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OPEN ECONOMY: The customer’s impulse is king

14 Jun, 2015 - 00:06 0 Views

The Sunday Mail

It often crosses my imagination that if there were scriptures on economics, amongst them would be the Book of Impulses.

A significant part of economic experimentation, and subsequent understanding, has to do with constructing models that depend on people’s economic impulses.

For instance, the idea behind interest rates is that at lower interest rates you and I will impulsively save less and start consuming more. On the other hand, offered higher interest rates, we are probably going to save more and reduce on consumption.

A lot of economic impulses, just like these, have become somewhat naturally expected of us, even becoming categorised as “rational”; behaviour that any normal thinking human being is expected to follow.

These studied generalisations are of paramount importance to both retailers and policy-makers.

Numerous retail models from product pricing to marketing strategies, and just as many policy models from tax incentives to legal fines, are all constructed on the idea that human beings are expected to act in a certain way in accordance to a given economic situation.

However, the challenge faced by most of these models — and this is what many people fail to comprehend about why economics is inherently difficult — is that human beings are unpredictable creatures!

It is difficult to be conclusive about people’s behaviour, especially as it relates to their economic impulses.

It follows then that for retailers and policy-makers, it is crucial to find economic models that are increasingly accurate in capturing most of the people’s economic impulses. The most competent retailers and policy-makers continuously struggle to achieve this.

For instance, in retail, JC Penney, a pioneer of discount retailing and one of the world’s largest department stores, was experiencing declining sales in the early 2000s.

The board decided to hire well-respected and accomplished retailer Ron Johnson as the CEO. The board picked him for his canny ability to identify consumer tastes. Ron Johnson is the man behind the design of Apple stores.

He revolutionised how consumer electronics are displayed and sold worldwide. Today his vision is replicated by Samsung, Microsoft, LG and our local electronics stores.

Johnson’s first moves at JC Penney were to stop giving out sales coupons and to remove the traditional discount tags on clothing items.

He thought that consumers were more likely to pick an item simply tagged US$40, than an item tagged 20 percent discount on US$50.

In theory, this seemed like a sound pricing scheme that would appeal to rational consumer impulses.

The move, however, proved to be the demise of Johnson’s short tenure at JC Penney.

Sales plummeted even further and the removal of discount tags, though not affecting actual prices, was the culpable cause.

An instance where policy-making is vulnerable to the sensitivities of consumer impulses is also in the aforementioned example of interest rates.

While you probably agreed to being enticed into saving less when the market offers low interest rates, if those interest rates are kept low for too long, you are likely to start saving more for yourself.

Such an impulse would be motivated by the fear that with no investment propositions or accounts available to give you good returns in the long term, you have to start looking out for your own future.

Hence, prolonged low interest rates, in effect, end up encouraging less consumption and more saving.

This is a phenomenon currently being experienced in the Western world, leaving policy-makers seemingly dumbfounded at their struggles to boost economic activity.

This all goes to stress that people’s impulses are no easy thing to create economic models around.

Accordingly, it is this background which should inform the Buy Zimbabwe movement.

In any economic scenario, if an economy, institution or private entity is to derive benefit from people’s economic behaviour, it must understand the factors that motivate people’s impulses.

Thus, efforts to achieve Buy Zimbabwe objectives can only involve designing economic models, which most accurately identify Zimbabwean consumers’ impulses; specifically their purchasing motivations.

Later this month, there is a Buy Zimbabwe Summit in Victoria Falls.

While I am sure that discussion will focus on many correct concerns, such as policy support and how to encourage local producers’ competitiveness, I’d like to suggest that dialogue also centres on understanding the Zimbabwean consumer.

Particularly, it would be constructive if we did away with chastising the Zimbabwean consumer for buying foreign goods, especially without interrogating motives behind those impulses.

It is inadequate to be dismissive and just say it’s a Zimbabwean culture to want foreign things.

That may be so, but there are more influential motivations affecting spending patterns. I will mention a few quick considerations.

First, understand the consumers’ buying power. We are an economy suffering from low consumer demand. Incomes are low. This must make retailers reconsider their pricing models so as to match prices with realistic consumer buying power.

Traditional profiteering by sellers shows that this is a concept entirely absent from many of our retail models. Margins seem to be of greater importance to pricing than consumer demand.

That shouldn’t be the case.

A strategy in markets of low buying power is to rethink size of packaging. This matches pricing with what the consumer can afford in the short term, motivating a consumer to make a purchase. Likewise, smaller packaging has an effect of matching pricing with consumer standards of living.

Examples worthy of mention are Chibuku Super and Mazoe 2-litre bottles. Just as commendable are stores offering credit sales that allow consumers to pay over longer periods. Pricing based on consumer buying power helps win back customer equity in products that may have begun to be perceived as beyond livelihoods, of which foreign goods have become a competitive alternative.

Second, understand the consumers’ need for utility.

Retailers must be introspectively honest and understand the utility of their market offering to consumers’ livelihoods. This can only happen by understanding where exactly retailers strike an impact in the day to day life of the Zimbabwean consumer.

In our current economic circumstance, consumers have become more conscious of utility. Money is tight, and every purchase has to have notable utility.

Hence, retailers must consider if market offerings improve quality of life. It is a rather spoilt concern to bemoan lost customer equity without first questioning the utility you offer those customers.

Retailers must know this for themselves.

It seems economic pressures force our retailers into just being concerned about making the sale without being cognisant of the consumers’ livelihoods.

Be part of a consumer’s life!

I’d advise retailers to ask themselves: do their products have adequate utility to sustain a relationship with Zimbabwean consumers?

I believe that these are factors, which should lead the Buy Zimbabwe movement. Ultimately, what we are trying to achieve is win over the Zimbabwean consumers’ impulses.

I am worried that what I have heard and read thus far from this movement is a narrative of entitlement.

Particularly, it would be constructive if we did away with chastising the Zimbabwean consumer for buying foreign goods, especially without interrogating motives behind those impulses.

It is inadequate to simply ridicule this perceived culture of Zimbabweans wanting foreign things.

Firstly, Zimbabwean consumers do not owe anyone their hard-earned money.

Secondly, there are more influential motivations affecting spending patterns. This misguided expectation will only lead to keep our uncompetitive retail and policy models.

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