Author: Ilan Mann

This is part one of an ongoing series about consumer behaviour.

What follows may seem like an esoteric or purely academic post in a blog that is normally about marketing, but nothing could be further from the truth.

Traditional marketing focuses on the customer or client as a self-interested, rational consumer, and expresses value to them strictly in those terms: Goods and Services (Value) in exchange for Money (Price)

Which is why most advertisements are expressed in one of the following ways:

• Buy now! Our price is better than alternatives!
• Buy now! Our value is better than alternatives!
• Buy now! The cost of not receiving this value is greater than the price!

The thrust of these ads are not incorrect, they are simply unsophisticated in their understanding of consumer behaviour.

One of the reasons that the proliferation of behavioural economics has been such a seismic shift in the business world is that for decades, we have been taught to base our models on the idea of consumers as Homo Economicus – the calculating, perfectly rational being that pursues his or her economic interest, whether as a consumer or a purveyor of goods and services.

As Adam Smith writes in The Wealth of Nations, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

The work done on behavioural economics, in my opinion, is not meant to contradict these models, but rather to complicate and augment them – after all, it’s not by benevolence of the Dean, the steering committee, or the student that the professor expects his tenure!

It is tempting to misrepresent the work of Kahneman and Tversky, or of Dr. Richard Thaler, as promoting the notion that there is rational thought, and there are feelings, emotions, prejudices, and biases, and the two are totally different, competing, and conflicting guiding-forces – like two different pilots reaching for the controls at the same time.

In reality, Kahneman and Tversky describe two systems of thinking – System 1 and System 2.

System 1 is fast, emotional, unconscious – making quick calculations like “2 + 2 = 4” or “that person seems trustworthy.”

System 2 is slow, deliberate, and conscious – making slower calculations like 19 x 7 = 133″ or “I’m going to find waldo in a crowded picture”

When we think fast, it is not necessarily because we are making quick calculations. Oftentimes we engage system 1 to make extremely complicated calculations for which using system 2 would overwhelm our brains.

Think about driving a car – I love going for long drives, because it gives me an opportunity to zone out and think.

Ironically, that’s not because safely operating a speeding ton and a half of metal is an easy calculation; you need to be aware of the pressure of your foot on the gas and how it correlates with your speed, the proper minute movements that your hands need to make on the steering wheel in order to navigate the curves of the road, the changing speeds of the cars in front of you, behind you, and beside you, as evidenced by their headlights, break lights, and positioning on the horizon or in your rear-view mirrors. You need to be aware of speed limits, traffic lights, stop signs, sometimes while controlling the AC, radio, and maybe talking about politics with the passenger in the front seat.

If we gave any of these tasks the same slow, considered attention that we give to the question of “what’s the best movie you’ve seen in the last 5 years?” or “What is 36 plus 2585?” we would never be able to back out of the driveway, let alone make the drive from our homes to our offices in one piece.

Luckily, our brains have evolved to allow us to engage system 2 to approximate these calculations, making quick and dirty decisions to undertake all of these tasks for which being close enough is good enough. You don’t need to start braking at exactly the optimal moment so that you slowly come to a complete stop exactly 2 car lengths behind the car in front of you. If you break a little too early, you can creep forward; if you break a little too late, you can compensate by braking harder.

It’s like answering the question “What is 36 plus 2585” with the answer “somewhere between 2500 and 2700.” It’s correct, and it’s correct enough for the task at hand – as my music teacher at arts camp used to say, “it’s close enough for jazz.”

What behavioural economists have been able to build out on is the notion that we use system 1 to make a lot of decisions for which we should maybe we should be using system 2, and we get a lot of those decisions wrong.

For a demonstration, try answering these questions from Yale SOM’s Dr. Shane Frederick. The answer should immediately come to you (answers at the bottom of the post)*:

1) A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball.
How much does the ball cost? _____ cents

2) If it takes 5 machines 5 minutes to make 5 widgets,
how long would it take 100 machines to make 100 widgets? _____ minutes

3) In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake? _____ days

In the next part of this blog, we will talk about how these 2 systems make decisions in harmony – or disharmony – when consumers buy products and services.

Keep scrolling down for the answers to the above questions

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*The ball costs 5 cents and the bat costs 105 cents for a total of $1.10. It takes 100 machines 5 minutes to make 100 widgets. It takes 47 days for the patch to cover half of the lake. Most people get these questions wrong because their System 1 mistakes them for easy questions, and forcefully shoves the quick and dirty answer down their throat.

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Like most suburban kids, I never really understood the proverb, “a bird in the hand is worth two in the bush.”

Why is a bird in the bush worth anything? A bird in the hand sounds like a lot more trouble than it’s worth. Is the bird a pet? Is it a friendly bird? I was not envisioning a friendly bird.

As unattractive a prospect as “a bird in the hand” sounds, the lesson that the proverb is trying to impart is backed up by no-end of research.

Acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. 

Consider a stunning insight that a friend of mine who worked at a major telecom imparted onto me about five years ago, as I was founding Postalgia.

The year was 2015, and cell phone saturation in North America was around 80%. My friend’s job was to help increase revenue, which was largely driven by mobile phone sales. If 80% of the population had mobile phones, there was still 20% of the population left to sell to, right?

Well… not so much.

80% is approximately the adult population of the United States – so unless they were going to sell mobile plans to 10-year olds (basically a non-starter), they had essentially saturated their market.

They had two ways, and two ways only to increase their revenue:

1. Retain customers through loyalty
2. Take customers from other telecoms

This is what where the conversation got interesting – while other telecoms were cutting margins, running expensive ad campaigns and promotions, and spending fortunes on new products and services to try to poach customers from one another, my friend told me that the telecom that he worked for was going to double down on retaining and selling to their existing customers.

I love a good contrarian strategy, but I was worried that my friend was playing with fire. His telecom was playing defense, trying to keep their customers, while competitors were actively trying to lure them away with free hardware, predatory pricing, and temporarily attractive services.

He ended up switching jobs a few years later, but I recently asked him how the strategy played out. Apparently, it was a huge success.

They were able to engage their existing customers and promote a positive customer experience, loyalty-inducing programs, and attractive offers for existing customers instead of new customers.

While competitors swapped new customers back and forth, this telecom saw a churn rate way below the industry average. Their competitors spent a fortune acquiring new customers – they passed many of those savings on to their existing customers.

Their competitors had customers jumping from company to company, plan to plan, chasing new deals, while they promoted referrals, family and group plans, and new products to their existing customer base.

This lesson really stuck with me, and I decided to do a bit more research beyond the anecdotal evidence that this strategy had worked for a friend.

Fred Reicheld at Bain & Co has a great study on customer loyalty, chalk full of insights.

KPMG also has a solid overview on what inspires loyalty

Finally, if you’re looking for something more scholarly, Roger Hallowell of Harvard Business School has a paper on the intersection of customer satisfaction, loyalty, and profitability.

Here are a few of the key takeaways:

Switching has a cost 

In the field of consumer behavior, there are conventional costs, and there are invisible costs. Things that cost your customers time, energy, or comfort may not be readily visible to them, but play a huge role in their purchasing decision. Switching has an invisible cost for your customer, and it has an invisible cost for you.

Don’t believe me? Well, would you move to a new, identical house or apartment, across the street from where you currently live, if I promised you $25 savings on your rent or mortgage every month?

I didn’t think so.

Return customers spend more than new customers

Maybe it’s because they have more time to consider their spending decisions, or maybe it’s just because they’re more comfortable spending money with your brand, but a 5% increase in customer retention produces more than a 25% increase in profit.

Putting a face to a company makes it harder to leave

No one feels guilty when they shop at one supermarket instead of another, but I’ve walked 40 minutes in the rain and passed dozens of barbers to get to my barber. He gives a great haircut, but that’s not why – it’s because he would know if I went to a different barber, and I would feel bad about that.

That’s why my aunt may forget to send me a birthday card, but my wealth manager never does; I’m not very likely to shop around for a new aunt.

Cross-sell. Up-sell. Retain.

Selling to an existing customer is the easiest sale you’ll ever make. You have a captive audience.

Servicing return customers is cheaper than servicing new customers

Not only is acquiring new customers more expensive than marketing to and retaining, cross-selling, and up-selling existing customers, servicing new customers is also more expensive.

You would be amazed how expensive it can be to on-board someone new. Just think of the 20 minutes you spend talking to the receptionist at your dentist’s office on your first visit, versus the 45 seconds you spend talking to them on every subsequent visit. Someone is paying for those 20 minutes of that receptionist’s time.

Let your loyal customers do the marketing for you

Check out this blog post on turning your donors, customers, and clients into your salespeople and fundraisers.

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You’re jogging across an intersection when a city bus turns the corner a little too fast. You jump out of the way and narrowly avoid being run over.

Okay – I’ll admit that it’s a morbid beginning for a blog post about marketing.

But if it’s jarring, it only further illustrates my point.

There is a pervasive fiction in the marketing world that marketing materials are subject to a law of increasing returns. This is sometimes represented as some variation of “the rule of seven,” which proposes that a viewer needs to see or hear advertising from a brand 7 times for it to be effective.

Obviously this so-called rule benefits whoever is trying to sell you the ad space or marketing services. Obviously this rule is just more pseudoscience.

Suppose that over the course of 4 weeks, you see the name of a real estate agent 7 times.  Once in a community newsletter, once on a sponsored post on your twitter feed, twice in your mailbox as you toss their flyers into the recycling bin, and four times on a park bench that you pass on your jogging route.

Now suppose that you’re jogging across an intersection when a city bus turns the corner a little too fast. You jump out of the way and narrowly avoid being run over. Gripping your knees and panting from the safety of the sidewalk, you stare incredulously at the smiling face of a different real estate agent on the back of the bus.

Which name are you more likely to remember?

I’m not suggesting that you should advertise on the side of city buses in the hopes that the drivers recklessly endanger your prospects, but I am suggesting that it is ridiculous to push the idea that you need to hit someone over the head with your brand 7 times when one strong impression will do the job.

In fact, to the extent that there is research on whether or not advertising has increasing returns, it implies that advertising experiences diminishing returns in the long run. 

So why am I, someone who sells handwritten direct mail marketing services for a living, telling you this?

In short, it’s because I know that what I’m selling you doesn’t suck; the other guy hopes that if you throw enough of his stuff at your customer, some of it might stick.

In my previous post, I wrote about how another marketing myth – that humans have an attention span shorter than that of a goldfish – is used to justify putting out barely passable printed marketing products that don’t even try to stand out or catch anyone’s attention.

The theory goes that if you are sent a flyer, or a window-enveloped piece of promotional direct mail, once a month for 2 years, you may eventually recognize the brand, having seen it 24 times for a second or two on each occasion.

The sender is gambling on the fact that if they spend all that money making you throw out their flyers once a month, scroll past their videos, drive absent-mindedly past their billboards, and tune out their radio ads on your morning commute, you (or a few of the other 1,500 people on your city block) are going to choose them next time you need a ______ (fill in the blank with real estate agent, food delivery app, insurance broker, wealth manager, bank, charity, politician, or whoever sends you the most annoying mail).

So what they lack in the ability to stand-out, command your attention, or engage you enough that you remember their name – what they lack in quality – they make up for in quantity.

Like that old joke about the restaurant with the terrible food, but at least no one can complain that the portions are too small.

And if you have no idea what I’m referring to, do yourself a favour:

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If commonly cited statistics are to be believed, it’s a miracle that you clicked on this article.

If it took you more than 4 or 5 seconds to read that first sentence, I can’t be expected to hold your attention to the end of this one.

If you’ve made it to this – the third sentence – it was nothing short of a herculean effort that got you here, because according to conventional wisdom, average human attention spans are down to 8 seconds, (from 12 seconds in 2000).

Time Magazine thinks that I have a better chance of holding the attention of a goldfish than of holding your attention, and based on the media that most marketers are putting out, those marketers seem to agree.

The thing about conventional wisdom is that it is often another word for bullshit. Do I have your attention now?

According to British psychology professor Dr. Gemma Briggs, measuring “attention span” is a meaningless pursuit: “How much attention we apply to a task will vary depending on what the task demand is.”

In other words, treat your prospects and clients like goldfish, and you’ll get the attention of a goldfish.

Forget about the egregious crimes against attention committed by email and digital marketers, who give us our daily thumb workout as we furiously scroll past their videos and swipe their unopened emails into the trash bin of our inboxes.

Let’s turn our attention to physical marketing for a moment. You’re familiar with the scene:

You open your mailbox, and it’s filled with admail – some addressed, some unaddressed; you quickly shuffle through the pile, dealing piece after piece straight into the recycling bin.

The pieces don’t demand your attention, so you don’t give it.

Marketers continue to spend the money printing high definition photos on sturdy card-stock thousands of times over, because even conversion rates of 0.05% (that’s one in every 2,000!) enable them to turn a profit. And the lifetime value of the two or three customers that they win (out of every few thousand to whom that they market) is enough for them to make money.

But it shouldn’t be enough for them to be satisfied. Forget about all of the brands and companies for whom this strategy doesn’t work – innovative brands getting new solutions to market, small companies with great products who don’t have a million dollar marketing budget to waste, etc… – anyone who uses this kind of brute force approach to marketing is leaving a ton of money on the table.

That’s because not all attention is created equally – or more accurately, not all attention is demanded equally.

If you’re like me, you are thrilled to be competing in a market full of people who take this kind of approach to marketing. The more that their media all blends in together to create this ubiquitous white-noise of printed and digital materials, the more that truly unique, attention-grabbing marketing stands out in the mailbox.

That’s why we founded Postalgia, and that’s why our clients, from huge multinationals to independent professionals, from century-old nonprofits to scrappy startups, see massive spikes in conversion rates, retention, customer engagement, and above all else – attention.

The less people send handwritten mail, the more it stands out amidst the clutter of coupons and bills.

Since you made it this far, enjoy one of the most attention-grabbing scenes in movie history – but make sure your kids are out of the room.

Thank you for your attention!

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