Can I get Ten, Fifteen, Twenty, Twenty-Five?
I sold my vehicle, privately, not long ago and it got me thinking about all of the different ways the laws of supply and demand play out around us every day. For all the press around self-driving cars, it’s easy to forget that there is still a really big secondary car market.
I ended up getting a reasonable price for the vehicle given its extremely low mileage, age, and maintenance history. Living in the fourth largest metropolitan area in North America, I was surprised that the two most interested “non-tire kicker” buyers weren’t local. One was at the other end of the province four hours away; the other one was much further in a neighbouring province. It didn’t hurt that time was on my side. The final buyer was preemptively looking for a 4×4 winter vehicle for his spouse and he sent someone to pick it up once we agreed on terms.
It’s hard to believe the used car market was a dog’s breakfast just a generation ago. You might even say George Akerlof published the business case for Carfax back in 1970 when he published a paper on the used car market called “The Market for Lemons” that won a Nobel Prize.
Carfax democratized used vehicle history for American and Canadian consumers – and helped ease the question on every used car buyer’s mind: “What’s really under the hood”?
Manufacturing and Quality control processes weren’t yet up to the standards we’ve come to expect. There was no Autotrader, eBay, or Kijiji. Marketplaces that incorporate blue, red, or black book values and then aggregate that against real-time sales prices based on location and demand to share “good, better, best” sale prices whether you’re a buyer, seller or a dealer were unheard of. That was an era of asymmetrical information for the used car buyer.
Asymmetrical Information
The principle behind asymmetric information is that one party has more information than the other, such that they may have made a different decision having had access to that information before any financial transaction takes place.
In the right context, asymmetric information is a healthy sign of a growing economy. Take knowledge workers. Over the past 100 years, many professions have developed specializations and have made a living sharing their expertise with the world.
But some things have changed. There was a time when we would watch snowy screens but now we live in the golden age of scripted TV where we can binge to our heart’s desire. Are we entering into an era of subscription fatigue with pricing plateaus to the number of solutions that the consumer will subscribe to and spend money on with a la carte offerings?
Software. The proliferation of it is aptly captured in Scott Brinker’s annual Marketing Technology Landscape Supergraphic that illustrates the ballooning choice in marketing software alone from 150 to over 7040 marketing software companies in just eight years! Our time is finite, the opportunities, endless.
Salesforce pioneered the subscription software era over twenty years ago versus the way people purchased software before. It typically involved a one time upfront contract. Success metrics continue to evolve, and they will further splinter with measuring and assessing the problem you solve, especially when you look at the desired outcome against the value and the risk to your business.
One way to reduce the buyer’s feelings of risk is to establish trust. I know what you’re thinking: that’s common sense. But in the context of sales, the perceived or unperceived asymmetry of information towards the seller can cause prospects to associate risk with purchasing a product or service. The higher the perceived risk of purchasing any product or service, the less likely that person is to make a buying decision that is favourable to you. And a ‘no decision’ is still a decision.
So the next time you find yourself in that situation put yourself in the mind of your prospect and ask what you can do to reduce the risk associated with purchasing your product or service. Even more important. What can you do to reduce the likelihood of your client personally experiencing those feelings?
People love to buy, they don’t want to be sold.
Loss Aversion
The holidays are in the rearview mirror for most of us, but you may still be experiencing flying hiccups in regard to winter storms depending on your present location.
Most people can relate to a time when the airline they were flying over-booked the number of tickets sold. First, they looked for volunteers to give up their seats in exchange for payment and then moved on to involuntarily denying passengers boarding once that failed to produce any or enough volunteers. This occurred even when that next flight may have included a complimentary upgrade to business class.
Conventional economic wisdom said that we make decisions based on sound reason and logic.
Daniel Kahneman and Amos Tversky shattered that notion when they published their economic theory in 1979 in what came to be known as Prospect Theory. It helped them win the Nobel Prize in 2002.
They found that human beings regularly make conscious decisions that are irrational.
Going back to our airline example: prospect theory says that people are twice as likely to avoid a loss rather than win a potential gain. In other words, the pain of losing $1000 for some people could only be compensated by winning $2000.
So the next time no one offers to give up their seat keep that in the back of your mind. Now your public service announcement: in the US, passengers are entitled to 200% of the cost of a one-way flight up to $650 for flights arriving between 1-2 hours after their scheduled time in the US. and up to 400% to a maximum of $1350.00 for delays over 2 hours.
My car beeps when I’m on the road and another vehicle is nearby to the left or right of my blindspot when I’m about to switch lanes. Our brain is an incredible engineering marvel, but we also have blind spots. Whether you’re in the market to buy or sell a used car or have recently experienced surge pricing for an Uber or Lyft given the current supply or demand in their area, Asymmetrical Information and Prospect Theory are like water, electricity or the internet. They’re everywhere, and omnipresent.
We just need to be mindful of the next time we find ourselves in a situation where we’re trying to decide whether to keep things as they are or make a move to another product or solution.
Every day we’re bombarded with a series of choices that influence our daily lives. However, in business, depending on your role and perspective – any change can be considered a business risk. Logic dictates focusing on what we stand to gain but think about the impact of what we stand to lose if we don’t. We are the consumer and we all have the right to choose.