The entire experience of going to the movies lies in the movie itself, not the $10 popcorn or the $12 soft drinks. Our enjoyment starts when the movie starts, and most of us are prepared to sit through a movie regardless of the distractions that come with it, like mobile phones that go off, rude movie talkers, stinky seats, sticky floors and so forth.
So why do cinemas discount the actual movie (half-price Tuesdays, half price every day before Noon) and overcharge for everything else?
It boils down to profit and margins. Popcorn and soft drinks cost next to nothing to make and sell, whilst the movie itself has royalties and fees. However if you’re discounting the primary purpose of your industry – in this case it’s to entertain and not to feed – then why would people value what you sell?
Why wouldn’t we download movies from the internet when we’re being told that the popcorn is more important and more valuable than the movie itself?
WHEN PAYING MORE RETURNS MORE
Another example of skewed marketing logic can be found in real estate, where the marketing seems to be built around commissions and the lower the better. Is this logical? Surely the incentives for each party involved in the sale are not aligned using this approach? Sure you’ll save money paying a lower commission but you’d actually make more paying a higher commission. Confused? Then consider the following scenario.
You’ve decided to sell your home and you’ve hired an agent to sell it because everyone knows you can’t sell your own home. The agent takes some photos, writes a seductive ad and hosts the show days.
Most importantly, the agent negotiates aggressively on your behalf for a “killer deal”. Let’s assume your estate agent presents you with an offer of $500,000. A standard agency commission is 5%, of which your agent splits half with his agency, so he only gets 2.5%. Which means on your sale he gets $12,500. Not bad for a day’s work. But what if your home was worth more than $500,000?
What if, with a little more effort and patience, the agent could get you $525,000? After you pay commission on this bigger sale, you would find an extra $23,500 in your pocket. But the agent’s additional share – their extra 2.5% – comes to a puny $625. So if you earn $23,500 and the agent only earns $625, the incentives aren’t aligned at all. Is the agent willing to put in all the required time and work to secure a higher price for $625? Not likely.
So why do real estate agents market their business this way? Based on this logic, every estate agent should charge a higher commission but they don’t. The reason? It’s easier to sell something for less than for more.
FLAT FEES – WHERE’S THE INCENTIVE?
Still not convinced? What would you think of a gym that charged you incrementally for every day you don’t go to the gym instead of debiting a monthly fee? They’d start with a dollar and double it every day you don’t go. So $1 for the first missed day, then $2, then $4, then $8, then $16 and so on. You’d be at that gym every day without fail!
But this will never happen because the incentives between gym owner and gym member are not the same and the status quo of how gyms market themselves will most likely never change on such a fundamental level. Even if they did, would consumers accept the change? I wouldn’t.
And what about an advertising agency that charged clients based on the success of the advertising they created? The current status quo in advertising is that clients pay regardless of success. With this approach, if an advertising agency launched a new product and the launch bombed, they would get no payment at all. Obviously if it was a big success you’d pay them heaps more. So why doesn’t anyone do it? (I do.)
There are more examples out there but the point is obvious. Finding ways to align your incentives with those of your customers will give you a way to break the status quo and to effectively crush the competition.
The hardware industry is by no means immune to this misalignment and I’ll be taking a closer look at the skewed logic of hardware in next month’s issue.
Greg Kramer is the Creative Director of Partisan Advertising and specialises in creating effective and measurable sales increases for his clients. Call 021 254 0082 or visit www.partisanadvertising.co.nz