may not sell, they can increase sales of the superior products that the store really wants to move. An excellent example is that of many of our client restaurateurs who frequently find that the second-most-expensive bottle of wine is very popular, as is the second-cheapest. This lies in the fact that customers who buy the former feel they are getting something special but not going over the top. Customers buying the latter feel they are getting a bargain whilst not being perceived as cheap. Another way in which to consider the consumer “offer” relates not only to the products a company has available to purchase, but to the way in which it displays them. Our research suggests, for instance, that ice cream shoppers in grocery stores look at the brand first, flavour second, and price last. Organizing supermarket aisles according to way consumers prefer to buy specific products will make customers more responsive and less likely to base their purchase decisions solely on price, allowing retailers to sell higher-priced, higher-margin products. This explains why shopping aisles are rarely organized by price. In contrast, for more basic purchases, customers generally start with price, then function, and finally brand. Clearly then, this is not a case of one layout fits all but emphasises the need to have regard to both customer thinking and the nature of the product when considering the merchandise layout.

2. Avoid information and product overload
Despite our love for choice, designers and retailers must be wary of generating visual “choice overload,” which makes consumers less likely to purchase. In a store experiment, some customers were offered the chance to taste a selection of 20 wines, whilst others were only offered a limited selection of 5 wines. Perhaps surprisingly, whilst the greater variety drew more customers to the sampling, it ultimately resulted in fewer purchases than the consumers that were restricted to the 5 wines on offer, resulting in the smaller group sales being five times higher. This suggests that huge choice means customers have to work harder to find what they seek. This is further perpetuated by a degree of heightened awareness generated by increased choice and the negative effect that results from having to compromise and pass up desirable features in other products. Consequently, reducing the number of options available makes people more likely to reach a decision and leads them to feel more satisfied with their choice. The key is therefore is to provide an optimum level of product availability and service whereby the customer will look to the retailer to advise them of the best suit for them, increasing trust and building loyalty. There are, of course, additional financial benefits to be had through enhanced stock management leading to lower costs and improved efficiency which will ensure availability meets fluctuations in demand so that customers will always remain satisfied as products will be available and avoid the dissatisfaction resulting from “stock-outs”. Overstocking also results in increased costs for the retailer for several reasons.
• Increases warehouse space needed
• Higher insurance costs needed
• Higher security costs required to prevent theft
• Stocks may be damaged, become obsolete or go out of date
• Cash tied-up on stock purchase could have been better spent elsewhere

3. Make a product’s purchase less painful

In almost every purchase, consumers have the option to walk away and save their money for another day. Consequently the retailer and designers task is not just to beat competitors but also to persuade shoppers to part with their money in the first instance. According to economic principle, the pain of payment is the same for every pound spent. In practice though, many factors influence the way consumers value a pound and how much pain they feel parting with their money. Understanding customer “mental accounting” affects product placement and customer decision making. Consumers use different mental accounts for money they obtain from different sources and the experience of the purchase. Windfall gains/pocket money or treat products are usually the easiest for consumers to spend and should lead retail hierarchy. Income is less easy to relinquish, but purchases the “essentials” food, fuels, etc. The erosion of savings is without doubt the most painful of all. These purchases tend to be breakdown and maintenance items and need to be acknowledged as a means to an end, clearly identified and set at the bottom of the retail chain.