Jonathan Sinton

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  • Members of the backpacking and adventure industry, thank you for inviting me to debate this issue with you today. We at TNS are passionately committed to the success of our tourism industry – it’s one of the things our clients say they like most about working with us. As such, we have a strong PoV on issues that affect the success of the industry like discounting. I hope to convince you today that discounting is not a sensible option for our industry. In doing so, I am going to talk about three reasons why it is not sensible…..
  • Firstly, I will talk about the fact that it isn’t working….
    Secondly, I’ll explain the reason why it isn’t working. Namely, it is based on a false assumption about customer behaviour that has very long term consequences for your business
    Thirdly and finally, I want to leave you with a positive message by reminding you that there are other strategies that can help you just as much but with a different impact on your bottom line both in the long term and the short term.
    In doing so, I have drawn on a great deal of work TNS has done on consumer behaviour but also the pioneering work done by Dan Ariely of MIT in the US. For anyone who thinks discounting is the way to go, I can recommend you read his book ‘Predictably Irrational’.
  • But first let’s talk about the fact that it isn’t working. The industry has seen a prolonged bout of discounting but what has actually happened? In this I am indebted to Thumbrella and the team at YHA.
  • As we can see, numbers have declined quite sharply. Now we’ve heard many reasons for this including the high Aussie dollar and the global recession. But on the lead times most backpackers are planning a trip to Australia, the exchange rate was actually rather favourable to them.
    And if the GFC was the reason, well I think we’ve demonstrated that if it is affecting your decision it isn’t at the price point level – it’s whether or not to come at all.
    We have a number of theories of our own on why this is at TNS. Firstly, if you are going to come it looks like you will come anyway. So all that discounting your backpacker hostel is doing is giving the consumer more money to spend somewhere else.
    If the consumer is going to care whether it is $2 or 3 dollars more a night then they are going to go to Bali not Australia.
  • So my first point to you is: if discounting isn’t working and it’s costing you money, how can it be a sensible option?
  • Secondly, I want to probe a little bit deeper into the assumptions that underpin the use of discounting as a strategy:
    In this context, we think that there are two flaws in the reasoning behind discounting.
    -the consumer is thinking about that decision in the way that you are
    -and secondly – and most importantly - that this decision is rational.
    If there is one thing we know from all the research that we do is that it is emotion that drives customer decision-making not reason.
    When you put a discounted price into the current marketplace you are thinking about the fact that this is a tough time, that numbers are down, that the bed isn’t there to sell tomorrow and that the exchange rate is against you.
    What the customer is seeing is that this is what it really costs you to offer the service or worse, if the guy down the road has discounted further that you are actually overcharging for it…. Given we are talking backpackers they are probably calculating how much beer that equates to!
    This is because as human beings, we look at things relatively and not absolutely. This process is known as anchoring.
  • The prices others are charging for similar goods and services dictates what you expect to pay for this good and service.
    And the price you paid in the past also influences your decision.
  • The prices others are charging for similar goods and services dictates what you expect to pay for this good and service.
    And the price you paid in the past also influences your decision.
    MIT student experiment
    Students in a class at MIT were asked to write down the last two digits of their social security numbers and were asked if they would pay this amount for a number of products – a bottle of wine, a cordless mouse, a design book and a box of chocolates.
    They were then asked to write the last two digits down next to the list of products in the form of a price. For example, if the last two digits were 23 the student would write $23. They were then asked to write down the maximum price they would be prepared to pay for the products. When asked if their social security numbers influenced how much they were willing to pay for the product, there was a unanimous no.
    However, analysis of the data revealed that the social security numbers had in fact influenced the amount students were willing to pay – students with higher numbers were prepared to spend more, while those with lower numbers were not prepared to pay as much.
    This experiment displays what’s called ‘arbitrary coherence’. The basic idea of arbitrary coherence is that although initial prices are arbitrary, once those prices are established in our minds they will shape expectations of, not only present prices, but future prices also. In the experiment, the social security numbers formed an anchor for the students’ expectations, just as sale prices set an anchor for what travellers are prepared to pay for their trips. This is very powerful, as once the expectation is set, it becomes the coherence – the understanding people have of what the product or service is worth.
  • On paper, this looks like an argument in favour of discounting – because you are pretty much forced into it. But what it actually says is that you should.
    Now does that sound like a sensible strategy?
    My colleague Carolyn Childs spoke to you last year about the issue of using price as the main lever for your brand or category. She made the point that it is this attitude that creates the perception of the backpacker category as price sensitive. Or as another brand guru put it
  • Feeling depressed? Let’s come now to the third of my premises – which is more positive.
  • Now if you are thinking that isn’t true and backpackers are price sensitive I’d like you to think again. Think about the kit that those backpackers bring with them…. iPods, iPads and iPhones, digital cameras and videos, branded trainers and clothing. Very few of those items are ones on which they are price sensitive or where the people who bought them are price sensitive. Apple, Nike, Adidas and even events like Splendour in the Grass have all made good money from making something so desirable that ‘price sensitive’ youth is prepared to pay a handsome yield on it!
    Similarly, what if one of the chains in the room offered a deal on their top level rooms that could be purchased as a gift in advance by parents or well wishers? Wouldn’t that be better than selling your cheapest room at a massive discount two days out?
  • The other element of the consumer psychology that you can exploit is the POWER OF FREE!
  • Press F5 or use the tool bar to enter presentation mode in order to see the poll.
    http://www.polleverywhere.com/multiple_choice_polls/MTA1Nzg2ODM0Mw
    Behaviour towards free is irrational as most will jump at the mention of it rather than make a choice to receive something of greater value.
    If you like, you can use this slide as a template for your own voting slides. You might use a slide like this if you feel your audience would benefit from the picture showing a text message on a phone.
    In an emergency during your presentation, if the poll isn't showing, navigate to this link in your web browser:
  • So faced with such a positive outcome, you can see why you should vote No to the idea that discounting is a sensible idea in a price driven industry. Thank you!
  • Jonathan Sinton

    1. 1. Motion against Discounting in a price sensitive industry is not sensible: It isn’t working It’s based on false assumptions about consumer behaviour There are better options for long term business success 3 2 1
    2. 2. It isn’t working Numbers Nights Expenditure m$ Jun-09 vs. Jun-10 7% decrease Jun-09 vs. Jun-10 10% decrease Jun-09 vs. Jun-10 17.5% decrease Source: International Visitor Survey (IVS) by YHA Ltd. (http://thumbrella.com.au/yha-study-reveals-true- picture-behind-latest-ivs-backpacker-numbers-9536) Year-on-Year Backpacker Statistics
    3. 3. If discounting isn’t working and it’s co$ting you money, how can it be a sensible option?
    4. 4. Consumer behaviour isn’t rational it is that drives customer decision-making … not reason
    5. 5. The prices others are charging for similar goods and services dictates what you expect to pay for this good and service. And the price you paid in the past also influences your decision.
    6. 6. Arbitrary coherence Product 0-19 20-39 40-59 60-79 80-99 Bottle of wine $11.73 $22.45 $18.09 $24.55 $37.55 Chordless mouse $9.64 $11.82 $13.45 $21.18 $26.18 Design book $12.82 $16.18 $15.82 $19.27 $30.00 Box of chocolates $9.55 $10.64 $12.45 $13.27 $20.64 Social security numbers Average price paid for each product
    7. 7. only discount today if you are prepared to do so for a long time and if you want your business decisions to be bound by the most broke, most desperate and most awful backpackers in Australia
    8. 8. Tom Dorresteijn, Visual Branding The consumer will treat your brand like you treat the consumer. If your brand has no personality and no warmth, the consumer will treat it likewise: zero loyalty, high price senstivity
    9. 9. It doesn’t have to be this way. The very quirks of the human brain that make discounting a bad idea offer us options that are sensible – and can make this industry less price sensitive.
    10. 10. the POWER OF FREE!
    11. 11. The power of free  Q: If you were offered the choice between the following gift certificates from Amazon which would you choose?  A: A free $10 certificate [FREE1]  B: A $20 gift certificate for the cost of $7 (delivering a $13 profit) [FREE2] TO VOTE: Please vote for A or B, by texting the option code to 0429 883 481. E.g. to vote for option A enter the code ‘FREE1’ in the message text.
    12. 12. The power of free
    13. 13. Discounting is NOT a sensible idea in a price driven industry

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