A few years ago, psychologists Chip Heath and Josh Soll ran an experiment.
They asked two groups of people whether they would be willing to buy a ticket to the theatre at the weekend.
The first group were told they had spent $50 earlier in the week going to a basketball game. The second group were told they had received a $50 parking ticket earlier in the week.
Both groups had had been told they had spent $50. It shouldn’t make a difference to whether they would buy the theatre ticket, right?
Wrong. Those who were told they had spent $50 on the basketball game were significantly less likely to say they would buy the theatre ticket.
Why? Theatre is entertainment. So is basketball. This meant both costs were coming out of their “entertainment budget”. They thought, “I’ve already spent $50 this week on entertainment, I can’t spend another $50 on it.”
This is an example of what behavioural economists call “mental accounting”. It refers to how we explicitly (spread sheeters – you know who you are…) or implicitly manage our spending.
It’s why you can’t dip into the holiday fund to buy the new TV.
The spend is in different “mental accounts”.
Why are we talking about this? Mental accounting is a sensible way of managing our finances in normal times. Allocate spend to certain things. Don’t move it around.
But these aren’t normal times. Food price inflation is at its highest level for 10 years. Petrol prices are at an all-time high. Energy prices are being hiked.
Shoppers can’t just increase their mental account for grocery. The one for energy bills. The one for petrol. They are going to have to manage finances across their mental accounts.
This is a threat. Will they cut back on grocery spend in order to spend in other areas? It’s also an opportunity. Will they cut back spend in other areas to spend on grocery? Will they move money between categories within their grocery spend?
Household spend will be more fluid than ever. Competition for that spend will be more fluid than ever.
So, how can you respond to this?
Competing across CATEGORIES. Categories used to be pretty well defined. It was clear what a biscuit was. It was clear what a cake was. Well, apart from Jaffa Cakes. Now there is a lot of category blurring. Products taking properties from more than one category. Brands associated with one category moving into new categories. The competitive set continues to change.
Many brands are competing within their category AND competing across categories. This means that they have two jobs to do.
The first job is to show that you are the best option in your category. So, if you’re a pasta sauce you need to show shoppers that you are the best pasta sauce to buy right now. Why you are the best value – the best value for money not the cheapest. The second job is to give shoppers a reason to eat more pasta-based meals. Show them why pasta-based dishes are great meals to have right now.
Many brands focus only on the first battle. Trying to gain share within their category. They focus much less on the second battle. Helping their category gain share versus other categories. If you’re a big fish in a shrinking pond you will eventually run out of water. Don’t just think narrow. Think broad.
Competing across CHANNELS. Channels (particularly food…) used be pretty well defined. We had grocery. Where shoppers bought most of their food – to eat at home or carry out. We had takeaways. We used to drive there. Queue. Drive home. We had restaurants. You could only dine in.
Now there is a lot of channel blurring. You can go onto Deliveroo to order from a grocer. Or a takeaway. Or a restaurant. Or maybe you don’t need to because you’ve already had your meal kits delivered to you.
All this means that shoppers “mental accounts” are blurring. It also means that what is trade up and what is trade down is blurring.
What do we mean? Take M&S Dine In for £12 activity (there is inflation right there, it used to be £10). That is a trade up option within the grocery channel – £12 is a lot more than most shoppers spend on a supermarket bought meal. But it’s a trade down from dining out. Take Peroni. At £1+ a bottle it’s a trade up in the beer category. But it’s a trade down from spending £5+ a pint in a pub.
There are a lot of opportunities for retailers and brands to trade shoppers up when they are trading down.
The competitive environment is changing. How shoppers think about their budgets is changing.
There is a lot of spend up for grabs.
Can you grab it?
Feel free to forward. Have a great weekend. Speak to you in fortnight.