All posts filed under “Bad profits

Swoopo: Irrational escalation of commitment

Swoopo

Swoopo, a new kind of “entertainment shopping” auction site, takes Martin Shubik’s classic Dollar Auction game to a whole new, automated, mass participation level. It’s an example of the escalation of commitment, or a sunk cost fallacy, where we increase our commitment (in this case with real money) even though (in this case) most users’ positions are becoming less and less valuable.

Thee Cake Scraps has a good analysis of how this works:

It is a ‘auction’ site…sort of. Swoopo sells bids for $1. Each time you use a bid on an item the price is increased by $0.15 for that item. So here is an example:

Person A buys 5 bids from Swoopo for $5 total. Person A sees an auction for $1000 and places the first bid. The auction is now at $0.15. Person A now has a sunk cost of $1 (the cost of the bid they used). There is no way to get that dollar back, win or lose. If Person A wins they must pay the $0.15.

Person B also purchased $5 of bids. Person B sees the same auction and places the second bid. The auction price is now $0.30 (because each bid increases the cost by exactly 15 cents). Person B now has a sunk cost of $1. If Person B wins they must pay the $0.30. Swoopo now has $2 in the bank and the auction is at 30 cents.

This can happen with as many users as there are suckers to start accounts. Why are they suckers? Because everybody that does not have the top spot just loses the money they spent on bids. *Poof* Gone. If you think this sounds a little like gambling or a complete scam you are not alone. People get swept up into the auction and don’t want to get nothing for the money they spent on bids.

The key thing seems to be that some bidders will win items at lower than RRP, i.e. they get a good deal, but for every one of those, there are many, many others who have all paid for their bids (money going to Swoopo) and received nothing as a result. The house will always win.

Swoopo staff respond here and here (at Crunchgear).

As is obligatory with this blog, I need to ask: where else have systems been designed to use this behaviour-shaping technique? There must be many examples in auctions, games and gambling in general – but can the idea be applied to consumer products/services, using escalating commitment to shape user behaviour? Can this be applied to help users save energy, do more exercise, etc as opposed merely to extracting value from them with no benefit in return?

Freudian slip in BBC iTunes story

Apple has repeatedly made clear that it is in this business to make money, and would most likely not continue to operate iTS if it were no longer possible to do so profitably, said Mr Cue. The National Music Publishers' Association has asked for the royalty rake increase and has said it believes everyone will benefit because the digital music market is growing. I think we established a case for an increase in the royalties, said David Israelite, president of the NMPA. Apple may want to sell songs cheaply to sell iPods. We don't make a penny on the sale of an iPod

From this BBC story, as of 6.43 pm.

P.S. I love the way it’s claimed “everyone will benefit” from the royalty rise. As a consumer, I can’t wait to be paying more! Perhaps a price increase will help limit the consumption of this precious rivalrous good… oh, wait…

P.P.S. Not the first time a BBC story about Apple’s had truer-than-they-perhaps-meant phrasing.

How to fit a normal bulb in a BC3 fitting and save £10 per bulb

BC3 and 2-pin bayonet fitting compared
Standard 2-pin bayonet cap (left) and 3-pin bayonet cap BC3 (right) fittings compared

Summary for mystified international readers: In the UK new houses/flats must, by law, have a number of light fittings which will ‘not accept incandescent filament bulbs’ (a ‘green’ idea). This has led to the development of a proprietary, arbitrary format of compact fluorescent bulb, the BC3, which costs a lot more than standard compact fluorescents, is difficult to obtain, and about which the public generally doesn’t know much (yet). If you’re so minded, it’s not hard to modify the fitting and save money.

A lot of visitors have found this blog recently via searching for information on the MEM BC3 3-pin bayonet compact fluorescent bulbs, where to get them, and why they’re so expensive. The main posts here discussing them, with background to what it’s all about, are A bright idea? and some more thoughts – and it’s readers’ comments which are the really interesting part of both posts.

There are so many stories of frustration there, of people trying to ‘do their bit’ for the environment, trying to fit better CFLs in their homes, and finding that instead of instead of the subsidised or even free standard 2-pin bayonet CFLs available all over the place in a variety of improved designs, styles and quality, they’re locked in to having to pay 10 or 15 times as much for a BC3 bulb, and order online, simply because the manufacturer has a monopoly, and does not seem to supply the bulbs to normal DIY or hardware stores.

Frankly, the system is appalling, an example of exactly how not to design for sustainable behaviour. It’s a great ‘format lock-in’ case study for my research, but a pretty pathetic attempt to ‘design out’ the ‘risk’ of the public retro-fitting incandescent bulbs in new homes. This is the heavy-handed side of the legislation-ecodesign nexus, and it’s clearly not the way forward. Trust the UK to have pushed ahead with it without any thought of user experience.
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Persuasion & control round-up

  • New Scientist: Recruiting Smell for the Hard Sell
    Image from New ScientistSamsung’s coercive atmospherics strategy involves the smell of honeydew melon:

    THE AIR in Samsung’s flagship electronics store on the upper west side of Manhattan smells like honeydew melon. It is barely perceptible but, together with the soft, constantly morphing light scheme, the scent gives the store a blissfully relaxed, tropical feel. The fragrance I’m sniffing is the company’s signature scent and is being pumped out from hidden devices in the ceiling. Consumers roam the showroom unaware that they are being seduced not just via their eyes and ears but also by their noses.

    In one recent study, accepted for publication in the Journal of Business Research, Eric Spangenberg, a consumer psychologist and dean of the College of Business and Economics at Washington State University in Pullman, and his colleagues carried out an experiment in a local clothing store. They discovered that when “feminine scents”, like vanilla, were used, sales of women’s clothes doubled; as did men’s clothes when scents like rose maroc were diffused.

    A spokesman from IFF revealed that the company has developed technology to scent materials from fibres to plastic, suggesting that we can expect a more aromatic future, with everything from scented exercise clothing and towels to MP3 players with a customised scent. As more and more stores and hotels use ambient scents, however, remember that their goal is not just to make your experience more pleasant. They want to imprint a positive memory, influence your future feelings about particular brands and ultimately forge an emotional link to you – and more importantly, your wallet.

    (via Martin Howard‘s very interesting blog, and the genius Mind Hacks)

  • Consumerist: 5 Marketing Tricks That Unleash Shopping Frenzies
    Beanie BabiesThe Consumerist’s Ben Popken outlines “5 Marketing Tricks That Unleash Shopping Frenzies”:

    * Artificially limit supply. They had a giant warehouse full of Beanie Babies, but released them in squirts to prolong the buying orgy.
    * Issue press releases about limited supply so news van show up
    * Aggressively market to children. Daddy may not play with his kids as much as he should but one morning he can get up at the crack of dawn, get a Teddy Ruxpin, and be a hero.
    * Make a line of minute variations on the same theme to create the “collect them all” effect.
    * Make it only have one highly specialized function so you can sell one that laughs, one that sings, one that skydives, etc, ad nauseum.

    All of us are familiar with these strategies – whether consciously or not – but can similar ideas ever be employed in a way which benefits the consumer, or society in general, without actual deception or underhandedness? For example, can artificially limiting supply to increase demand ever be helpful? Certainly artificially limiting supply to decrease demand can be helpful to consumers might sometimes be helpful – if you knew you could get a healthy snack in 5 minutes, but an unhealthy one took an hour to arrive, you might be more inclined to go for the healthy one; if the number of parking spaces wide enough to take a large 4 x 4 in a city centre were artificially restricted, it might discourage someone from choosing to drive into the city in such a vehicle.

    But is it helpful – or ‘right’ – to use these types of strategy to further an aim which, perhaps, deceives the consumer, for the ‘greater good’ (and indeed the consumer’s own benefit, ultimately)? Should energy-saving devices be marketed aggressively to children, so that they pressure their parents to get one?

    (Image from Michael_L‘s Flickr stream)

  • Kazys Varnelis: Architecture of Disappearance
    Architecture of disappearance
    Kazys Varnelis notes “the architecture of disappearance”:

    I needed to show a new Netlab intern the maps from Banham’s Los Angeles, Architecture of Four Ecologies and realized that I had left the original behind. Luckily, Google Books had a copy here, strangely however, in their quest to remove copyrighted images, Google’s censors (human? algorithmic?) had gone awry and had started producing art such as this image.

    It’s not clear here whether there’s a belief that the visual appearance of the building itself is copyrighted (which surely cannot be the case – photographers’ rights (UK at least) are fairly clear on this) or whether that by effectively making the image useless, it prevents someone using an image from Google Books elsewhere. The latter is probabky the case, but then why bother showing it at all?

    (Thanks to Katrin for this)

  • Fanatic Attack
    Finally, in self-regarding nonsense news, this blog’s been featured on Fanatic Attack, a very interesting, fairly new site highlighting “entrancement, entertainment, and an enhancement of curiosity”: people, organisations and projects that display a deep passion or obsession with a particular subject or theme. I’m grateful to be considered as such!
  • Biting Apple

    BBC News headline, 28 September 2007

    Interesting to see the BBC’s summary of the current iPhone update story: “Apple issues an update which damages iPhones that have been hacked by users”. I’m not sure that’s quite how Apple’s PR people would have put it, but it’s interesting to see that whoever writes those little summaries for the BBC website found it easiest to sum up the story in this way. This is being portrayed as Apple deliberately, strategically damaging the phones, rather than an update unintentionally causing problems with unlocked or modified phones.

    Regardless of what the specific issue is here, and whether unmodified iPhones have also lost functionality because of some problem with the update, can’t we just strip out all this nonsense? How many people who wanted an iPhone also wanted to be locked in to AT&T or whatever the local carrier will be in each market? Anyone? Who wants to be locked in to anything? What a waste of technical effort, sweat and customer goodwill: it’s utterly pathetic.

    This is exactly what Fred Reichheld‘s ‘Bad profits’ idea calls out so neatly:

    Whenever a customer feels misled, mistreated, ignored, or coerced, then profits from that customer are bad. Bad profits come from unfair or misleading pricing. Bad profits arise when companies save money by delivering a lousy customer experience. Bad profits are about extracting value from customers, not creating value.

    If bad profits are earned at the expense of customers, good profits are earned with customers’ enthusiastic cooperation. A company earns good profits when it so delights its customers that they willingly come back for more—and not only that, they tell their friends and colleagues to do business with the company.

    What is the question that can tell good profits from bad? Simplicity itself: How likely is it that you would recommend this company to a friend or colleague?

    If your iPhone’s just turned into the most stylish paperweight in the office, are you likely to recommend it to a colleague?

    More to the point, if Apple had moved – in the first place – into offering telecom services to go with the hardware, with high levels of user experience and a transparent pricing system, how many iPhone users and Mac evangelists wouldn’t have at least considered changing?

    In default, defiance

    ‘Choice of default’ is a theme which has come up a few times on the blog: in general, many people accept the options/settings presented to them, and do not question or attempt to alter them. The possibilities for controlling or shaping users’ behaviour in this way are, clearly, enormous; two interesting examples have recently been brought to my attention (thanks to Chris Weightman and Patrick Kalaher):

    Send to FedEx Kinko's button in Adobe Reader

    Recent versions of Adobe’s PDF creation and viewing software, Acrobat Professional and Adobe Reader (screenshot above) have ‘featured’ a button on the toolbar (and a link in the File menu) entitled “Send to FedEx Kinko’s” which upload the document to FedEx Kinko’s online printing service. As Gavin Clarke reports in The Register, this choice of default (the result of a tie-in between Adobe and FedEx) has irritated other printing companies and trade bodies sufficiently for Adobe to agree to remove the element from the software:

    Adobe Systems has scrapped the “send to FedEx Kinkos” print button in iAdobe Reader and Acrobat Professional, in the face of overwhelming opposition from America’s printing companies.

    Adobe said today it would release an update to its software in 10 weeks that will remove the ability to send PDFs to FedEx Kinkos for printing at the touch of a button.

    No doubt the idea of linking to a service that’s often the only choice presented to consumers in the track towns of Silicon Valley made eminent sense to Adobe, itself based in San Jose, California. But the company quickly incurred the wrath of printers outside the Valley for including a button to their biggest competitor, in software used widely by the design and print industry.

    I wonder how many users of Acrobat/Reader actually used the service? Did its inclusion change any users’ printing habits (i.e. they stopped using their current printer and used Kinko’s instead)? And was this due to pure convenience/laziness? Presumably Kinko’s could identify which of their customers originated from clicking the button – were they charged exactly the same as any other customer, or was this an opportunity for price discrimination?

    As some of the comments – both on the Register story and on Adobe’s John Loiacono’s bloghave noted, the idea of a built-in facility to send documents to an external printing service is not bad in itself, but allowing the user to configure this, or allowing printing companies to offer their own one-click buttons to users, would be much more desirable from a user’s point of view.

    In a sense, ‘choice of default’ could be the other side of process friction as a design strategy. By making some options deliberately easier – much easier – than the alternatives (which might actually be more beneficial to the user), the other options appear harder in comparison, which is effectively the same as making some options or methods harder in the first place. The new-PCs-pre-installed-with-Windows example is probably the most obvious modern instance of choice of default having a major effect on consumer behaviour, as an anonymous commenter noted here last year:

    Ultimately, though, you can sum up the free-software tug-of-war political control this way: it’s easiest to get a Windows computer and use it as such. Next easiest to get a MacOS one and use it as such. Commercial interests and anti-free software political agenda. Next easiest is a Linux computer, where the large barrier of having to install and configure an operating system yourself must be leapt. Also, it’s likely you don’t actually save any money upfront, because you probably end up buying a Windows box and wiping it to install Linux. Microsoft exacts their tax even if you won’t use the copy of Windows you’re supposedly paying them for.

    Starbucks Mug; photo by Veryfotos
    Photo by veryfotos.

    Sometimes ‘choice of default’ can mean actually hiding the options which it’s undesirable for customers to choose:

    Here’s a little secret that Starbucks doesn’t want you to know: They will serve you a better, stronger cappuccino if you want one, and they will charge you less for it. Ask for it in any Starbucks and the barista will comply without batting an eye. The puzzle is to work out why. The drink in question is the elusive “short cappuccino”—at 8 ounces, a third smaller than the smallest size on the official menu, the “tall,” and dwarfed by what Starbucks calls the “customer-preferred” size, the “Venti,” which weighs in at 20 ounces and more than 200 calories before you add the sugar.

    The short cappuccino has the same amount of espresso as the 12-ounce tall, meaning a bolder coffee taste, and also a better one. The World Barista Championship rules, for example, define a traditional cappuccino as a “five- to six-ounce beverage.” This is also the size of cappuccino served by many continental cafés. Within reason, the shorter the cappuccino, the better.

    This secret cappuccino is cheaper, too—at my local Starbucks, $2.35 instead of $2.65. But why does this cheaper, better drink—along with its sisters, the short latte and the short coffee—languish unadvertised? The official line from Starbucks is that there is no room on the menu board, although this doesn’t explain why the short cappuccino is also unmentioned on the comprehensive Starbucks Web site, nor why the baristas will serve you in a whisper rather than the usual practice of singing your order to the heavens.

    The rest of this Slate article* from 2006, by Tim Harford, advances the idea that this kind of tactic is designed specifically to allow price discrimination:

    This is the Starbucks way of sidestepping a painful dilemma over how high to set prices. Price too low and the margins disappear; too high and the customers do. Any business that is able to charge one price to price-sensitive customers and a higher price to the rest will avoid some of that awkward trade-off… Offer the cheaper product but make sure that it is available only to those customers who face the uncertainty and embarrassment of having to request it specifically.

    Initially, one might think it a bit odd that the lower-priced item has survived at all as an option, given that it can only be a very small percentage of customers who are ‘in the know’ about it. But unlike a shop or company carrying a ‘secret product line’, which requires storage and so on, the short cappuccino can be made without needing any different ingredients, so it presumably makes sense to contnue offering it.

    Thinking about other similarly hidden options (especially ‘delete’ options when buying equipment) reveals how common this sort of practice has become. I’m forever unticking (extra-cost) options for insurance or faster delivery when ordering products online; even when in-store, the practice of staff presenting extended warranties and insurance as if they’re the default choice on new products is extremely widespread.

    Perhaps a post would be in order rounding up ways to save money (or get a better product) by requesting hidden options, or requesting the deletion of unnecessary options – please feel free to leave any tips or examples in the comments. Remember, all progress depends on the unreasonable man (or woman).

    *There is another tactic raised in the article, pertinent to our recent look at casino carpets, which I will get around to examining further in due course.