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Posts Tagged ‘Fairness’

Transparency; reliability; trust: These key terms are rehearsed and highlighted many times in textbooks and business books, academic and trade articles about managing customer relationships. Holding up to them is based, for example, on being honest, truthful and fair when making product or service offers to customers and in any other dealings between a company and its customers. However, those concepts that are good in managerial and marketing theory are too often lost when it comes to practice.

In addition, experts, technology consultants and other advocates of digital marketing are praising the capacity gained by companies to know so much about the behaviour and personal characteristics of their customers. One of the great benefits of this customer knowledge is in enabling companies to construct offers that will closely fit the needs, preferences and consumption or usage habits of their customers. Again, a gap emerges between what companies are supposedly capable to do with digital technologies available to them, including information and tools, and what they actually do. More accurately,  oftentimes companies are not doing enough in utilising those technologies to the intended purpose of creating better fitting offerings and messages.

The present post is based on a true story of a troubling journey to acquire an iPhone from a mobile telecom service provider (it will be called here ‘WM’). But this post is not just about the case of a particular company. Similar forms of problematic conduct are likely to be encountered at competing mobile service providers as well as other telecom service companies such as TV (cable and satellite), telephony (voice and data) and Internet providers. Moreover, at least some of these types of flawed conduct will be familiar to the reader from interaction with service providers in other domains (e.g., banking and finance, credit cards, insurance, healthcare, travel and tourism). In essence, this conduct refers most typically to providers of contractual services, and particularly when services extend over months and years.

An upgrade of a customer’s mobile phone is often accompanied by a modification of his or her service package; it is justified especially when a large generation gap exists between the previous and the new model. Two-part and three-part tariff schemes have been common in mobile communication for many years, splitting the price of service between fixed and variable components. Usage possibilities and patterns have changed, however, with smartphones, pertaining in particular to the online flow of data and the use of mobile applications (‘apps’). Service packages more frequently combine bundles of included (‘pre-paid’) units — minutes (voice), messages (SMS), and data MBs/GBs (mobile websites and apps); the weight of variable cost (i.e., based on price per unit), drops vis-à-vis a fixed cost component.

Subscribed customers are encouraged to pre-commit to ever larger bundles or unit quotas, some of them could constantly be left unspent each month. At least in one category it is sensible for mobile service providers to ‘give away’ a large quantity of messages amid the expanded messaging by customers via free chatting apps (e.g., WhatsApp, Facebook’s Messenger). The marginal cost per unit of any kind could be much lower now for the mobile network companies to make it economic for them to offer larger bundles, and thus attract customers to their ‘great value’ plans (i.e., the customer gets lots of ‘free’ units). Albeit, if customers do not utilise large enough portions of their quotas, they could end up paying for units they never get to benefit from.

A service plan was offered with the new phone purchased, including 10GBs of data, 5000 minutes and 5000 messages per month. This volume signalled a dramatic increase from my previous consumption levels. No doubt the new smartphone could support a huge data volume not possible with the previous semi-smartphone model, but also a volume hard to imagine how it may be used. Nor was it perceivable how to use anything near 5000 SMS. That is the magic of large numbers — they can be fascinating and captivating, yet meaningless at least in a short to medium term. The sales representative at the store and service centre of WM promised that it will save up to 45% of my bill so far. With the service package I get also ‘marvellous high-fidelity’ wireless-Bluetooth earphones, supposedly as a bonus or gift. No other plan was suggested. The relation of the earphones to the discount was not explained. Protesting that I do not really need those earphones did not help. It was awkward, but then it seemed that the enlarged traffic volume, that one might learn how to take advantage of, with a reduction in monthly cost could be worth it. The value of the earphones was negligible to me (but apparently not to WM). That is probably where System 1 got the hold of me. When not feeling on solid ground, swapped with documentation, and distracted, one may fail to pose difficult, intelligent questions;  System 2 remains dormant or blocked. It was a combination of desire to believe the offer is good for me, and to trust the company that it will treat me fairly.

The secret behind the earphones was revealed in the next monthly bill. If paid in cash, their price was about $150 vis-à-vis $900 for the iPhone. I agreed to pay for the iPhone in 12 credit installments (adding  5% in cost). However, the additional and unexpected payment for the earphones was set to be spread over 36 months (+65%! added to price in cash). The discount on service was for 12 months. The payments for the earphones would “eat” much of the discount during the first year. Furthermore, they will drag for another 24 months while the cost of service package returns to its previous level, though of course with a much greater usage allowance. Lesson: Beware of ‘free gifts’ and make sure to get all the details (see more in the section below on contracts).

This has brought me promptly back to the service centre — the staff refused to take their earphones back and gave me another nice demonstration of their performance. However, with the help of a kind supervisor we agreed that payments for both iPhone and earphones will be changed to 6 instalments with no interest (see more in the section on execution).

The Bluetooth earphones may well be a good product and the representatives were right to offer it, but it is wrong to impose the earphones as a ‘bonus’ or incentive if the customer is not interested and declines the offer. Furthermore, at least one other package option should have been recommended that would be more aligned with previous usage in recent months. A smart system should know how to use past behaviour of the customer as a benchmark and propose a reasonable expansion of usage levels of minutes, messages and data. First, it would make the customer feel that the company knows him or her (e.g., needs and usage patterns) and is trying in accordance to provide the most suitable personalised solutions. Second, when the quota of units posits a sensible ‘ceiling’ to the customer it may serve as a goal or an aspiration level to gradually increase his or her usage towards it, and then upgrade the service plan. Otherwise, the customer may be just lost, having no appreciative reference for scaling one’s personal usage levels (perhaps that is the objective, to let customers with less self-control carry away, but that is beyond the scope of this story).

Signing contracts to purchase products or receive services is frequently a sensitive matter and a host of potential pain points. This happens because customers usually cannot fully or even adequately read the contract and comprehend it at the time of transaction, and they are not sufficiently encouraged to spend the time reading and asking questions. The contract for my smartphone included, for example, the terms of payment, basic support, terms of usage,  liability and warranty, etc.. On each desk at the store and service centre of WM stands a tablet in portrait position. Regularly, it displays ads for services and products. However, WM saves on paperwork and employs the screen also to display contracts that can be signed digitally (later sent by e-mail). Reading the contract from the screen is not very convenient and the customer also cannot control the display to the pace of his or her reading. One is quickly brought to the place for signing. The contract for the earphones was separate in origin from the iPhone’s (later corrected); when the representative came to it, he jumped to the signature position which incidentally fell at the top of the screen. When asked to see what comes before, he said this is simply to confirm that I accept the earphones. At that point I wanted to trust him and WM. This turned out to be a mistake. Lesson: Never agree to sign a contract on a screen without seeing the previous screen pages (as you should not do when signing a paper contract). The tablet screen may appear informal and friendly but the contract is binding.

  • In fact, by returning to the issue of service plans, the tablet already on the desk can be used cleverly for displaying service options to a customer while taking into account his or her personal usage patterns. That is, the company can show the customer what would be the cost implication of a proposed service plan given current usage levels, and how it may change if usage levels increase by X%.

On top of all, bad execution of proceedings can temper even actions taken in good faith. It may happen as a result of neglect, lacking proficiency by the staff (e.g., how to use the computer system), or flaws in computer software (e.g., poor execution of instructions). Here are two examples — no attempt is made to guess what has caused them:

As told above, the payment arrangement was changed with special managerial consent to six instalments with no interest, as an option in the contract allows, for both the iPhone and earphones. Unfortunately, a notice from the bank as well as the credit card monthly bill soon revealed that the whole amount was charged in a single payment. The trap is apparently in the phrasing of the contract (translated): “The sum of $$$ that will be charged in one payment (or up to six payments to the choice of the customer at the time of acquisition)”. The phrase ambiguously does not specify in how many (equal) payments, up to six, that (cash) price will be charged. This ambiguity has led to practically ignoring the content in parentheses and what was agreed accordingly. It is noted that a statement on an option of payment in instalments with interest explicitly indicates the number of payments and amount of each one. The phrasing of the first statement must similarly be fixed for that option to have any validity.

In the second case, the company left in place a monthly charge (~$6) for a quota of 70 SMS from my previous service package. Obviously, this number is negligible relative to the new allowance of 5000 SMS a month in the new service plan with the iPhone. They should have automatically removed this obsolete component together with other components from the older plan. The customer service representative at the call centre argued that I should have asked it to be cancelled. That is, instead of apologising for an honest mistake, and possibly reimbursing me for the past month, she made it look as if I may have wanted a non-significant addition of 70 SMS to 5000 SMS (>70:1 ratio). That was already infuriating because it made no sense at all. Lesson: Always check your bills carefully.

The customer journey to purchase an iPhone evolved into a kind of chain of pitfalls, acts of malpractice, and errors of unknown source or cause. It must be emphasised that the troubles are concerned with the envelope of services that enable using the iPhone and not the device itself. It is a story of failure of sales and service representatives to listen, a tendency to repeat answers regardless of the customer’s response (i.e., lack of sensitivity or rigidity forced from above), and possibly a skill problem in retrieving information and instructing their computer systems correctly. Where supervisors or managers do try to fix things, organisational and technological pitfalls may stand in their way. Nonetheless, the more disturbing moments of the experience surface when a customer feels an attempt to manipulate has been made (e.g., by diverting attention or hiding information). Being manipulated generally feels uneasy, because among other things it infringes on a consumer’s autonomy to make a decision in one’s own good, but it is all the more damaging when done just to serve the manipulator’s interest (e.g., make a sale)[*].

Companies and customers alike can help in minimising negative encounters that can spoil customer journeys. Consumers can be more vigilant, pay more attention to details, and ask questions when offers do not sound or look right. Yet in the real world consumers cannot avoid being off guard, erring in judgement, or being complacent — much of the time humans are driven by the intuitive and instinctive System 1 mode of thinking. Companies can make greater effort to ensure customers have the relevant information and comprehend it; be attentive to what customers ask or argue; and overall show respect to customers and refrain from egregiously exploiting their cognitive vulnerabilities — perhaps naïve, but not illegitimate to expect.

Ron Ventura, Ph.D. (Marketing)

 

[*] Further reading: “Fifty Shades of Manipulation”; Cass R. Sunstein , 2016; Journal of Marketing Behavior, 1 (3-4), pp. 213-244.

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Fifteen years have passed since a Nobel Prize in economics was awarded to Daniel Kahneman to this time (Fall 2017) when another leading researcher in behavioural economics, Richard Thaler, wins this honourable prize. Thaler and Kahneman are no strangers — they have collaborated in research in this field from its early days in the late 1970s. Moreover, Kahneman together with the late Amos Tversky helped Thaler in his first steps in this field, or more generally in meeting economics with psychology. Key elements of Thaler’s theory of Mental Accounting are based on the value function in Kanheman and Tversky’s Prospect theory.

In recent years Thaler is better known for the approach he devised of choice architecture and the tools of nudging, as co-author of the book “Nudge: Improving Decisions About Health, Wealth and Happiness” with Cass Sunstein (2008-9). However, at the core of the contribution of Thaler is the theory of mental accounting where he helped to lay the foundations of behavioural economics. The applied tools of nudging are not appropriately appreciated without understanding the concepts of mental accounting and other phenomena he studied with colleagues which describe deviations in judgement and behaviour from the rational economic model.

Thaler, originally an economist, was unhappy with predictions of consumer choice arising from microeconomics — the principles of economic theory were not contested as a normative theory (e.g., regarding optimization) but claims by economists that the theory is able to describe actual consumer behaviour and predict it were put into question. Furthermore, Thaler and others early on argued that deviations from rational judgement and choice behaviour are predictable.  In his ‘maverick’ paper “Toward a Positive Theory of Consumer Choice” from 1980, Thaler described and explained deviations and anomalies in consumer choice that stand in disagreement with the economic theory. He referred to concepts such as framing of gains and losses, the endowment effect, sunk costs, search for information on prices, regret, and self-control (1).

The theory of mental accounting developed by Thaler thereafter is already an integrated framework that describes how consumers perform value judgements and make choice decisions of products and services to purchase while recognising psychological effects in making economic decisions (2).  The theory is built around three prominent concepts (described here only briefly):

Dividing a budget into categories of expenses: Consumers metaphorically (but sometimes physically) allocate the money of their budget into buckets or envelopes according to type or purpose of expenses. It means that they do not transfer money freely between categories (e.g., food, entertainment). This concept contradicts the economic principle of fungibility, thus suggesting that one dollar is not valued the same in every category. A further implication is that each category has a sub-budget allotted to it, and if expenses in the category during a period surpass its limit, a consumer will prefer to give up on the next purchase and refrain from adding money from another category. Hence, for instance,  Dan and Edna will not go out for dinner at a trendy restaurant if that requires taking money planned for buying shoes for their child. However, managing the budget according to the total limit of income in each month is more often unsatisfactory, and some purchases can still be made on credit without hurting other purchases in the same month. On the other hand, it can readily be seen how consumers get into trouble when they try to spread too many expenses across future periods with their credit cards, and lose track of the category limits for their different expenses.

Segregating gains and integrating losses: In the model of a value function by Kahneman and Tversky, value is defined upon gains and losses as one departs from a reference point (a “status quo” state). Thaler explicated in turn how properties of the gain-loss value function would be implemented in practical evaluations of outcomes. The two general “rules”, as demonstrated most clearly in “pure” cases, say: (a) if there are two or more gains, consumers prefer to segregate them (e.g., if Chris makes gains on two different shares on a given day, he will prefer to see them separately); (b) if there are two or more losses, consumers prefer to integrate them (e.g., Sarah is informed of a price for an inter-city train trip but then told there is a surcharge for travelling in the morning — she will prefer to consider the total cost for her requested journey). Thaler additionally proposed what consumers would prefer doing in more complicated cases of “mixed” gains and losses, whether to segregate between the gain and loss (e.g., if the loss is much greater than the gain) or integrate them (e.g., if the gain is larger than the loss so that one remains with a net gain).

Adding-up acquisition value with transaction value to evaluate product offers: A product or service offer generally exhibits in it benefits and costs to the consumer (e.g., the example of a train ticket above overlooked the benefit of the travel to Sarah). But value may arise from the offering or deal itself beyond the product per se. Thaler recognised that consumers may look at two sources of value, and composing or adding them together would yield the overall worth of a product purchase offer: (1) Acquisition utility is the value of a difference between the [monetary] value equivalent of a product to the consumer and its actual price; (2) Transaction utility is the value of a difference between the actual price and a reference price. In the calculus of value, hides the play of gains and losses. This value concept was quite quickly adopted by consumer and marketing researchers in academia and implemented in means-end models that depict chains of value underlying the purchase decision process of consumers (mostly in the mid-1980s to mid-1990s). Thaler’s approach to ‘analysing’ value is getting more widely acknowledged and applied also in practice, as expressions of value as such in consumer response to offerings can be found in so many domains of marketing and retailing.

A reference price may receive different representations, for instance: the price last paid; price recalled from a previous period; average or median price in the same product class; a ‘normal’ or list price; a ‘fair’ or ‘just’ price (which is not so easy to specify). The transaction value may vary quite a lot depending on the form of reference price a consumer uses, ceteris paribus, and hence affect how the transaction value is represented (i.e., as a gain or a loss and its magnitude). Yet, it also suggests that marketers may hint to consumers a price to be used as a reference price (e.g., an advertised price anchor) and thus influence consumers’ value judgements.

We often observe and think of discounts as a difference between an actual price (‘only this week’) and a higher normal price — in this case we may construe the acquisition value and transaction value as two ways to perceive gain on the actual price concurrently. But the model of Thaler is more general because it recognizes a range of prices that may be employed as a reference by consumers. In addition, a list price may be suspected to be set higher to invoke in purpose the perception of a gain vis-à-vis the actual discounted price which in practice is more regular than the list price. A list price or an advertised price may also serve primarily as a cue for the quality of the product (and perhaps also influence the equivalent value of the product for less knowledgeable consumers), while an actual selling price provides a transaction value or utility. In the era of e-commerce, consumers also appear to use the price quoted on a retailer’s online store as a reference; then they may visit one of its brick-and-mortar stores, where they hope to obtain their desired product faster, and complain if they discover that the price for the same product in-store is much higher. Where customers are increasingly grudging over delivery fees and speed, a viable solution to secure customers is to offer a scheme of ‘click-and-collect at a store near you’. Moreover, when more consumers shop with a smartphone in their hands, the use of competitors’ prices or even the same retailer’s online prices as references is likely to be even more frequent and ubiquitous.


  • The next example may help further to illustrate the potentially compound task of evaluating offerings: Jonathan arrives to the agency of a car dealer where he intends to buy his next new car of favour, but there he finds out that the price on offer for that model is $1,500 higher than a price he saw two months earlier in ads. The sales representative claims prices by the carmaker have risen lately. However, when proposing a digital display system (e.g., entertainment, navigation, technical car info) as an add-on to the car, the seller proposes also to give Jonathan a discount of $150 on its original price tag.
  • Jonathan appreciates this offer and is inclined to segregate this saving apart from the additional pay for the car itself (i.e., ‘silver-lining’). The transaction value may be expanded to include two components (separating the evaluations of the car offer and add-on offer completely is less sensible because the add-on system is still contingent on the car).

Richard Thaler contributed to the revelation, understanding and assessment of implications of additional cognitive and behavioural phenomena that do not stand in line with rationality in the economic sense. At least some of those phenomena have direct implications in the context of mental accounting.

One of the greater acknowledged phenomena by now is the endowment effect. It is the recognition that people value an object (product item) already in their possession more than when having the option of acquiring the same object. In other words, the monetary compensation David would be willing to accept to give up on a good he holds is higher than the amount he would agree to pay to acquire it —  people principally have a difficulty to give up on something they own or endowed with (no matter how they originally obtained it). This effect has been most famously demonstrated with mugs, but to generalise it was also tested with other items like pens. This effect may well squeeze into consumers’ considerations when trying to sell much more expensive properties like their car or apartment, beyond an aim to make a financial gain. In his latest book on behavioural economics, ‘Misbehaving’, Thaler provides a friendly explanation with graphic illustration as to why fewer transactions of exchange occur between individuals who obtain a mug and those who do not, due to the endowment effect vis-à-vis a prediction by economic theory (3).

Another important issue of interest to Thaler is fairness, such as when it is fair or acceptable to charge a higher price from consumers for an object in shortage or hard to obtain (e.g., shovels for clearing snow on the morning after a snow storm). Notably, the perception of “fairness” may be moderated depending on whether the rise in price is framed as a reduction in gain (e.g., a discount of $2o0 from list price being cancelled for a car in short supply) or an actual loss (e.g., an explicit increase of $200 above the list price) — the change in actual price is more likely to be perceived as acceptable in the former case than the latter (4). He further investigated fairness games (e.g., Dictator, Punishment and Ultimatum). Additional noteworthy topics he studied are susceptibility to sunk cost and self-control.

  • More topics studied by Thaler can be traced by browsing his long list of papers over the years since the 1970s, and perhaps more leisurely through his illuminating book: “Misbehaving: The Making of Behavioural Economics” (2015-16).

The tactics of nudging, as part of choice architecture, are based on lessons from the anomalies and biases in consumers’ procedures of judgement and decision-making studied by Thaler himself and others in behavioural economics. Thaler and Sunstein looked for ways to guide or lead consumers to make better choices for their own good — health, wealth and happiness — without attempting to reform or alter their rooted modes of thinking and behaviour, which most probably would be doomed to failure. Their clever idea was to work within the boundaries of human behaviour to modify it just enough and in a predictable way to put consumers on a better track to a choice decision. Nudging could mean diverting a consumer from his or her routine way of making a decision to arrive to a different, expectedly better, choice outcome. It often likely involves taking a consumer out of his or her ‘comfort zone’. Critically important, however, Thaler and Sunstein conditioned in their book ‘Nudge’ that: “To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates“. Accordingly, nudging techniques should not impose on consumers the choice of any designated or recommended options (5).

Six categories of nudging techniques are proposed: (1) defaults; (2) expect errors; (3) give feedback; (4) understanding “mappings”; (5) structure complex choices; and (6) incentives. In any of these techniques, the intention is to allow policy makers to direct consumers to choices that improve the state of consumers. Yet, the approach they advocate of ‘libertarian paternalism’ is not received without contention —  while libertarian, that is without coercing a choice, a question remains what gives an agency or policy maker the wisdom and right to determine which options should be better off for consumers (e.g., health plans, saving and investment programmes). Thaler and Sunstein discuss the implementation of nudging mostly in the context of public policy (i.e., by government agencies) but these techniques are applicable just as well to plans and policies of private agencies or companies (e.g., banks, telecom service providers, retailers in their physical and online stores). Nevertheless, public agencies and even more so business companies should devise and apply any measures of nudging to help consumers to choose the better-off and fitting plans for them; it is not for manipulating the consumers or taking advantage of their human errors and biases in judgement and decision-making.

Richard Thaler reviews and explains in his book “Misbehaving” the phenomena and issues he has studied in behavioural economics through the story of his rich research career — it is an interesting, lucid and compelling story. He tells in a candid way about the stages he has gone through in his career. Most conspicuously, this story also reflects the obstacles and resistance that faced behavioural economists for at least 25-30 years.

Congratulations to Professor Richard Thaler, and to the field of behavioural economics to which he contributed wholesomely, in theory and in its application.    

Ron Ventura, Ph.D. (Marketing)

Notes:

(1) Toward a Positive Theory of Consumer Choice; Richard H. Thaler, 1980/2000; in Choices, Values and Frames (eds. Daniel Kahneman and Amos Tversky)[Ch. 15: pp. 269-287], Cambridge University Press. (Originally published in Journal of Economic Behaviour and Organization.)

(2) Mental Accounting and Consumer Choice; Richard H. Thaler, 1985; Marketing Science, 4 (3), pp. 199-214.

(3) Misbehaving: The Making of Behavioural Economics; Richard H. Thaler, 2016; UK: Penguin Books (paperback).

(4) Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias; Daniel Kahneman, Jack L. Knetsch, & Richard H. Thaler, 1991/2000; in Choices, Values and Frames (eds. Daniel Kahneman and Amos Tversky)[Ch. 8: pp. 159-170], Cambridge University Press. (Originally published in Journal of Economic Perspectives).

(5) Nudge: Improving Decisions About Health, Wealth, and Happiness; Richard H. Thaler and Cass R. Sunstein, 2009; UK: Penguin Books (updated edition).

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A consumer who eats a chocolate product would want to know that it contains the ingredients it is supposed to — mainly cocoa. That sounds so reasonable and understandable. If you are a true chocolate lover, it is not enough that the food product tastes like chocolate; you want it to be really a chocolate. This is expected not only from chocolate bars and confiserie (pralinés, truffles) where it is obvious. It should also hold for snacks like chocolate-coveted waffles, cookies and biscuits with chocolate, and milk delicatessen with chocolate. But “chocolate products” are not always what consumers would expect or believe them to be. One example as such is a milk deli called “Milky” from Strauss dairy company (Israel).

Some companies may think that resembling chocolate in flavour and appearance is enough. It does not have to be a complete fake (i.e., no cocoa, just flavour and colour substitutes). The more clever companies include in the product some cocoa substances, only to give it a feeling of chocolate. However, formal food standards are quite strict and require that a product contains a minimum (proportional) amount of cocoa substances to be designated as “chocolate” or a “chocolate product”. An honest company that sells a product which does not stand by the standard can state that its product is “chocolate flavoured”, though it leaves the consumer to figure out what that means. Yet sometimes companies tempt to hide the reality about the chocolate content of their presuming product.

Milky is a special dairy deli product. It comes in two layers: a chocolate cream at the base (about 2/3 of the cup) and whipped cream on top. This combination has bought Milky many fans — some prefer to keep the layers in place and dig in with a spoon to pick some chocolate cream from below and then take whipped cream from above, whilst others simply mix the creams well together and indulge on the composition. Milky was created and first launched in 1979 when Strauss, now the second-sized dairy in Israel, was a marginal local dairy. But the deli has made its leap to fame and popularity only in the early 1990s following its wonderful, humourous commercial “The Chase for Milky” (two housewives chase each other in a supermarket to collect the last Milky on the shelf). It was one of the best executions of a TV commercial in the early days of advertising on TV in Israel (Channel 2) , and it quickly caught the attention and favour of consumers.  Along the years Strauss has added variations of Milky like a supplement 0f tiny candy beans, “extra chocolate”, and “mini” serving.

But is the chocolate cream really made of cocoa, its essential component? Two class action suits against Strauss (for 274m shekels=~€62m), submitted in 2013, have put the composition of the chocolate cream into question. Two claims were made, one against the label title declaring the product as “Milky Chocolate”, and another regarding an image of a chocolate cube on the label. The two lawsuits were settled together this month (February 2015) in court in a compromise agreement between the plaintiffs and Strauss.

Only a symbolic monetary compensation was awarded because no direct damage to the plaintiffs or the consumers they represent could be proven  — though Strauss has agreed to donate dairy products in worth of 300,000 shekels (~€70,000) to a peripheral hospital or a similar association as decided by court. But although the litigation ended in a compromise the bottom line is that Strauss was charged with wrongdoing by misleading consumers and was ordered to change the way it describes its Milky products (“Milky Chocolate”, and its “extra chocolate”, “mini” and “light” versions). The judge ruled that the designation “chocolate”, as if the product contains chocolate, misrepresents its content; the label should instead state that Milky is “in chocolate flavour”. It was also confirmed that the picture image of a chocolate cube may give consumers a false impression about the product’s nature but without concluding that the image should be removed.

The heart of chocolate is its cocoa content: The amount of cocoa mass and cocoa butter (making up cocoa solids) in the final product. The European Union regulation from 2003 requires that for being designated “chocolate” or “chocolate (contained) product” cocoa solids must compose at minimum 25% of the product’s weight. This minimum particularly describes “milk chocolate” as the baseline. The practical norms vary for different types of chocolate. In Belgium, for example, the norm is that milk chocolate contains 30-35% cocoa solids, and dark or bitter chocolate includes 70% cocoa solids (extra bitter chocolate will have even 80-90% cocoa solids). White chocolate has only ~20% cocoa butter and no mass and therefore some connoisseurs question its status as “chocolate”.

  • The rule for (brown) chocolate in the EU is that cocoa mass should weigh at least 2.5% of the product, the rest of the cocoa solids made of cocoa butter. However, a larger amount of cocoa mass will improve the taste of chocolate (e.g., richness). The amount, quality and processing of cocoa beans making the cocoa mass are determinants of the overall quality of the chocolate.

The chocolate portion of a product comprises primarily cocoa solids, milk solids (including milk fat) and sugar. Producers of inferior or imitation chocolate replace cocoa butter (fat) with vegetable fats, yet the EU has entered a stipulation that vegetable fat can account for no more than 5% of the chocolate portion of the product (not of its total weight!). Other ingredients of the product (e.g., nuts, honey filling) contribute to the total product weight in addition to the chocolate portion or mix.

  • The UK has been specially allowed to market milk chocolate with just 20% cocoa solids and 20% milk solids whereas in continental Europe the norm is a mix ratio of 25% cocoa solids to 14% milk solids of total product weight. However, Europeans designate the former mix as “family milk chocolate” to be distinguished from their “milk chocolate”.

The current standard in Israel from 1996 refers to a minimum requirement of 30% cocoa solids in chocolate, but the Standard Institution of Israel notes it is “under revision” (according to a draft proposal from August 2014 the SII may adopt the EU rules). It is not revealed if the Milky product contains an insufficient amount of cocoa solids (even just cocoa butter) or none at all. Yet, whether the court ruling is based on the current standard or considering the prospect standard in line with the EU, the level of cocoa solids in Milky has had to be low enough to fail formal chocolate regulations either way. Since the product is largely made of milk produces, it may give the manufacturer a relatively large space for maneuvering between cocoa solids and milk solids. Ironically, the “extra” version of Milky that contains a greater amount of chocolate cream, and perhaps should have been “darker” chocolate, is not recognized as “chocolate” either.

It is very much possible that Milky did contain a larger proportion of cocoa substances in its chocolate cream in previous years. Manufacturers tend to get into a quality-price cycle in which they try with time to lower their costs by reducing the amount of higher quality ingredients in their products that are more expensive, thus lowering the product’s quality; they may nevertheless continue to raise the price to consumers to improve their profitability. There could be mitigating circumstances in this case, but the question is how companies like Strauss handle them. The rising prices of raw cocoa in the global market, especially so in the past few years, could have pushed manufacturers to gradually use less cocoa in the chocolate portions of their products. The alternative would be to raise the consumer price, but that has a limit in consumer acceptance — particularly in view of the growing social protest since 2010. It is worthy to note that the price of Milky in Israel compared with similar products in Europe played a role in this protest last fall.

Therefore, if Strauss has reduced the amount of cocoa in Milky to control its costs, it was wrong to conceal it from consumers. But pricing Milky as purportedly a chocolate product in disregard that it contains less or none of its more expensive ingredient, cocoa, is seemingly a grave mistake. Consumers are more dispositioned to perceive a company as unfair when it increases rather than only protects its profits. Strauss claimed that it had changed the labeling more than a year ago (as currently appears on their Milky labels) but it did not dissuade the judge from including the requirement in the compromise agreement.

Truly, Strauss and Milky are not alone in this game. Competing milk delis of chocolate cream are apparently also imitations given that they are labeled as “milk deli in chocolate flavour”. Additionally, a similar charge was made against a popular “chocolate” spread (“Hashachar Haole” — Hebrew for The Rising Dawn) that did not make clear on its packages that it actually had no chocolate in it as defined by standard regulations. It is now described as a “select cream for spreading”, specifying at most the cream is “in chocolate flavour”.

  • Cocoa can also have positive health implications. Research in past years has suggested that cocoa beans carry a benefit for cardiovascular performance where content in their nibs supports the growth of blood vessels, and increases blood circulation, helping to lower blood pressure. Moreover, a recent study (at University of L’Aquila in Italy with Mars Inc., cited in Scientific American) suggests that this is good not only for our heart but also for our brain: a better flow of oxygen to the brain improves cognitive functions. This benefit is attributed to compounds in raw cocoa beans known as flavanols. There is, however, a practical caution for consumers: The level of flavanol in chocolate products could be much lower than in raw cocoa due to food processing methods in use (even for dark chocolate), too little to have the expected effect. That may come as quite a disappointment for chocolate consumers. It is apparent that consumers should not hope for health benefits of this kind in products like Milky or Hashachar Haole.

This affair is a cause for embarrassment to Strauss. First, Milky has been a flagship brand and a source of pride for the company. The affair is hurting the brand of Milky by potentially diminishing the perceived quality of its product. Second, Strauss is now united with Elite, a major chocolate producer in Israel that was once an independent company and these days is a prime brand of Strauss, acting as an endorsing or umbrella brand for multiple product ranges (e.g., chocolate, coffee, candies). Therefore, Strauss management should have known better. It suggests that the two merged companies are still not properly integrated and there is not enough learning and collaboration between their managerial and professional staff. The damage to Strauss is accentuated by the fact that it has been publicly forced through a legal litigation to label its Milky products “in chocolate flavour”.

The takeaway to food manufacturers should be clear: Do not try to deceive consumers and let them believe their products have properties or ingredients they do not actually hold. Sadly, it is neither unusual nor new for companies to hide from consumers the true compositions of their products or any changes made in them over time. Milky could garner more consumer respect and support by describing it as “chocolate flavoured” but at the same time informing consumers of an actual, low yet non-zero proportion of cocoa solids in the product. Just do not try to hide it under the carpet because someone will lift the carpet for the company eventually.

Ron Ventura, Ph.D. (Marketing)

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The Rolling Stones most probably need no introduction. At least those born anytime between 1950 and 1980 should know the band, with Mick Jagger as its lead singer, and some of their widely known hits like (Can’t Get No) Satisfaction, Start me Up, Jumpin’ Jack Flash, and Paint It Black. By continuing to perform after the 1970s the band has given better chance for younger generations to become its fans as well. It is the longest acting rock band ever (since 1962, albeit some changes in their original line-up).

  • They are now four: Mick Jagger, Keith Richards, Charles Watts, and Ron Wood (the first two have written most of the band’s songs). Wood replaced (1975) Mike Taylor who has recently returned to perform with the band as a guest.

Therefore, when it was announced this spring that the Rolling Stones will have performed in a concert for the first time in Israel on 4 June 2014, the news were received with great excitement and anticipation. But then came a snag: the ticket prices declared were higher than Israeli rock fans apparently expected. The concert took place in the city park of Tel-Aviv in an area similar in form to an “amphitheatre”. There were three types of tickets. A small portion were allocated for standing on the lawn in a close area in front of the stage (“Golden Ring”), priced 1600 NIS (US$460) for a ticket. The vast majority of tickets allowed standing on the lawn stretching from behind the Golden Ring to the back slopes of the “amphitheatre”. Each ticket cost 700 NIS (US$200). Additional VIP tickets with extra perks offered sitting places on a staircase-balcony situated on the right-hand side, facing the stage, for the price of 2700 NIS (US$770). A total of 50,000 tickets were offered.

Rock fans have made mainly two types of complaints: (a) that tickets were more expensive than demanded for other concerts of foreign artists performing in Israel this year and in the past few years; (b) they were more expensive compared with prices charged in concerts of the Rolling Stones in other countries (e.g., 2012-2013 “50 & Counting” tour and the current 2014 “On Fire” tour).  Those price comparisons were used as a basis for consumers to claim that the ticket prices in Israel were unfair. The anger was directed towards both the local organizing agent and the Rolling Stones. Social activists ran a protest campaign in social media to persuade fans not to buy tickets. It most likely explains the sluggish progress of ticket sales until the day of the concert. All that time in the run-up to the concert there were talks that not enough people were buying tickets. Eventually, the amphitheatre was filled-up with 48,00o spectators, including the VIP balcony (a sigh of relief is permitted).

Consumers frequently judge the fairness or unfairness of a price in question based on comparisons to prices paid by others (e.g., friends), to prices paid by oneself on previous occasions, and to prices paid in other outlets for the same or similar products or services. Such comparisons are not easy to make, varying in accuracy and level of relevance. A key criterion for the relevance of a comparison is the degree of similarity between cases for which prices are compared — the more similar cases are on their non-price aspects while the prices are non-equitable, the judgement of unfairness is expected to be stronger.

  • When comparing with the prices for other rock or pop concerts consumers attended in the past, we should take into account factors such as: (1) the other artists used as reference; (2) when the other concerts took place (e.g., this year, three years ago); (3) the venue for the concert (e.g., a park, a football/basketball stadium, a concert hall). Further attributes extend from a difference in venue: seating or standing tickets, distance from stage, and flat versus rising ground or balcony. For example, standard tickets for standing in the same park at the concert of Paul McCartney cost 500 NIS, but that was five years ago. Niel Young, however, will be performing at that park later this summer, and standing tickets cost less than 400 NIS. In another case, Cliff Richard performed last year at Tel-Aviv basketball stadium: tickets for sitting on the flat floor of the basket field cost about 1000-1500 NIS while tickets in the first rows of the tier balcony facing the stage cost about 650 NIS. Arguing for unfairness is therefore not straightforward.
  • In comparisons to concerts of the Rolling Stones in other countries, differences associated with the venue of the concert are again important. In addition, one may also need to account for differences in standard-of-living and purchasing-power-parity (PPP) between countries. Fans in Israel, for instance, were angered that tickets in countries like the US or UK  where standard-of- living is higher than in Israel actually cost less when translated to shekels. Let us consider a few cases in example: (1) Ticket prices for concerts in Rome (22 June) and Paris (13 June) range from “standard” €78 (~US$110) to “premium” €150 (~US$210), nominally and relatively less expensive; (2) In the concert at Perth Arena in Australia, scheduled for 29 October this year, tickets for standing in the Tongue Pit adjacent to the stage or for seating in the flat area at the centre of the arena cost A$580 (~US$540) whereas tickets for sitting on the lower rows of the tier balconies more distant from the stage cost A$376 (~US$350) — while some place arrangements may be more convenient in Perth, overall the tickets are not less expensive than in Israel; (3) In fact, complaints about the relatively high prices the Rolling Stones charge have also been voiced in other countries — for instance, an article in The Telegraph criticised the high prices for the band’s concerts in London in November 2012 during their 50 & Counting tour (prices ranged between £95 and £375 [~US$150-600] with VIP Hospitality tickets priced £950! [~US$1520]), requiring the Rolling Stones to defend the prices they charge (Ron Wood explained they invested millions in arranging the stage).  Truly, there are not many active bands today like them.

In a cognitive, calculated decision process, according to the theory of mental accounting (Thaler), a consumer would evaluate the value to him or her of attending a rock concert based on some attributes or benefits of the band performing (e.g., how much the songs are liked, their singing and music-playing, and the show given at live concerts). Expressed in monetary terms, it is the highest price a consumer is willing to pay that would be equivalent to the psychological value to him (similar to the concept of reservation price in economic theory). The difference between the monetary value of equivalence and the (normal) price the consumer is asked to pay denotes the acquisition utility for the consumer.

  • The normal or ‘list’ price is often not the actual price paid due to special deals and discounts put forward — a difference between the normal price and the discounted actual price denotes the additional transaction utility a consumer can gain. For instance, customers of an Israeli mobile telecom company could buy their tickets for the Rolling Stones concert at prices 100 NIS lower than the official prices. (Some fans had a chance to buy standard tickets at half price of 350 NIS in a contest organised by the band.)

This methodic way for deriving a (perceived) value and reaching a decision may run out-of-order when trying to apply it to a rock or pop concert. Music as a form of art evokes emotions that are likely to disrupt sensible calculations of value. Moreover for devoted fans of a singer or a band, adoration and affective attachment are likely to influence their decision process more strongly. The fans of the band may find it difficult and disturbing to analyse their experience of listening to the music or attending a live concert in the way required to derive a well-founded value or utility. When the experience is about enjoyment, excitement, and getting carried-away by the music, the monetary value or the price fans are willing to pay can be expected to receive a boost upwards. They could perceive a reasonable acquisition utility even with the premium near-stage or VIP tickets.

But many other fans who feel close to rock and pop music, who may be greater fans of other artists of these genres, could also be strongly attracted to attend the concert because of the extraordinary opportunity to see and hear the Rolling Stones performing live in Tel-Aviv. Consumers may sense the historical significance of such an event, not to be missed. That could act as an emotional inducement for these fans to elevate the price they are willing to pay high enough to buy at least the standard type of ticket. It took until an hour before the concert to ascertain that there were indeed enough of them to fill the amphitheatre in the park (with some help from discounts).

Two important ways of approaching price were considered above: one is directed inwards and focuses on the perceived value of the target service, a rock concert; the other is directed outwards and compares the target price with prices for other cases or episodes that seem similar to the consumers and through which they judge the (un)fairness of the target price. Both avenues introduced challenging problems for the rock concert; it probably could have not occurred without the emotional component of the decision process. However, it does not have to spoil the event itself for those who bought tickets. Price may continue to pre-occupy the customers’ minds in the gap period between the time of buying the ticket and the day of the concert. When the event arrives customers “close” the mental account; they may either conclude the value obtained from their ticket acquisition or shift their attention fully to the event and the benefits it delivers, the more desirable way for them to avoid conflicts of value.

The concert of the Rolling Stones was wonderful. Mick Jagger was fantastically energetic on the stage (admirable in his age of 70+), and Keith Richards looked especially joyful. Jagger also demonstrated nice skills in expressing himself in Hebrew to the delight of the local audience. The band performed the songs mentioned above among others (19 in total); unfortunately Jagger did not sing their beautiful song Ruby Tuesday, but he performed another ballad from their repertoire not appearing regularely in their concerts, Angie.

  • Given the enthusiasm of the audience, the spectators did not let price issues spoil the celebration. There were other two factors that threatened to hinder the enjoyment. First, there was a heat wave that evening with high humidity — but that could not be anticipated and was beyond human control. It just had to be tolerated while drinking lots of water. The second factor was entirely due to human behaviour — spectators lifting smartphones above their heads in attempt to record on video episodes from the concert. The quality of images captured on the little screen (e.g., from a distance of 200m+) and the enjoyment spectators feel doing so is left for debate elsewhere. Meanwhile those screens waived above “stole” pieces from the field-of-view of the spectators behind who tried to escape them — what a shame.

The Rolling Stones did everything in their power, and they had the power, to make spectators happy for the money they had paid to the last shekel. Price did matter in making the decision to purchase and it even threatened to spoil the concert. However, that was true during the run-up period until the concert started on 4 June at 21:15. As the performance went on the spectators could easily forget about the price. The price effect was mitigated or vanished, leaving the spectators with pleasure of the music and performance of the Rolling Stones and particularly Mick Jagger. One may think of other artists who can achieve this outcome, but the Rolling Stones are definitely on the top list. It remains a specially good experience to remember.

Ron Ventura, Ph.D. (Marketing)

 

 

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This is a story of genuine consumer protest over the pricing of cottage cheese that turned into a public roar. On the face of it, it looks rather surprising how discontent with the price of a basic food product like cottage cheese can evoke so much excitation. It seems to be the outcome of multiple factors including public agitation, corporate insensitivity, oversensitive government, and media urge to produce headlines and fill airtime.

In May 2006 the Israeli government lifted its price supervision on most dairy products. A few months later an initial increase of nearly 6% in the price of cottage cheese was witnessed. By early 2008 the price was 22% higher. Three more years have passed until two months ago the price for the same cup (250g) reached 7 NIS or 42% increase since before supervision had been lifted. And this month the price peaked to 8 NIS, reflecting a 63% increase in price over 5 years. At that point the consumer public has lost its patience and protest has started to spread.

  • The price of a cup of cottage cheese 250g (9% fat) before lifting supervision was 4.90 NIS ($1.10 or €0.87 at prevailing exchange rates). The price for the same cup of cottage now stands at 8 NIS ($2.35 or €1.63 at current exchange rates). Note however that the Israeli currency has also appreciated against both the US dollar and the Euro, mostly during the last 3 years, which makes the product  appear even more expensive in these foreign currencies.

Cottage cheese is an elementary food item in Israel, popular in breakfast and light meals in general. It frequently accompanies salads. People have not been used to think too long about much of this cheese they buy and eat. The cottage cheese is common particularly among families with children, the elderly, and consumers of lower socio-economic status who cannot afford specialty and more delicate food products. It is probably because the cottage cheese has become such an essential meal component, kind of symbol typical of the country’s diet, that a potential threat to their usual way of life and their well-being led consumers to cry out loud against the price rise. But the price has been rising gradually for five years. Also, prices of other dairy products like soft spreadable cheese and yoghurt have risen by 30% or more. It seems that the price of cottage cheese as a symbol surpassed a tipping point for consumers that ignited the protest, starting on Facebook.

It appears like the food manufacturers and retailers lost sight of the consumers and their sensitivity to price. For a relatively long time, it should be admitted, Israeli consumers absorbed price increases within a range of acceptable prices they are willing to pay for cottage cheese and possibly other similar dairy products. Consumers may have adapted to inflation and shifted this range a little upwards. Yet, marketers got closer and closer to scratching the maximum price consumers can accept and the marketers just would not see this (what has happened to pricing research?). So finally they have reached a price level that consumers simply could no longer tolerate. The marketers have some justification to argue that consumers did not react in a way that would signal a problem in their pricing, but it is still the marketers’ primary responsibility to monitor relevant pricing-related metrics and initiate appropriate steps proactively.

The cottage cheese market (1.5bn NIS in 2010) is dominated by Tnuva which obtains a market share of approximately 70%, the remaining being equally divided between Strauss and Tara. The cottage cheese of Tnuva indeed has the seniority in the market for many decades and the product category is mainly associated with this brand and its cottage house icon. A major source of the problem is seemingly that these manufacturers would not allow a price gap to open between them. Suppose a major brand increases its price but the competitors do not follow, they can signal that they allow the former to keep a price premium and do not encourage further increases. But the competitors act as if they silently agreed (i.e. without their explicit co-ordination) to match each other prices, and only upwards. It is possible they were afraid of entering a price war. On the other hand, it suggests that any of the three were concentrated in internal (e.g., cost, operations) concerns and were reading market signals wrongly. Nonetheless, the responsibility lies not only with the manufacturers; the large food retail chains were also likely to have a role in this process, and they should not be exempt from scrutiny.

However,  the economic implication of the rise in price of cottage cheese probably did not prompt alone an angry protest. The negative emotional reaction can be mainly attributed to a sense of price unfairness by consumers: Why has the price had to get so high? The consumers look for reasonable explanations and when they fail to find one they feel treated unfairly.

  • Consumers were alerted that the rate of increase in the price of the cheese was much higher than that of inflation (approximately 10% vs. 3%  annually, compounded over 5! years).
  •  Consumers tend to be more forgiving for the price increase if they recognise a cause that is external to the firm and not in its control. For example, for a manufacturer it could be higher cost of raw materials. Consumers perceive as less fair price increases that are due to managerial driven cost (e.g., salaries, inefficiency). However, consumers are not familiar with details of the cost of production. They cannot truly tell either if a cost increase rests initially with the manufacturer or the seller-retailer. Without being explicitly informed of potentially legitimate reasons for the price increase they are likely to believe that the marketer/seller is just increasing his profit.
  • An indication of the difficulty of Israeli consumers to make sense of this price surge can be found in a provocative claim made by the protest organizers: a cup of cottage cheese costs more than a litre of fuel (gasoline) for the car. The logic for striking a comparison between these apparently unrelated goods is that they are both perceived as essentials to our everyday lives. Yet, people may say to themselves, we understand that the fuel price is rising because the price of the barrel of oil is so high and rising, but what can explain the rise in price of our cottage cheese? First, people are probably much more aware of the global oil crisis than the growing global food shortages, that food prices are also on the rise — a crisis in the making. Second, however, even if consumers are aware of the general rise in food prices, they may not be able to directly link it to their dairy products (we are being told for instance that Israeli cows are among the most productive of milk worldwide). Third, the more  observant consumers may note that the maximum fuel price under supervision is dropping occasionally when oil prices drop but food prices in the supermarkets never drop even if it is published that shortages in food ingredients have eased and their prices have dropped.

The public protest was initiated by three young men who opened a petition on Facebook and called for a boycott of cottage cheese. A week later they reported that 70,000 viewers signed in support. The protest has since broadened to include additional dairy products. So far, that is a strongly positive and legitimate move. The festival in the media and the political system that followed and took over the popular protest is far more baffling.

The real test of the protest in my view should be in the retail outlets, when consumers cut on their purchases of cottage cheese and other selected dairy products not under supervision. The boycott is planned for July, but if each family or household participates for just one week it can already have a strong impact. I am much less impressed by a protest in front of the computer — what does it mean that people ‘liked’ the protest post on Facebook? A ‘armchair protest’ is too convenient and does not prove real committment as yet. If as some retail chains reported there has already been a major drop in sales of cottage cheese in their stores then that is a good sign.

What has appeared on our TV screens, on the radio, in newspapers, and on the Internet, since the protest came to life is evident of nothing less but a panic reaction. Minutes of airtime reports, long tiring talks, politicians trying to make gains in the role of knights of social justice, and that is just on TV and radio main news programmes and news magazines. The Treasury Minister suggested allowing import of dairy products, alerting different sectors of the industry. Others proposed returning products to supervision, so the government said it would consider that too. The parliamentary (Knesset) committee for economic affairs entered the scene and opened an enquiry. The state comptroller also declared his own investigation.

One may seriously doubt how this turmoil will help to resolve the price issue in a responsible manner and in benefit of the consumers. The problems start with the market structure and the relations between the current local players. Regulation may be appropriate for a few essential products but it should not be adopted before making effort to resolve the issue by other means in co-operation with manufacturers and retailers. Finally, I do not believe that it would hurt the companies so much if they concede and allow prices to drop somewhat to restore peace with their customers. They may learn that they can achieve more by dialogue with consumers in different channels and avoid trouble in due time.

Ron Ventura, Ph.D. (Marketing)

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