Creative Generalist

Consumer surplus is one of those useful little concepts you learn about in elementary economics that, once understood, sheds light on all manner of commercial activities and pricing decisions.

Without getting too technical, it’s the area under the demand curve and above the market price, as illustrated in red in the above diagram.  The traditional notion in economics is that demand starts low when price is high (red line, start at the top left) and increases as price comes down (follow the red line as it falls to the right).  What that suggests is that even at the highest price, at least one person is willing to buy it.  But as we know, goods are sold at the market (or equilibrium) price where demand equals supply (also shown on the diagram), which means that the one person who was willing to pay top dollar, and all the people who were willing to pay at least something above market price, have got themselves a bargain, right?  That quantity of money (all the people who were willing to pay more multiplied by the amount extra they were willing to pay) is the consumer surplus.

To an individual company, exploiting the consumer surplus means trying to charge each consumer just, and no less than, what they are willing to pay, which is notoriously difficult.  Astute traders have known this for centuries and exploit the consumer surplus essentially by letting you haggle.  Starting with a high price, a good commercial bargainer will quickly ascertain how much you are able or willing to pay for an item and try to sell it for you for just that.  Sell high to the people who can afford it, and sell low to the people who can’t.  Student discounts do exactly the same.  Companies know that students have less money to spend, so they sell them exactly the same products at a cheaper price.  This is not some seedy tactic – it’s going on in most of the shops in your local shopping centre.  Fair? Probably not.  Commercially effective? Definitely.

Once you grasp this concept, you’ll begin to see it all over the place.  Another of the tactics that companies use is to repackage the same (or very similar) product in some way so as to be able to sell it at different price points to consumers.  At your local supermarket, there are probably 3 or 4 different types of baked beans, or tinned tomatoes, ranging from the shop’s own brand, to some sort of gourmet brand in black packaging with gold writing.  Do you really think there is much difference in these products apart from the salt content and/or 2 cents worth of oregano or some other ‘gourmet’ ingredient.  No.  They do this so that people who can afford to pay 3 times the entry level price will.  And they’ll feel good about it too.  I think Apple do this with iPads and iPhones.  Does it really cost them anything significant to go from 16 GB to 64 GB? Probably very little.  But the products are priced hundreds of Dollars apart.  Why?  So there are options for consumers who can only afford entry level units, and there are options for consumers with money to burn.  Classic consumer surplus.

Anyway, why the hell am I rambling on about this on a Friday morning when I should be doing something more productive?  Well, Jessi ordered some stuff online yesterday, which arrived today.  We had a little theory about this order related to the concept of consumer surplus which proved, I think, to be correct.  Let me explain.

Stradivarious (at least in this context) is a clothing brand with a chain of stores and an online shop.  Jessi ordered some clothes yesterday (Thursday).  Since she spent more than 60 Euro, she qualified for free delivery.  When she got to the checkout, there were two delivery options:  the ‘standard’ (free) one, which was quoted as taking 2-3 days, and the ‘express’ option for 6.99, which was next day.  Since we operate an e-commerce business ourselves, we were pretty confident in thinking that mainstream national couriers, like MRW used by Stradivarious, do not offer anything other than an overnight service.  It wouldn’t make sense.  Since their infrastructure and procedures are built around getting a parcel from A to B in less than 24 hours, they’d probably have to work even harder to make it take longer.  No, I suspected that what Stradivarious were doing here was exploiting the consumer surplus.  Of course there will be customers who are very keen to have their stuff the next day, and will be willing to pay an extra 6.99 for the privilege.  But then there will also be customers who balk at paying delivery charges.  Great pricing tactic, no?

We tested the theory – Jessi chose the free delivery option.  Sure enough, at 9am this morning the courier turned up with the parcel, clearly labelled as having been sent on an overnight service.

So let this be a lesson.  To e-consumers – watch out for this tactic.  I’m not sure how widespread this particular trick is, so keep an eye out for premium delivery service charges that don’t seem to add up.  And to online sellers – depending on your degree of morality, perhaps this would be a good pricing tactic for you to milk a little more out of your customers.  We won’t be doing it though.

If you managed to get past the title of this post and are still here then this article could potentially be of great help to you.  If you’re bemused by the title but have stuck around thinking this might be an entertaining read, leave now – you are horribly mistaken.

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A year ago, a little man with round glasses rang our doorbell and asked me if would be interested in buying some cherries. I was in the attic and busy with work so had to run down to front door, phone in hand. “Bloody annoying salesman,” I thought, and sent him on his way. Despite one’s natural tendency to treat any travelling salesman these days as a con artist (although a fruit-based scam would be almost worth going along with), I was just too busy to give him any time.

Fast forward exactly one year and the same little chap rings my doorbell again. Again I sprint down to answer the door, pen behind ear, dog barking in excitement. This time he holds out a full box of bright red, fully ripe cherries and says “Look what lovely cherries I have – would you like some?”. I looked down at the cherries and my mouth watered slightly in anticipation. I was sold. “Well how much are they?” I asked. “It’s a 2 kilo box for 5 Euros”. I’m no expert on fruit prices, and probably would have bought them at double the price, but 5 Euro for a full box of ripe cherries seemed like a bargain to me, so I paid him and took ownership of my fruit.

As is custom in Spain, we chatted for a while, eating ripe cherries in the sunshine. “They’re from my land in El Bierzo,” he told me. I had assumed that they were from the south, or imported, like most of the fruit in Spain. “Picked ‘em myself this morning with my daughter,” he said, showing me, at close range, his filthy fingernails as proof. Of course, I was delighted: I’d bought 2 kilos of locally-grown, same-day-picked cherries, direct from the farmer and his daughter (who was 6 or 7 years old in my mind – I pictured him holding her up to pick the cherries off the top of the tree (Do cherries even grown on trees? Spot the London boy). Alas, when she drove round the corner in the van, she turned out to be middle-aged and definitely unhoistable without mechanical aid).

I called over to my neighbour who was doing some work in the front garden. “Hector, look at these fantastic cherries,” I shouted, “they’re local and fresh picked this morning”. He strolled over, tried one and bought a box too.

So just a lesson for vendors really. Ask someone to buy your cherries, and they probably won’t. Show someone your lovely, fresh, bright-red cherries in their best light and you might just sell two boxes.

“Avoid generalisations” – that’s what were taught from the very beginning.  If you generalise, you’re either racist, sexist, ageist, appearancist, intellectualist or some combination of the many other undesirable ‘ists’ with which we’d rather avoid being labelled.  As any serial generaliser already knows, ’sweeping generalisations’ most often get swatted down with a “you can’t say that”.Technically, you can say anything you want, so what’s really meant by “you can’t say that” is more like “you can’t conclude that”, or in a slightly more mathematical-socialogical way: “you can’t extrapolate the characteristics of one individual to an entire population or subset thereof”.

Whilst generalisation is one of those crimes of reasoning, logic or simply attitude with which we all get familiar from a young age, its opposite concept, specialisation or particularisation, is most often overlooked and it’s something we’re all guilty of to a greater or lesser extent.

Specialisation, for our purposes, means extending the perceived characteristics of a group to oneself.  The consequences of deciding that a certain rule applies to you because you have observed it or heard that it applies ‘in general’ can lead to, at best, errors in decision making, and at worst, personal catastrophe.  And it’s something I see happening more and more around me.  People say things like:

- Now is a good time to buy, but if I wait for the housing market to drop even further, I’ll get a better bargain.

- Populations with high levels of fat consumption in their diets tend to exhibit high levels of obesity.  Fat consumption makes you fat, so I’ll go on a low fat diet.

- The economy is bad at the moment, I’ll wait to sell my business.

- I can’t afford to go out and eat, this country is in the middle of a financial crisis you know!

Last year, I was looking around for a small flat to buy in order to make a smart financial investment for the future.  The housing market in Spain has fallen massively since its peak in 2007 and there were some very good value potential purchases out there.  Yet I argued almost weekly with my father-in-law.  “The market still hasn’t hit the bottom yet, you should wait more,” he’d say.  “Prices are predicted to fall another 10% within the next 12 months – if you wait you’ll get a better bargain”.

Here’s the thing though.  I don’t care whether the housing market drops another 10% or rises 15%.  These percentages are averages of millions of properties up and down the country.  I wasn’t planning on buying the whole available housing stock of Spain, or even a statistically significant representative sample of it.  I was looking for one flat.  I only needed to find one emergency sale, conduct one successful negotiation, or find one isolated anomaly and I would have my bargain.  It wouldn’t matter if the price of housing were to drop 10% in the 6 months after my purchase – as long as I could get the flat under value I would have done well.

Don’t get me wrong, finding a bargain is significantly easier in a buyer’s market, but concluding that a general 10% fall in house prices will mean you can get the house you are interested in for 10% less is a mistake is a fallacy of specialisation.

Of course there are markets with such low variance in the value of transactions that the general is a perfect indicator of the specific.  If I want to sell some shares and their price is 10% lower this month, then to a very tight degree of accuracy, I’ll get 10% less for them.  If I partake in a fund that invests in a basket of shares and suddenly 50% is knocked off the value of the stock exchange, then I just lost about 50% of my money.

But even if the stock market falls 50%, somebody always comes out winning.  Why?  Because the headline statistic is always just an average.  And averages are made up of a lot of stuff in the middle that follows the trend pretty closely, and then a few outliers that do crazy stuff.  In the stock market example, there were probably a load of stocks that fell by about 50% along with a few that fell by much more and a few that actually rose.

Therefore, your task is to be on the positive side of average.  To rise when everything else falls.

The current employment situation in Spain is bleak and has been for a long while.  Youth unemployment is up somewhere around 50%.

What does that actually mean?  Well, on average, across the whole country, only half of the young people eligible for work are actually in work.  That’s the general picture, and it’s a genuine tragedy for the current ‘lost generation’.  But that’s just the group perspective.  If I am a young person looking for a job, what should I read into this static which is trumpeted loudly on the news almost every single day on national television?  Should I assume that I have only a 50% chance of getting a job?  Should I assume that I will have to wait 50% longer to find a job?  That I will earn 50% less?

I’ve heard all of these conclusions.

The truth is that these statistics are almost irrelevant to any one individual.  Yes, we should worry about them from a point of view of social consciousness and group economic prosperity.  But to an individual, averages are just that, averages, and any individual has the ability to buck any trend with relative ease.  You are one in ten million,  a hundred million, 2 billion, do you think that the statistical world will implode because you have managed to find a flat for 20% less than its value, or find a job when 50% of your competitors can’t, or lose 10Kg on a high fat diet when the general advice is that high-fat diets make you, well, fat?

Did you know you have a 1 in 119 chance of dying by suicide?  Damn, better be careful then.  Or perhaps just don’t commit suicide.

Let this be our little secret.  You are you, and that’s it.  You are not representative of the average.  The general does not apply to you.  Be wary of generalisation, but be even more wary of specialisation.  When the news tells you that taxes, divorce rates and the cost of of living have gone up, that educational standards, living standards and life expectancy have gone down, and that we’re in for a rubbish summer, turn off the TV and say “I don’t care – this year I will be richer, happier, smarter and healthier than ever”, and go out and do something to make that happen.

A couple of months ago, I signed the company up for TrustPilot, one of the new breed of review collection services that prompt your customers to give you a score and leave you some feedback after placing an order. TrustPilot then collates these reviews on their website and pushes them out to aggregators, like Google. All this review stuff may or may not be important in the future, as search engines try to get a handle on commercial reality rather than just empty keywords, so I figure it’s good to be on board as early as possible. TrustPilot seemed like a good option – easy to set up, fairly comprehensive feature set and a competitive price. I’m satisfied with the service and would recommend them.

But that’s not what this article is about. What concerns me is what customers are saying in their reviews.

We’ve got a couple of hundred responses now – most good, some bad – and I’m starting to recognise the pattern. Let’s have a look at a smattering of typical good ones:

(5 star) Ordering on line was straightforward and goods arrived within a couple of days extremely well packaged with no breakages. No complaints at all and will certainly use again.

(5 star) Goods ordered late Tuesday and delivered early Friday, just what was expected and glad to recommend them.

(5 star) the products i bought where good quality and a quick good delivery service ,will continue to order in future

(5 star) Delivery as promised great service

And now for the bad ones.  There aren’t too many (thankfully), so I haven’t had to be very selective.  These are the worst:

(1 star) I ordered some of their products as a wedding present for some friends in France and it took 15 days to arrive to them. It looks like there was a first delivery attempt (according to their tracking system) but no card was left at the house so my friends could not pick it up.

(2 star) only part delivered and my staff tell me your courier wanted to wait until Tuesday and my staff insisted we had part delivery

(3 star) Everything about the service from tapas lunch company was good however I would normally expect swifter dispatch of items. The third party delivery service provided decent online awareness of delivery progression but I stipulated a telephone number to call for delivery. This was not used on my initial delivery day when I was in the flat all day long. They did ring it on the second delivery day but I was out and in meetings so could not answer the phone and on the third attempted delivery day a UK mail van pulled up outside my flat and delivered a parcel to a neighbouring permises. He was about to drive away when I ran out to question whether there was an item for me that I actually got my delivery.

Looking through all 200-odd reviews, the vast majority of positive comments centre on:

1. Fast despatch of order.

2. Good packaging of order.

3. Easy to navigate, pretty website.

4. Most importantly – successful and efficient completion of next-day delivery service by courier.

On the flip side, the bad comments all focus on:

1. Products arriving broken (interpreted as bad packaging by customers).

2. Non-immediate despatch of order (usually only if out of stock of a particular product).

3. Some problem with the website.

4. Most importantly – failure of next-day delivery service by courier.

Few comments say much, if anything, about:

1. The product – it’s quality or anything else.

2. The price.

3. The customer service they receive from us.

To be honest, I find this quite depressing.  When we started out in this business, we wanted to bring fantastic authentic Spanish food to the UK and offer it at a sensible price.  We also committed to being an open, honest and friendly company that would treat customers well, so that they would enjoy dealing with us.  Looking back, I might just as well have set up to sell empty boxes, but with the commitment to offer them through a beautifully designed website with a guarantee of same-day delivery.

To make things worse, like many online sellers we outsource our logistics and delivery service – we have a warehouse that pick, pack and despatch our orders and a courier service that delivers them.  That’s to say, aside from constant goading and remonstrating, there is little to nothing I can do to affect the quality of the service coming from these partners.  Of course we are constantly monitoring and talking to account managers to try to improve things, but at ground level, on a transaction-by-transaction basis, it’s out of our hands – which means we live and die by their strengths and weaknesses.  So the praise we are getting, mostly for speedy delivery, is really praise of the courier service.  Likewise, most of the criticism we get is really nothing to do with us, but more directed at the logistics providers.  It seems our core proposition, offering great food, at a great price, coupled with great service, is entirely overlooked by the customer.

It’s frustrating, but of course the truth is a little more complicated.  Firstly, the reviews are skewed by sampling bias.  Only 5% of customers actually bother to leave a review, which means the results are exaggerated.  Reviews tend to be either 5 star or 1 star, reflecting the fact that customers will only respond if they are elated or seriously pissed off.  The others just receive their order and get on with it.  More importantly though, I have a feeling that these reviews show how e-customers are evolving (or not) with the times.  In an online world where you can get pretty much any product from a hundred sources, it is the customer-facing aspects of the business – like the website and delivery service – upon which customers judge your performance, even if to you these are only fringe aspects of your business.

“I’m really sorry, but WE ARE NOT THE COURIER”, is a phrase I repeat about 3 times a day.  I’ve had to use it in an attempt to excuse anything from a customer being on the toilet when the van arrived to an unshaven delivery driver.  Clearly, it’s quite ridiculous for the customer to be judging us on these factors – but guess what, they do.  They don’t care who’s who in their transaction, they just want their stuff, and quickly.

The Bottom Line

As business people, we’re constantly offered services that allow you to ‘focus on your real business’, anything from contracted accounting, customer service, admin or logistics.  Supposedly we’re supposed to be ‘doing what we do best’ – which I guess is some kind of business development to allow us to offer bigger better products at lower prices.  But before you get stuck in developing your next killer product, think about the empty-box scenario above.  Perhaps you need to give some more thought to those ugly, customer-facing aspects of the business on which your customers are judging you.  I know I do.