So you have identified a company that you think might be a good investment. You did the break even analysis to understand how many years it will take for you to get your money back (read this post to understand break even analysis). The company has passed the Shark Tank test(Learnings from the Shark Tank). Now you are thinking if the company will be able to maintain or even grow its customer base in the future. One of the things to pay attention to is if the company has any psychological tactics in play. Companies use different psychological tactics to influence customer behavior. They have identified how we react to certain external stimulus and are using them to influence our spending habits. Lets take a look at few examples:
- Expensive means good quality – Most of us have a habit of associating price with quality. If something is expensive it’s of good quality. Lululemon has understood this behavior and is using it to come up with strategies to maintain high prices. For Q3 2017, Lululemon reported adjusted gross margin of 52.2%. One way Lululemon controls the price is by keeping low levels of inventory, for example, if they estimate the demand for a product will be 100, they only produce 80. By maintaining low inventory levels they avoid putting things up for sale. If you visit their stores, you will not find the popular items on sale even during the holidays and you end up buying Christmas presents at full price. The CEO explained this strategy on a quarterly conference call. I highly recommend listening to these calls – a lot can be learned from them.
- We love deals – No company uses our love for deals to sell products better than Costco. Costco sells products in larger quantities at a lower price than a normal grocer. As soon as a customer enters Costco, they get into bargain hunting mood. Costco capitalizes on that mood by not labeling any aisles. So if you want to buy coffee you will have to walk through the entire section to find it and while walking you will see other products on sale and will buy them because you think you are getting a deal. On your next visit you think you know the coffee aisle but guess what it’s changed and there are no labels. You will again walk the whole store and end up buying more things than what was on your list.
- We don’t like change – Because we don’t like change companies go out of their way to make it even harder. Prime examples of this are Google & Apple. Both these companies make it easier to access accounts seamlessly across different devices. They offer free email, cloud storage and host of other services thus building a mouse trap. Among other things this mouse trap is one of the prime reasons why we become repeat customers.
- The membership trap – Companies like Amazon & Costco love memberships. By offering relatively inexpensive memberships they make us commit to spending future dollars with them. Amazon offers free video, music, 2 day shipping, books etc all for $100 a year.
- Oh, I don’t do this often – When we go to a movie theater we pay $10+ for popcorn which we know costs less than 50 cents. We pay this ungodly amount and justify it with “oh, I don’t do this often” attitude. Generally price is determined by supply and demand but not in this case. Movie theaters will never run out of popcorn. Its our feeling to have a good time that makes us not worry about the amount we are spending.
Developing an understanding about the factors that influence our spending habits will help you in analyzing your target companies better. Look for these kind of mouse traps, the better the mouse trap higher the probability of success. I highly recommend reading the book Influence: The Psychology of Persuasion, Revised Edition
Disclaimer: These are my personal views and are for educational purposes only. I am not a financial advisor.
