A Framework for Understanding the Consumer Response to Ancillary Revenue

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A Framework for Understanding the Consumer
Response to Ancillary Revenue

• Stowe Shoemaker, PhD
• University of Houston

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Goals of Seminar

• Introduce Consumer Buying Model
• Investigate how each component of the buying
  model impacts likelihood of purchase
• Show how behavioral economics can be used to
  increase revenue
• Allow time for questions

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The Purchase Cycle
WOM
Brand Advocate
Repeat Purchase
Loyalty Circle
Satisfaction
Trial (Initial Purchase)

• Barriers
• Switching costs
• Perceived risks
• Lack of information
• Method of Payment
• Perceived Fairness

Dissatisfaction
Complain
Switch
Why Switch?
Need Recognition
Awareness/ Search/Evoked Set
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Barriers to Purchase

• Risk
• Switching costs
• Lack of information/too much
• Method of Payment

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Buyers Most Sensitive to Risk

• Monetary Risk Relatively little income and
  wealth are most vulnerable
• Functional Risk Alternate means of performing
  the function or meeting the need. Practical
  consumers are most sensitive.
• Physical risk Consists of physical vigor,
  health, and vitality. Those who are elderly,
  frail, or in ill health are most vulnerable
• Social Risk Consist of self-esteem and
  self-confidence. Those who are insecure and most
  uncertain are most sensitive
• Psychological Risk Consists of affiliations and
  status. Those lacking self-respect or
  attractiveness to peers are most sensitive.

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Purchases Most Sensitive to Risk

• Monetary Risk High-ticket items that require
  substantial expenditures are most subject to this
  form of risk.
• Functional Risk Products or services whose
  purchase and use requires the buyers exclusive
  commitment are most sensitive.
• Physical Risk Mechanical or electrical goods
  (such as vehicles or flammables), drugs and
  medical treatment, and food and beverages are
  most sensitive.
• Social Risk Socially visible or symbolic goods,
  such as clothes, jewelry, cars, homes, or sports
  equipment are most subject to social risk
• Psychological Risk Expensive personal luxuries
  that may engender guilt, durables, and services
  whose use .

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Barriers to Purchase

• Switching costs
• Lack of information/too much information

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Barriers to Purchase Method of Payment

• Method of Payment or Lack Of
• Problem Lack of Correct Change, wallet in
  briefcase that is above seat, etc
• Solution A stored-value card represents money on
  deposit with the issuer, and is similar to a
  debit card. One major difference between stored
  value cards and debit cards is that debit cards
  are usually issued in the name of individual
  account holders, while stored value cards are
  usually anonymous.
• http//en.wikipedia.org/wiki/Stored-value_card

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Barriers to Purchase Fairness

• Fairness Consumers evaluate price fairness
  based on three anchor points
• past prices,
• competitors prices and
• production costs (Bolton and Myers 2003).
• Transaction similarity is the key in prompting
  fairness judgment

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Barriers to Purchase Fairness

• When the degree of similarity between two
  transactions is high, then consumers have little
  additional information to explain a price
  discrepancy. In such situations, consumers tend
  to believe that they are entitled to equal prices
  and hence consider price variations as unfair.

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How to Get to Trial

• Change Frame of Reference

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Prospect Theory Basic Idea

• Value is associated not with actual levels of
  consumption, but with anticipated changes in well
  being
• Buyer assesses prospective decision outcomes
  (prospects) by mentally categorizing them as
  either gains or losses relative to reference point

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Example

• Station A sets reference point at 2.30 and then
  rewards buyers who pay cash that is a gain
  relative to the reference point
• Station B first establishes a reference point at
  
• 2.20 and then penalizes buyers who use credit
  cards a loss relative to the reference point
• This is in contrast to economic theory that
  predicts that gains and losses of equal size are
  valued the same

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Positive Value
Value Function
Station A (2.30 0.10)
1.0
Gains
Losses
1.6
Reference Point (state of well being)
Station B (2.20 .10)
Negative Value
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Prospect Theory Implications

• Increasingly larger gains are incrementally less
  pleasurable (10 to 20 great 110 to 120 not as
  great)
• Increasingly larger losses are incrementally less
  painful (and smaller losses are almost as painful
  as slightly larger losses)
• The displeasure associated with losing a certain
  amount (e.g., of money) is generally greater than
  the pleasure associated with winning the same
  amount (e.g., of money)

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Implications

• Once consumers have agreed to spend a certain
  amount of money, getting to pay more is easier
  than one would think
• Goal for is to move the reference point beyond
  price to something that can gain a competitive
  advantage e.g., brand, type of ingredients,
  service, etc.

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Positive Value
Value Function
Gains
Losses
Reference Point (state of well being)
Negative Value
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Prospect Theory Leads to Framing
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Goal of Understanding Frames of Reference
1. Change the relationship between what customers
perceive they pay and what they perceive they
get in return. And manage this relationship
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Change the relationship between what customers
perceive they pay and what they perceive they get
in return.

• Option 1 Oliva Cameroon Cigar for 15
• Option 2 Oliva Cameroon (Figurado, 6 ½ inch x 60
  ring) made by Oliva Cigar Co. Nicaragua
• The Authentic Cameroon Wrapper gives this boxed
  pressed figurado a pronounced aroma of nuts, with
  hints of cocoa and coffee.
• It is medium-bodied, but not exceedingly strong.
  15

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Change the relationship between what customers
perceive they pay and what they perceive they get
in return.

• Let customer know the cost of not booking and
  paying now that is, give the difference between
  current booking class and the next level up
• Structure transactions to reflect gains and avoid
  losses
• Present price last after descriptions
• endow potential buyers

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Change the relationship between what customers
perceive they pay and what they perceive they get
in return.

• Frame decision outcomes in terms of gains or
  losses
• do not discuss benefits of buying the product,
  but discuss the consequences of not buying the
  product
• Make it simple for customer to see options and
  trade-offs

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Positive Value
Value Function
Gains
Losses
Reference Point (state of well being)
Negative Value
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Questions?

• sshoemaker_at_uh.edu
• www..stoweshoemaker.net