09 May 2008

Coles Express and predictable irrationality.

As gas prices rise around the world, it's not hard to see why consumers and governments are getting more and more irritated with gas retailers but perhaps they only have themselves to blame.

In Australia, the dominant supermarkets chains - Woolworths and Coles - have seen spectacular revenue growth from their entry into the petrol retailing market and a major contribution to this growth has been shopping docket priced discounts, mainly available through their supermarkets and liquor stores.

So when a furore broke over Coles' petrol pricing policies this week, it best illustrated the predictable irrationality around our brand based buying decisions.

Not less than two government pricing watchdogs, the Australian Competition and Consumer Commission and the new petrol price commissioner (yes, they do have one!!), warned Australian motorists to consider alternatives to the Coles Express stores following a survey into prices paid at the pump.

According to the price commissioner, Pat Walker, motorists who regularly used Coles Express discount dockets (available only after a $30 purchase in Coles Supermarkets and other Coles Group stores and offering an intial $0.03 off the per litre price), should shop around before buying petrol at Coles Express.

The Commission identified about 30 Coles Express sites in Sydney that were selling petrol for 155.9 cents a litre, when the average price was 143.3 cents a litre.

Although differences of 15 to 20 cents a litre among service stations were typical, the Commission had issued the statement because it believed the discrepancy was significant and was worried consumers might be buying out of habit.

The Commissioner's statement illustrates the kind of irrational behaviour identified by MIT professor Dan Ariely in his recent book, Predictable Irrationality: The Hidden Forces that Shape our Decisions.

In more than 20 years researching behavioral economics, Ariely discovered that people tend to behave irrationally in a predictable fashion. Drawing on psychology, economics and behavioral economics, Ariely's book demonstrates why cautious people make poor decisions about sex when aroused, why patients get greater relief from a more expensive drug over its cheaper counterpart (a 5 cent aspirin vs a 50 cent one), why we steal hotel soap. Or, in the case of Coles Express, why consumers are willing to buy petrol at more than 12c above the market rate just because they might benefit from a 3c cent or more discount.

According to Ariely, our understanding of economics which is currently based on the assumption of a rational subject, should, in fact, also be based on our systematic, unsurprising irrationality. It's also something that quantitative analysts in the financial markets have been dealing with for years.

Ariely argues that predictable irrationality provides an opportunity to gain a greater understanding of previously ignored or misunderstood forces (emotions, relativity, social norms and dare we say, brands) that influence our economic behavior brings a variety of opportunities for both consumers and brand owners to reexamine both individual motivation and consumer choice.

What's most interesting about the Coles Express example is that Ariely's predictable irrationality is being reinforced at the brand level. The station signage, ticketing and shelf ticketing provides a strong visual reinforcement of this irrational view that the consumer is actually saving. The constant message, right down to product naming, is always "saving".

Whether people associate Coles Express with value and hence saving, or its just plain laziness, can only really be explained by this predictable irrationality. And the brand messages simply serve to reinforce the perception of saving, even if it is, as the petrol price commission and the ACCC point out, it's not the case.

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