Friction, Fat Pigs, and Mobile Commerce

by Russ Jones on August 30, 2011

in Mobile Commerce, Mobile Payments, Mobile Technology, Russ Jones

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Poor friction. Everybody hates it. Nobody loves it.

For brick and mortar merchants, friction backs up their checkout line.

For online sellers, friction leads to shopping cart abandonment – and lost sales.

And as payment professionals, we know that lots of money has been spent on things like contactless in an attempt to take friction out of the purchase process.

But sometimes I think friction gets a bad rap. Sometimes a little friction can go a long way.

I say this because what we call “friction” is also the basis of differential pricing. You remember differential pricing? It’s the notion that the same product often needs to be sold at multiple price points in order to maximize revenue from a diverse group of buyers. This idea is often illustrated by the story of the two fat pigs. Here’s the story…

A farmer has two fat pigs that he wants to sell, but doesn’t know how much he should charge. So he asks his first friend, who says he would gladly pay $1,500 for a fat pig. He asks his second friend, who says he would only pay $1,000 for the same pig. The farmer does the math and figures out that if he prices his two pigs at $1,500 he only nets $1,500 because the second friend won’t buy. If he prices his two pigs at $1,000 he sells both pigs and but only nets $2,000. What’s worse, he knows he is leaving money on the table. But if he could sell the pigs at different prices he will net $2,500, as long as he can sell both pigs to the right person at the right price — $1,500 for the friend willing to pay $1,500 (the full price) and $1,000 for the friend only willing to pay $1,000 (the discounted price). Economists call this differential pricing.

In practice, sellers will use any number of tactics to group buyers with different price sensitivities into different categories. Many of these tactics are based on adding friction to the buying process in order to distinguish the price sensitive customer (who will endure the inconvenience to get the better price) from the non-price sensitive customer (who values convenience). Not every tactic relies on friction, but many of them are based on adding inconvenience (i.e. friction) to the buying process. Examples of popular tactics include:

  • The Sales Promotion — Introduces the inconvenience of having to wait for the sales window. You can buy the product now (at full price) or wait until our annual sale in February when everything is 20% off.
  • The Coupon Promotion — Relies on the inconvenience of having to locate, carry, and then remember to present the coupon. Coupons also sometimes introduce secondary restrictions that further inconvenience the customer with time or quantity limits. And then there are restrictions on combining coupons.
  • The Rebate Promotion — Provides a great price, right now, along with the inconvenience of having to process the rebate (according to detailed specifications) at a later date. Of course, there are cut off dates, hardcopy documentation requirements, etc.

Even outlet malls work on friction. You might be able to get the product cheaper at the outlet, but only if you’re willing to drive an hour out of your way to the outlet mall and risk the product not even being carried at the outlet. Willing to take the drive? Then you have proven yourself to be a price sensitive customer.

But for sellers, while friction has its place, it’s a fine line to walk.

There has to be enough of an inconvenience to make buyers work for the lower price — but not so much inconvenience that a price sensitive customer loses interest in buying. It’s an art form to be sure, and sellers strive to be very good, most the time, at being able to separate price sensitive customers from non-price sensitive customers.

I think about differential pricing (and the two fat pigs) whenever the sales clerk offers to give me a coupon when I’m standing at the register with card in hand ready to complete the purchase at full price. I also think about it when a company comes into our office to talk about mobile technologies.

Mobile technologists have, obviously, seized on the idea of using the mobile device to make shopping more convenient. You’ve probably seen as many of these pitches as we have. Many of them go like this.

Imagine a day, in the not too distant future, when you’ll be able to walk into a store and have relevant coupons loaded automatically into your phone. Our system will know what you like to buy, what your friends buy, and what you’ll probably want to buy — and then transparently deliver coupons from the cloud that offer incredible discounts that will drive your purchase behavior. And then, using this technology we call NFC, or something sorta like NFC, your phone will be able to exchange the coupons in real-time with a simple tap of phone to the merchant’s POS. And, of course, you’ll pay with your phone and be able to collect valuable offers/incentives/rewards/points for use on repeat visits to the store.

But while they are making it more convenient, I wonder if they aren’t also removing the friction that made coupons a useful tool to separate price-sensitive customers from non-price sensitive customers.

In today’s market (pre NFC), the early mobile coupon model is fine — the audience that uses mobile coupons is small, and the redemption process is generally pretty clumsy. Anybody that uses mobile coupons today is clearly experiencing ‘usage’ friction that demonstrates they are a price sensitive customer.

But this idea will never work if every customer has a mobile device, every coupon is delivered on demand for use at the point of sale, and redemption involves a simple tap of the phone. There has to be some friction in there somewhere!

Maybe the friction will be found in the signup process, or maybe there can be more friction in redemption process. Who knows?

But, for mobile coupons to work successfully for merchants at scale, it is going to have to be more of a hassle to use them than to not use them. The customer paying full price needs to justify in their mind how much easier it is to just pay the full price and be done with it.

Of course, maybe the path forward is that not everybody that is mobile-coupon enabled actually receives relevant mobile coupons for use at the POS. Maybe the coupons are more of an advertising tool than a price differential tool. Or, maybe, there is enough targeting ‘smarts’ in the cloud so that the coupons are selectively delivered to individuals that have proven themselves price-sensitive in some other way.

It will be interesting to see if all of this actually unfolds the way we’re hearing it being sold. I suspect it won’t.

You should think where friction belongs and doesn’t belong; where it’s bad and where it’s good. And while you’re doing that you should also think about how much you would be willing to pay for a fat pig the next time you go to buy something.

One Response to “Friction, Fat Pigs, and Mobile Commerce”

  1. Dave Birch says:

    It’s a good point Russ but what I think it really means is that mobile coupons will be different from paper coupons and will geared into more sophisticated feedback loops.

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