14 June, 2011

Always remember - people forget

You watch the TV news and someone is complaining yet again about how prices have gone up . It seems to be a staple item for a slow news day, anywhere. Britons, like Kiwis, Ozzies, Canadians and Americans, always doubt the official inflation figures. BBC News conducted a small study of three households whose principal shopper (the wife of course) all claimed that inflation was really 10-20% rather than the official UK figure of 3.4%. The official figure is an average, so you’d expect some variation at the individual household level. But to the shoppers’ surprise, their household inflation was only in the range 2-6%, even after recent price hikes in fuel, protein, etc..

Tesco, Britain’s leading supermarket, calculated that its real average prices have fallen 30% in the last 10 years.  And it’s not just food. The real price of just about everything has fallen - eg. food, clothes, cars, appliances, entertainment, communications, travel. The only major exception is housing. A lot of those savings have gone into bidding up house prices (for larger living spaces, second homes and investment). House prices confuse the issue. Most people already own a house, so they see rising house prices as a good thing - “I’m getting richer relative to the cost of stuff” - even if they have lived in the same place for decades and have no intention of selling up in the foreseeable future. Falling house prices are bad - “I’m getting poorer relative to the cost of stuff”.

So why, despite the contrary evidence, do people insist that inflation is higher than it is? Simply put, people forget benefit gains. They don’t notice gradual real price falls and they forget the big ones, even more so when they involve infrequent purchases. Those prices quickly become normalised. Conversely, they do notice price hikes. Most people really have no idea what inflation is and their ideas are screwed up anyway by housing market sentiment.

It’s important for businesses to understand this. Your customers will quickly forget those special deals you gave them, those extra services, your particular advantages for them. You need to remind them regularly, in the nicest possible way, of course. Remind them of your USP, your story, in newsletters, websites and presentations . Always show the full value of your quantity, term and payment discounts versus your standard price on your invoices.

Always remember - people forget.

First posted June 1st, 2008

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