Suyin Aerts: Gentlemen, welcome to Price Points Life. My name is Suyin Aerts. I'm delighted to be your host and moderator for this, uh, exclusive event organized by Omnia Retail. And here, if you look around this idyllic Saint Olof's Chapel. It's a place where we will unpack several topics and trends across the retail landscape where you are all part of, I suppose. We have some amazing speakers for you today and we will close with an interactive round table. And you all got a little leaflet where there is a QR code. If you scan that code, you come into our Slido environment. So during the afternoon, if you already have a question, feel free to drop it there. And then we might take your question at the end for the panel discussion. Our keynote speakers are coming from all across Europe, and they will cover very different topics ranging from inflation, behavioural and consumer psychology, decision making, urban logistics and how we will make the move to a more sustainable future. And ultimately, of course, how to adapt your pricing models. And increase profits during these times of high inflation. I suppose you all enjoyed the light lunch upon arrival. And I'd like to share with you that we have two breaks for scene during the afternoon. Grab another coffee, have a refreshment, and of course, start networking with each other. And after our lasts really good networking starting so you can enjoy talking to our speakers and talking to each other. And probably you wonder why is this event organized? And I'm not going to tell you. I'm going to invite on stage Sander Roose, who is the CEO of Omnia Retail, and he will tell you everything about it. Please welcome him, Sander Roose. Don't be shy. Take control of the mic.
Sander Roose: It's also a warm welcome from my side. So Omnia is a software company, but only we believe that just building the best software is not enough to help you maximize value from pricing. So you need knowledge about market development, about pricing strategies in order to give the software the right objectives and get the maximum value out of that software. So at Omnia, we also try to play an active role in that and we do that via our price point, blog posts, our podcasts, webinars, newsletters, of course, all of your interactions with our customer success team, but also an event like this price point live now talking about market developments, I think the last couple of years since our last event before Covid has been very eventful. Sorry about the war in Ukraine. And now, of course, also the sky high inflation. Now inflation is, in particular, something that we want to highlight from multiple angles to really help you provide inspiration for your day to day jobs. And I'm super proud of the great guest speakers that we've managed to bring together today that will provide that inspiration to you later today. Now, like with the market developments also for Omnia, as a company, the last year has been very eventful. And there's one event that I would like to highlight in particular and that is only joining forces with German pricing software company Patagonia by the end of 2021. The company founded by Max and Andreas, who are also here today, of course, was very similar in terms of product vision and company culture, but very complementary in terms of product proposition and also skills. And the really exciting thing about Umea and Patagonia joining Forces is that it will help us accelerate our product development in two ways. And the first way is that our team has found a way to move towards a best of breed platform. So combining the best of the Omnia platform with the best of the Patagonia platform, our total development team, over 80% of our total team has been working on that since spring this year and that project is very well on track. So we plan to release an early version of the platform to a first customer before the end of this calendar year and from the get go that will have several advantages. So there will be a new and improved user interface. There will be higher and more flexible scraping and repricing frequencies. There will be more pricing insights in the portal and there will be a new way to create pricing strategies via pricing decisions we approach. Now, this afternoon is not only about bringing you knowledge or market development and pricing, we also know that you really value connecting with other Omnia clients, with other peers at retailers and brands. And I would definitely want to invite you to take opportunity at breaks at the drinks afterwards. And almost our full Omnia team is here. So if you want us to make introductions to specific other Omnia customers, we're more than happy to do so, of course. Now, to conclude, uh, we know that these are very challenging macroeconomic times, but the exciting thing is that we really believe that pricing matters more than ever and can really help you win in the market. And we're very thankful and very happy that you've all selected Omnia as your partner to, uh, to achieve that. So very much looking forward to spending the whole afternoon and maybe a little bit of the evening together with you. Thank you.
Suyin Aerts: Thank you so much. Sander and I will take the opportunity to directly introduce you to our first speaker, and that is Aline Schuiling. And she is the senior economist eurozone at Group Economics of ABN Amro Bank. And, previously, she was working in the economic research departments at Rabobank, MS Pearson and also at Fortis Bank in the Netherlands. She studied economics here in the university in Amsterdam, and she specializes in monetary economics and international economic relations. And she will take us on the wrath of inflation. And I suppose we all know that in a market economy, prices for goods and for services can of course always change. Some prices will rise and others will fall. And inflation occurs when suddenly there is a growth increase in the prices of both goods and services and not just of individual items. So meaning that if you spend €1 today, it will not be the same euro you spent yesterday. So the currency will change over time. But I'm not going to explain to you how it really works and what the actual inflation situation is here in Europe, but also in the rest of the world. We are so lucky to have Aline with us to tell us all about it. Please welcome her: Aline.
Aline Schuling: Good. What shall I do? Yes. So I will give you a short presentation about inflation and central banks. First, this is what has happened to the inflation rate. As Myron already explained, it's a rise in a general price level. So it is an index that consists of a lot of different consumer goods in the basket with a certain weight. And this the blue line is just the total level of inflation. So September, we saw 10%. This is the eurozone aggregate. So this is the level compared to the index a year ago. So that is very important to remember. Inflation, you always compare the current price level to that of a year ago. And what we saw during the pandemic at the beginning of this graph is that inflation actually was negative for a while. So then the index dropped in total. So actually already automatically a year later, inflation starts to accelerate because the price level starts to rise and you compare it to a very low level a year earlier. What has happened since actually the start of this year or the middle of of last year, it's a particularly food and energy price. Inflation has written a lot. This is their contribution to to the total inflation rate. So for instance, energy, that's the yellow bar. The energy prices in total now are 40 so four 0% higher than a year ago. They have a weight of about 11% in the consumption basket. So that contribution to total inflation is more than four percentage points. The food and energy prices tend to be largely determined on global commodity markets. So it's out of reach of central banks. Central banks can fix domestic interest rates and they can have some impact on the domestic economy. But that part, food and energy, is largely driven by global commodity markets. Indeed, the war in Ukraine, Ukraine is a is a big global supplier of agricultural products. That's the food prices. And of course, the whole problem with gas from Russia, which is to energy price inflation. So those are shocks that will stay in the inflation rate for at least a year because you continue to compare to the level of a year ago. So this is how inflation works. Central banks can actually try to have some impact on the services. That's the dark green and the industrial goods price inflation. That's what central banks can have, particularly to services prices because they are largely determined domestically. This is a longer history, the headline inflation rate. So that's the green one, which is a 10% now and the core inflation rate, which excludes food and energy. So that is the part that central banks try to have some influence on. But what you normally what you see is that if the if the headline we saw that also in the years before the big financial crisis in 2007-2008, the headline starts to rise and then the core always rises a bit with the headline because of the high energy prices. So companies translate their own high energy costs into the price of their end product, and that is in services and in industry. So what you always see, and it's the same with food prices. If food prices, commodity prices rise a lot, restaurants and hotels translate those costs into their own prices, which is part of the services sector inflation. So there's always a link between the two. So if the green one rises, the yellow one rises as well. And then as you can see in history, when the green bond, the headline drops much lower, the yellow one follows as well. The ECB targets the inflation rate at 2%. First I had until about two years ago, their target was that inflation had to be below or close to 2%. Now they have a symmetrical target, so it has to be a bit above or a bit below 2%. A bit above is also okay for the ECB. This is the global commodity price indices, which I referred to earlier. They determine largely the energy and the food component in inflation. And what we can see is that since spring these have come down. This is just an index. We put the pre-pandemic level at 100. So that's early 2020. You can see during the pandemic they increased a lot and then indeed it started to really accelerate, particularly the energy price index at the start of of this year. But that has come down already. So this is good news. But this is this will show up in the inflation rate with a lag. This is the gas price futures contracts. They have also declined actually, they declined a bit further since the end of this of this graph. So that is also good news that indeed, but important to notice here is that the actual the the rise in gas prices already began in the autumn of last year. So that was well before. The start of the war in Ukraine. And this was related to gas supplies not being managed properly during the pandemic, which of course during the pandemic everything was disrupted. And so when the pandemic sort of ended a bit already, there occurred a global shortage in gas. So then already the gas prices started to rise. And then, of course, the war in Ukraine gave it another big hit. This is also a factor that has resulted in temporary distortions. This is an indicator for the global supply bottlenecks due to the pandemic, because as we know, China stayed in lockdown for a very long time, longer than the US and the eurozone. And this resulted in a lot of problems in supply chains, for instance, computer chips, but also other intermediate goods that come from China or other countries in Asia and go to the US and Europe to be used in the production of other industrial goods. And these shortages, of course, have also created price pressures in global industrial goods. But here as well, these supply bottlenecks have come down a lot. So that situation has also improved. And part of this why it has improved is also that global demand for industrial goods has slowed down. So it's a combination of the mismatch between supply and demand and that mismatch has improved. So that also was very bad at the start of this year and contributed also to higher inflation. This is a graph because of course this high inflation is is super damaging for households, small companies, these energy bills, as I mentioned, energy prices 40% higher for zero on average than a year ago. But in some countries it's much worse than in others in the eurozone. So what governments are doing to protect households and businesses from these very super high energy bills and these are huge amounts, for instance, Germany. This is, by the way, a maximum potential support, because the actual support depends on what the gas price will be in the end, because governments compensate part of the high gas price for households and and companies. But actually the size of how much they have to pay depends on where the price will be the market price. But this is what governments have put aside. They have reserved this to compensate households and businesses. And this is a lot. So let's say 5% of GDP, which is really a lot. And but this is what they have announced to yeah, to support the economy. France has a very high influence on its own energy market. And already in the autumn of last year because I showed you that already in the autumn of last year, the gas prices started to really accelerate so long before the war in Ukraine. And then France has already capped its electricity and gas price for households. And this is the difference between the inflation rate, Eurozone and France. France is about six, Eurozone is ten. Of course, the inflation rate in France is also lifted a lot by food prices. So it's not only energy and of course the energy price inflation is not zero in France. But just to show you how government intervention can help. But of course, in order to do that, it is necessary that the government has some influence on the energy market. In a lot of countries. For instance, the Netherlands, it's liberalised, so the government cannot just say to the energy company, Hey, this is the price you can, you can calculate. So then the support needs to go in a different way via income redistribution. But this is just to show you how how big an impact it can have. Okay. On the left hand side is the official policy rate of central banks. As I mentioned, the ECB has an inflation target of 2%. Fed is the same. So the Fed's the American central bank, that's the green one, already started hiking interest rates in March of this year. They have already hiked by 300 basis points. So the green line is where we are now and the red edition is where we and most market participants expect the Fed to go. So they will continue to hike until the end of the year. The yellow one is the ECB, the European Central Bank. They started hiking later they have hiked by 125 basis points so far. And we also expect them to continue to hike aggressively until the end of the year. Of course, these hikes of interest rates, policy rates by central banks have resulted on the right hand in a in a sharp rise in government bond yields and actually. Interest rates, also yields on corporate bonds, mortgage rates, they have all increased a lot. This is really a sharp rise back to the level from ages ago. What does it mean for the economy? Because we see that central banks are hiking rates. We see that inflation is super high. This is the eurozone wage growth, which is close to 2% and the inflation rate ten. So this is a drop in real income, real household income. The governments, of course, will will bridge some of this gap with the support measures that I showed you, but that will not be enough to completely bridge the gap. So real wages in the eurozone are plummeting. They're very super negative at the moment. Consumer confidence is the green line is total confidence and yellow one is the confidence that the consumer has in the labor market. It has come down a lot, particularly total confidence, which also reflects the propensity to to buy big ticket items is really low. So this is how the consumer observe the current crisis and what they think it will mean for their own financial situation and also for their position on the labour market. These are bank lending conditions. It's not the interest rate, but it's things like collateral, the maturity of a loan, all sorts of other conditions surrounding a bank loan. And banks have tightened these lending conditions. So it is even besides so, let alone the level of the interest rates or other lending criteria have tightened. Banks have become much more careful in giving loans to companies. And of course, as you see, that has happened during the financial crisis. The eurozone crisis is 2012 and 13 and now again also at the beginning of the pandemic. And this, of course, is the high level of uncertainty that is surrounding the economy at the moment. This is a leading indicator for GDP growth. The green bar is GDP quarter over quarter. So the current quarter compared to the previous one and the growth has been very strong in the eurozone since the end of the pandemic. So we have had a lot of quarters with super high growth. Also during the pandemic it was super low. I cut off the access because otherwise the whole graph becomes very flat. But as you can see, the normal relationship between growth and this leading indicator, the composite PMI is still very much working and we are now in a level that is consistent with a contraction in GDP. So this tells us that actually the eurozone economy has already entered a recession in the third quarter with GDP contracting. So we think this is just an index. So we can compare the US, the eurozone and the UK GDP. The forecasts, as you can see, we expect the yellow line, the eurozone to decline for three quarters. So starting Q3 and Q4, Q1 as well, the UK probably also a rather steep recession and in the US it will be more shallow, The US economy will probably be stronger and contract only modestly, with only a modest rise in unemployment. And we expect unemployment in the eurozone to rise a bit more. One important difference between the US and the Eurozone is that this is the level of private consumption pre-pandemic is hundreds. So what you can see is that the second quarter of this year, the volume of private consumption in the eurozone, So that's just a volume of goods still was a bit below the pre-pandemic level. So it has contracted much more during the pandemic. Actually, we've had two waves of lockdowns and it has not recovered as sharply as in the US and in the US. And this to a large extent is still the legacy of a previous President Trump, who handed out a lot of money in March 2020 at the start of the pandemic. And it was just basically what he gave to people was, yeah, we call it helicopter money. Everyone independent of your status, your income, whether you were retired or young, everybody got a lot of money in the U.S. so they all spend it on goods and services. So in the US, the story behind inflation also is different than in the Eurozone. In the eurozone, it comes very much from the commodity markets, from food and energy. First the pandemic, then the crisis in the Ukraine, the supply chain bottlenecks. But the domestic driver of inflation in the eurozone is much more moderate than in the US. So this is also why the Fed has hiked interest rates already much more aggressively than the ECB. Very important for the eurozone. As I mentioned, the central bank has a 2% inflation target, but that's a target for the medium term. It's not now. So what they try to prevent is that the current high level of inflation translates into domestic high price pressure, for instance, high wage growth. And that's what the central bank is really afraid of. So but if you look at this is the survey of professional forecasters. The ECB organizes it itself. It's super important for the central bank inflation next year. That's the green one is still a bit below for the next. This is the survey from the second quarter. The third quarter will be published two weeks from now, and I'm quite convinced that the green will then go to, let's say, four and a half, five. So that's the forecast for next year. Yeah, but then the forecast for two years ahead. So that's 2024 and even four, five years ahead is much lower and actually still quite super close to the ECB targets of a symmetrical 2%. So this is very important for the ECB that these longer term inflation expectations, because that of course, is what translates into all sorts of price setting behavior that this stays anchored at around its target. That is why the ECB is so aggressive and actually helps to push the eurozone economy into recession by aggressively hiking rates because they want to anchor the inflation expectations at around 2%. So this is yeah, it's surrounded by a lot of uncertainty, as you can understand. But this is how we now or how I think inflation will develop. So it will stay quite high. It's probably quite close to the peak now at around ten, but indeed at the start of next year it will still be around six. But that is because you always keep comparing to the level, the price level of a year ago. So it is in itself it's sticky. But then when you start comparing to the price level of a year ago, you go down and this assumes actually that the energy prices stay very close to their current level because what you could also see in the past is when you have had a shock to the energy market. After a while, the energy prices start falling and then your inflation rate can actually become negative, as we saw in the long history of that inflation graph. So now I think that actually by the end of next year we could already be um, around 2% again. And that is because, um, yeah, the economic outlook is really deteriorating and that will suppress the, the, the underlying inflationary pressures in the eurozone. And that brings me to the end. Other questions.
Suyin Aerts: I do have a question for you, actually. Um, you were talking about, um, the fact that of course the the ECB is hiking the interest rates. I wonder in case the, um, we are helping households and we are helping companies by giving them money for the high costs of energy. Do you think that the hiking of the interest will even go higher?
Aline Schuling: That is a risk. Um, we've seen that, for instance, uh, in the past couple of weeks. I don't know if you're aware of that. Uh, the situation in the UK, what happened over there is that the government actually, uh, wanted to implement a tax cut, general tax cut. So not support for households to compensate for the energy bill, but just a general tax cut and financial markets reacted super if they had a really a drop in pound sterling and a very sharp rise in interest rates because indeed immediately that's how financial markets indeed think, that if governments overcompensate and actually add fuel to the high inflation rate, the central bank will have to do more. So it's super important the way these support measures are organized and they have to be and I've looked at the detailed plans for Germany and for the Netherlands, and they are really focused on only compensating households for the very high energy bill, but not adding extra strength to inflation because indeed what happened in the UK was actually very nice example of how, how yeah, balanced things now are dangers. Yeah, it's a very tight rope that's worked by governments and central banks and what you prefer is that during the pandemic they all looked in the same direction and now you see some discrepancies where central banks are trying to reduce growth and governments are trying to actually limit the recession. So as long as they keep that balance, that's that's not a risk. But financial markets are super alert. So that's also a good thing that if governments try to push it too far, they are immediately punished by a very weak currency, which of course adds to inflationary pressures because it raises your input prices. So there is a lot of disciplining works done by financial markets in that respect.
Suyin Aerts: And as you say, it's very different over different countries in Europe. They don't talk together. They don't talk.
Aline Schuling: Uh, yes. And of course, also the European Commission has has guidelines also, for instance, for how much energy use must be saved. So there is also an agreement that each and every country will try to reduce the use of energy by households by at least or approximately 10%. So that's those types of things. But it's up to the domestic governments indeed, to to set the domestic policies.
Suyin Aerts: Mm hmm. And you've been touching a little bit upon the wages and, uh, wage inflation. Can we indeed expect the wages to rise, as they say, for about 8% next year?
Aline Schuling: Now, that's that's the fear. Of course. Uh, inflation on average will be probably about 8% this year. And a lot of comparisons have been made to the 1970s when we also had a period of very high inflation and therefore very high wage growth. And then it becomes self inflating and it continues. But a big difference is that back then wages were usually indexed to inflation. So you had an automatic rise in wages compensation that has completely disappeared. So only the minimum wage is is adjusted for inflation in some countries, but not overall wages. And of course, in wage negotiations, the ECB has done very interesting research and that is that most of the if inflation is being discussed at all during wage negotiations, it's always forward looking. So that's what matters. Like what is the what do you expect next year? And so basically what happened this year, the 80% is a one off loss that is compensated by governments to a large extent. And then you look at what's happening to the economy, what's happening to the labour market, we think unemployment will rise. The economy has entered the recession. So then wage demands automatically also go lower because companies also have high energy bills. And if on top of that you have a very high wage growth, there will be a lot of bankruptcies and unemployment will rise rapidly. So this is all part of wage setting negotiations everywhere. So you don't see very high wage demands at the moment, Not to the extent that you think like, hey, this will really continue to raise inflation for a long time. So that is all expected to come down again.
Suyin Aerts: Okay. Well, what you shared was very interesting to me. I hope also to all of you, and you will stay with us for the discussion later in the afternoon and you will stay with us during the break. So in case you have a question, I think we can reach out to you. Thank you so much. Given a lot. Then why do we buy what we buy? And what can we learn from psychology and behavioral and consumer psychology inside our businesses? We're going to find out in a duo keynote from Patrick Fagan and Dan Thwaites. And Patrick is not with us live, but he will join us remotely. But I'd like to introduce him to you first. He's a behavioral scientists and he's got 13 years of experience in turning mines into money. Interesting, right? He's, um, also working in an academic site. Hi, Patrick. You're there. How are you? He's a part time lecturer at three different universities, and he's also coauthored different peer reviewed papers. And they go from facial expressions to Facebook psychology. He also published a very nice book, "Hooked: Why Cute Sells and Other Marketing Magic". We just can't resist. I think it's a book worth reading, and he's going to publish a new book in 2023 about how not to get nudged. He was also the lead psychologist at Cambridge Analytica, amongst other very interesting jobs he did in the past, and he's now a co-founder and chief scientific officer at Capuchin Behavioral Science. And he gave me a very nice insight when we met up front of this, uh, of this day. And I'm gonna share that insight with you. He said that we all associate efforts with quality, meaning that in some contexts, making the eCommerce experience too easy and too efficient might actually be counterproductive. And he said she had something very nice with me. Sometimes he asked people not to call him Patrick, but to call him Pat, because what they say is if you have a short name or a nickname, people tend to find you more likable. So we ask people to call him Pat instead of Patrick, but he hates it when people call him Patrick. So that's also very interesting. I will mind my words, Patrick, and continue calling you Patrick. He will join for the second part of the keynote. But we have, as I said then, to wait with us live, and he's been working in the creative data and technology space for over 25 years. And during these many years and many experiences, he found and applied insights for a range of markets and audiences both nationally and internationally, to drive commercial growth. And together with Patrick, he is the co-founder and his role is the chief strategy officer. And he also gave me a very nice insight on e commerce. He said, If you listen to classical music, what you see while you browse the Internet, you will see it as more value. The things you see seem to have a bigger quality. And you will spend more. So think about the music you listen to when you go out there buying stuff. I am very curious about all the other things they want to share with us, and I'm going to give the floor first to Dan and then Patrick will take over. The floor is yours?
Dan Thwaites: I'm here. Thank you. Hello. I'm Dan, one of the co-founders of Capuchin. It's really nice to be here. Like in person. Not on a Zoom. Even if that does mean I can't get away with tracksuit bottoms for the talk. As I say, Patrick is going to join us. Patrick has recently become a new father, so it was very keen to to join. So he's going to join remotely. So let's start with an experiment. In this study, respondents were introduced to the researcher who shook their hand and told that the test was going to begin in a minute. Actually, it had begun. The test was what happens when you shake somebody's hand and as you'll see, they tend to touch their head, their face, particularly around the nose, as you'll see in a second. There we are. Any ideas why that is? Yeah, right here. You can see this is actually an air detector detecting movement of air. And what they're doing is sniffing their hand. Everybody does this, and I'm going to apologize in advance. This is going to spoil handshaking for you. Now we've finally got back together and do it. But everybody everybody does this. And the reason for it is that and this is a little bit gross when you shake hands, there is a transference of sweat. Sweat contains pheromones, and we can pick up from pheromones whether somebody is from the same tribe as us, whether they make a good mate, perhaps whether they have COVID or not. And and this is an evolutionary thing that we do. Everybody does it, as you can see here. And the thing about it is now I've told you about it, you will probably be a little bit conscious of it. But what will happen is when you're distracted by other things and it can be tiny things, you'll forget about it and you will go back to doing it. We all do this. This is what we do. There are millions of things like these that we do that drives how we behave, and that's what we do as a business. So we show you how to practically apply insights like that to drive commercial results. So if you like, what we do is we connect the commercial result that you're trying to get to with the minds that you need to influence in order to do that. And we do that by combining psychology and data to show you the real motivations of your audiences. We then use those insights to build models that show you how to predict and change customer behavior, and then work with our clients and their delivery partners to execute those, whether that is for strategic market opportunity studies or tactical, but very commercially important tasks like how do you stop somebody from abandoning a basket? Some questions that we've answered in the past. One is how do you apply the psychology of online ordering to persuade different psychological groups of people to nudge them to to buy Another one is how you prime and persuade people to buy in different channels, whether online or offline. How do you get people to adapt to new payment behaviors So they're coming to your checkout or to the checkout in a store and you want them to do something different? How do you get them to do that or other behaviors? How do you use price psychology to increase conversion and maintain premium pricing? And we'll talk a little bit about that today. Questions like how do you sell a Christmas product at different times of the year? Or a great product was how do you make non-alcoholic beer cool in different drinking cultures around the world? We've been asked a lot about how behaviors are changing in challenging times. Historically, that's been about COVID and how people respond as we come out of COVID. But increasingly it is around, okay, well, how will people respond to a turbulent, scary environment and hence the talk today? And I thought I'd throw this one in just for fun. How are the affluent? How are rich people psychologically different? And if you want to know, I can tell you all about the troubles of the of the poor, the the very poor, rich people that we feel very sorry for in the break. If you like what you hear. There's a lot more on our blog if you want to know about nudges, psychological profiling, the science of attention, or how our brains process money, there's lots of other good stuff on there, but let's get on to the topic in hand. So you will have seen lots of scary graphs from Ilene. Thank you. I feel terrified now, although good to see the UK beating everybody in something, even if it's just in inflation. What we wanted to do today was to give you a view kind of under the bonnet about what might be going on in your audience's minds. I'm going to share a few themes for you up front, five themes that I think are relevant and might help you think about this in different ways. And then Patrick is going to come and explore this a little bit further and show you how you can react to those and what you can do to change people's minds. So the first one is about fear and anger. And fear and anger are important because there are two ways that we respond to threat and worry. It's important because they're very different in terms of how they play. There was a great study that looked at fear and anger as a response to the 2008 recession. And what they found is if you imagine that like a fork in the road, there are some determinants that will change whether you go towards fear or anger. So, for example, if we perceive that somebody is responsible for this thing that I'm that I'm scared of, that will have a big determinant of whether we move more to anger than fear. So, for example, anger is a much more likely emotional reaction if we can identify. An external cause, like a war or whatever. Anger is also much more likely than fear among individuals who believe that the person who's responsible, if they can, they can imagine a person responsible, either should be under their control. In other words, perhaps a leader of a of a business or brand that they that they buy into or should care about their welfare. Like a politician, these are much more likely to drive anger rather than fear. And this is important because those mindsets are very different. And how you influence those mindsets is very different. So fear makes us much more risk averse, and it also makes us very vigilant. So if you think about us as cavemen avoiding being eaten by an animal, we tend to avoid our surveillance systems up. We're looking for for things to be scared about and avoiding those. Whereas anger, anger changes it. Anger is about getting ready to address that threat directly and looking at previously learned routines. What have we done before that could could help us deal with this problem so much more we call approach and distribution systems. Interestingly, some studies have shown that it's anger rather than fear, for example, that makes citizens protest and go on demonstrations. But how does fear play in in the theatre of our minds? What mental imagery is a really important part of what determines that? And if you think of two examples, one is as children being scared of the monster in the closet. So an imaginary thing. The other is replaying previously traumatic events that we've gone through, which is a real thing. But what is interesting is how those fear stimulus can generalize, as psychologists, psychologists say. In other words, how do they transfer from one to the other? So how does being scared of of a real thing transfer to me, being scared of an imaginary thing? And what this study found is that real and imagined images, mental images are processed by the learning systems in very, very similar ways. And in this study they acquire got respondents to acquire fear, conditioning to imaginary and real things. And then they tested their response to that fear by two things one, by asking them, but the other was sensing putting skin sensors on. Because when you're scared, you know what it's like being scared. You get the goose pimples so you can actually detect that. And what they found is that people can be conditioned to respond to imagined stimuli. So if you think of some of the graphs that Arlene showed that we see on the news and we start hearing that bad things might happen, it could be that actually just seeing a graph can start to trigger some of those fear fear signals, even though there's no rational connection necessarily for everybody between that. But I don't want to be completely miserable. There are seeds of seeds of some optimism here. There was a study on how millennials in particular behave during times of recession. And what it found is that although they lower their expectations regarding work life balance and and social atmosphere, expectations around job content, around career development and financial rewards remain high. And these are kind of embedded across the generation. So this indicates perhaps a heads down and work response to this to these these pressures. So this approach, rather than avoidance, which does give us some some seeds of optimism and optimism is important because optimism is very good for you. Previous studies have shown how people who are more optimistic tend not to suffer from chronic diseases and die prematurely. Another study showed that it was specifically related to people living longer, so 11 to 15% and also increasing your chance of living to what they call exceptional longevity, in other words, 85 or beyond. But the important thing about this study is this was independent of your wealth and health behaviors and so on and so forth, but not too much optimism. Optimism is related to numerous work life choices. More optimistic people, for example, tend to work harder. They expect to retire later. They're more likely to remarry if they get divorced or widowed. They invest more and they tend to save more. Interestingly, though, there's a difference between moderate and extreme optimists. So moderate optimists are seen to display sensible financial behavior, but extreme optimists start to start to demonstrate behavior that we would consider not prudent. Also, moderate optimists work significantly harder, but extreme optimists tend to do considerably less work. So some optimism, but not too much. And hopefully that set the scene a little bit. At this point. I'm going to hand over to Patrick, who I'm told will miraculously appear on the screen behind us. Hi, Patrick, how are you?
Suyin Aerts: Hi. I'm good. Thanks.
Dan Thwaites: Nice to see you. How's how's the little one?
Patrick Fagan: He's good. He's out of the house, which is good.
Dan Thwaites: Nice. Well, I'll let you. I'll let you carry on by himself.
Patrick Fagan: Yeah. Thanks, Dan. Hi, everyone. I'm coming in from Zoom, where I'm actually not wearing any trousers. And so, hopefully, on Dan's note, I can now crush some of that optimism. So we're not too optimistic. Yes, I do like to I do like to ask people to call me Pat, although I hate it, so please don't. But the reason I ask that is because as you can see from this study, people use a short name or a nickname as seen as more popular and more cheerful, which I think is where I could use the most help. I'm also doing something else to try and influence your perceptions of me at the minute, and that is actually these glasses, because research shows going back to the forties, but also recently that people who wear glasses are seen as smarter, more reliable, hardworking, so on. And I'm none of those things. And these are 99 glasses from eBay that actually make it harder to see. So we have to take them off now. And so this is how people's behavior can be influenced by seemingly quite incidental things and sometimes significant ways. So just some glasses or a nickname can actually have quite a profound effect on perceptions and behavior. To bring that to life in a more practical way. I'll give you an example of the power of behavioral science here. Let's say you sell beer in a supermarket. How could you increase sales without spending really any money? And that's really the essence of behavioral science, is how do you have big behavioral effects, especially in the long term, across lots of people and lots of interaction and exposures. We're just actually implementing very small nudges, very small kind of superficial, incidental changes. Well, in the case of this case study, which was for Guinness, they introduced these cardboard fins. These Guinness glasses really cost nothing. But in the intervention, they increase sales by 25% because they drew people's attention to the Guinness and reminded people that Guinness exists and that was simply enough to influence their purchase behavior. Likewise, other research has found that people are more likely to buy Reese's Pieces during Halloween simply because they're orange and Halloween. You're seeing all these orange decorations, orange leaves and so on, and that's influencing your behavior, even though, again, it's a very subtle incidental nudge. Well, the reason this happens is because we are what's known as cognitive misers. We have very limited attention spans for paying attention to the world, processing information, making choices. There was one study which had people walk through a park where there was a unicycle and clown, and only half of the participants noticed the. We just can't consciously, rationally process everything because our brains are too small and there's an infinite amount of information in the universe. So you can't really put a number on something like this. But people have tried. One researcher looked at all of the sensory neurons that fire in the brain. Every second finding. There are 11 million of them, but only 40 of these go through pathways. So that estimate is an estimate. Only 0.0004% of sensory processing is conscious. Most of it we're not aware of. And there's a nice study here which illustrates just how limited the conscious mind can be, how little brain power we're working with often. And participants were asked to memorize a number. Half of them were given a two digit number fairly easy. The other half were given the seven digit number, which is much more difficult. There's something in psychology called the magic number seven, which basically says we can only keep about seven pieces of information in our heads at any one time. I think that's why when you get those codes for 22 factor authentication, there are only about six digits long because seven plus is pushing it. But anyway, half of the participants had an easy two digit number and half a difficult seven digit number. And while they were memorizing it, they were offered a choice of snack. They could have either cake or fruit salad. Now under normal conditions of the two digit number most people chose. The fruit, whereas under the more taxing conditions, most people chose the cake. And the reasoning here is that which of these two snacks is the rational thing to do? It's the fruit and it requires effort to choose the fruit. Number one, because you have to inhibit your your so called monkey brain, which wants to stuff as many calories into its face as possible at all times. But number two, you have to think about the future. Think about your health and your waistline in the future. And that's an abstract thought which requires energy. And so all it took was a seven digit number to kind of max out the rational conscious brain, the working memory, and allow the emotional, impulsive brain to take over and choose the cake. This, I believe, is why retailers like Primark in the UK sell sweets and trinkets by the checkout. Because by the time you get there, you're usually stressed and tired and more likely to make an impulsive buy. So we're not dealing with a huge amount of conscious brainpower here for making choices, and we can't process everything. But the issue is there's a huge amount of information out there. Stores have tens of thousands of stock keeping units, for example, and there's almost infinite information and choice on the Internet, of course. So with our limited brains, how do we deal with all this choice? The answer is something called heuristics, which are essentially subconscious rules of thumb or shortcuts which allow us to navigate the world on autopilot. For example, if a restaurant is very busy, you assume it must be good, and so you're more likely to visit. And so the heuristic there is busy equals good, and you don't have to think about that rationally at all. To give you three examples of heuristics. There is, for example, value perceptions where people are more like, Sorry, people will pay more money for a beer when it's in a fancy hotel compared to a run down store. So their perception of the product's value has changed purely based on the context and the presentation. Even though the beer is the same in both cases. Another study found people would pay more for a brownie when it came on a plate compared to a napkin, even though the brownie was the same in both cases. So the upshot here is that you can get people to be more likely to buy or spend more money just by changing contextual framing factors. Representativeness is about if something looks like a duck and walks like a duck and quacks like a duck, it's probably a duck. And there's a really interesting study on that here where they had people rate packets of either cookies or rice cakes. And on the front of the packet there was a picture of the product. So either a picture of cookies or of rice cakes. And what they looked at was the effect of the location of the product on the packaging. Now, products in the bottom right are perceived as heavier because, number one, gravity. So if something's located in the bottom of the field, we assume it's heavy because obviously heavy things sink. But number two on the right, because of the pivot effect. So in the West, at least, we read from left to right and pivots say that the further you go out, the more kind of gravitational pull there is on the lever. So things in the bottom right are perceived as heavier things in the top left are perceived as lighter. And for that reason, for products where you want it to be heavy. So cookies having it in the bottom right resulted in higher valuation. Whereas for products that you want to be light like rice cakes, having it in the top left is the way to go. The final example is priming where our perceptions and behaviors are influenced by incidental cues. In this case, people spent more money on wine when the store was playing classical music compared to pop music, because classical music puts you in mind of sophistication and so on. Now, interestingly, these heuristics apply even for things where you think people would be rational, such as pensions, organ donation, even doctors are influenced by a whole host of biases, as we all are. And of course, money and the economy. For example, the chart on the left there is showing that there's a correlation between stock market performance and public sentiment as measured on Twitter. So the happier people are generally, the better the stock market does and vice versa. The study on the right is a favorite of mine as an illustration of what's known as the ostrich effect, where if there's something people don't want to know, they just won't look at it because it's painful to hear bad news. What the data is showing is that the worse the stock market performs, the fewer logins there were on this investment app. So when the stock market is doing poorly, people stick their head in the sand and they don't want to look at it, even though that's kind of irrational because when things are going badly, you probably should take action. And that note then on the economy brings us to where we are today. And so things aren't great is you don't need me to tell you. But what's interesting, and perhaps as a note of optimism for two reasons, is that we've been here before and there are some scholars and researchers and even data scientists who suggest that we kind of go through a cycle every generations, every 80 to 100 years ish. It's the kind of cycle of death and rebirth socially and economically. So 8,200 years ago, obviously, I don't need to tell you what happened in Europe. And so the theory goes that we're kind of going through a similar thing now in terms of pestilence, famine and war. But there's you know, there's data to back this up. And the two points of optimism are. Number one, it won't last forever, which is good. But number two, if this has happened before, then there must be lessons learned as to what will happen and how to survive really as a business. So on that note, we can look at past research, psychological research, and we can make some educated guesses as to how to engage people during these times based on what's happening psychologically. But here are six principles based on research. The first is status. So when people feel kind of scared and uncertain, they want to cling on to something solid and secure. And they also are worried about their status in the world. And so they want to kind of improve it and improve their status. So there's a study here which is titled He Who Dies with the Most Toys win, he dies with the most toys wins, where they found that purchasing tension for Rolex was statistically significantly higher when mortality was made salient. So that should say mortality, not morality. And when people were made to think about death, they were more likely to buy a status related product like a Rolex because it gave that sense of self esteem and something some heritage to kind of guarantee. Similarly, after the the financial crisis, the last one, this study in the Boston right there found that Gucci, not just Gucci, but several luxury brands, their logos got bigger on their products. So brand prominence increased because people wanted to show off their status more. One of the studies has a nice quote. Individuals may avoid experiencing existential anxiety, which most possibly have at the minute by making an enduring mark on the world, for example, through acquisition of items that symbolize high value within the culture. And that's really the point here. Related to this is something you may have heard of called the lipstick effect, where during times of recession, during economic tough times, sales of lipstick increase. And so to do due to other attractiveness related products. And this paper here showed that through a whole range of experiments, not just looking at sales data during recessions, but also running experiments. When people are made to think about recession, they are more likely to buy luxury or attractive attractiveness products. And there may be an evolutionary reason for that. When times are tough economically, there may be this kind of hardwired urge to compete for a mate who has resources. But that's what some of these researchers suggest. But recently, CNN reported that sales of mascara increased by 150% during lockdown. Sales of actual lipstick decreased because people were wearing face masks. But still, the point holds that people are spending more on attractiveness related products. And of course, related to this is luxury, which is both a status product and an attractiveness increase in products. Watches of Switzerland have been doing well. Luxury yacht makers have been doing well. And there's even something called the Rhett Butler Effect, which alludes to the fact that luxury products increase in sales during tough times, potentially for the psychological reasons that we've discussed, but maybe also for practical reasons, because that they have higher margins so they can withstand more kind of fluctuations in the market. We also tend to see a stockpiling behavior. And so a study of COVID 19 behavior found that people stockpiled approximately six items and toilet paper was the item most commonly procured. There's some interesting psychoanalysis there. Essentially, there's a theory that we're all dying. I mean, that's not a theory, it's true. But we deal with the fact that we're all dying psychologically in certain ways because it's an uncomfortable thing to face mortality. But in particular, the first time that a human is aware of this is in potty training, because that's when you become aware that your body does something beyond your control and that you kind of have this decay coming up with your body. And so perhaps the theory goes that this is why toilet paper was stockpiled and bought so much, because there was this psychological need to feel, feel clean and not feel kind of mortal. Gold, obviously, is a proven hedge against inflation. And there's also evidence for an end temporal substitution substitution effect where people spend more money today because they expect goods to be more expensive tomorrow. So generally speaking, in certain categories, maybe there's more spending people converting their money into more stable, tangible assets rather than cash. There is potentially also a desire to have escape from stress and negative emotions. For example, this study titled This study found essentially the point lots of eat and drink for tomorrow we die. The Bible quotes. But it found that particularly on Friday, when people are reminded of the fact that they are mortal and dying, they drink more alcohol because you want to kind of live in the moment and have fun to escape the stress. And the final principle I want to talk about is nostalgia. The study in the top left found that when people were reminded of their mortality, this the effect of their mortality salience was reduced or negated, in fact, if they were made to be nostalgic. So to think about, for example, their childhood. Because nostalgia and desire again to something certain, it gives you some kind of meaning and it makes your life feel more stable. And so that's perhaps why we're seeing more nostalgia for things like Friends, the Eighties. Lots of movies have an eighties aesthetic these days, and even people who aren't alive at that time seem to perhaps have nostalgia for when things were better and there was more optimism and. So those are some psychological principles. Two things which are fairly obvious are probably don't need to tell you, but there's more online shopping, of course, as people are online more. Whether this is beyond what was predicted seems to be different according to different countries. So you can see in the chart on the right there in the US, online retail percentage went back down after lockdown, but it was still on trend increase, whereas in Brazil the increase seemed to be maintained. And of course, people are more price conscious, doing more bargain hunting, that kind of thing, searching for cheaper holidays, moving to to discount retailers like Aldi and Lidl and that kind of thing. So even though people may be more likely or have more desire to acquire status products and attractiveness products, there is, of course, still this price consciousness. So what can you do about that? The price consciousness. Well, a little psychology on pricing. The first thing to note is that numbers are fairly new to us in our evolutionary history. So we've been using our eyes for a lot longer, many billions of years longer or millions of years longer than we've been using numbers which are fairly recent. And accounting and money is even more recent. So it's not something that we process and deal with intuitively. It's more of a rational thing. So if I were to show you a pen and ask you how much is this, it's quite hard to to to put a price on it. It's not something we deal with intuitively. Instead, we make judgments based on contextual cues and judging things comparatively. I could show you a pen and say the pencil is 50 PS or How much is the pen? And then you can make a much better guess, relatively speaking. So, for example, if a woman spills coffee on herself at McDonald's and requires a skin graft and sues McDonald's for it, how much compensation should you get? People have a very tough time answering this question, except for the people who say nothing immediately. But otherwise is very hard to put a monetary value on this. It's not something that comes intuitively to us. And instead we make judgments not in a vacuum, but relative to context and comparisons. And this is true even for our perceptions. If you look at these two squares, A and B, which of these squares is lighter? Now, you might rationally know this, you might know they're the same shape, but B still looks lighter. So many of you would say B is lighter. But in fact, as I said, they are the same shape. So I just prove it that I'll go back and see you again. They are the same shape. It's just that B looks lighter because it's being judged relative to contextual cues. So the dark squares around it make it look lighter. And also the shadow plays some tricks on our perception. So the same is true here. Prices for pounds looks cheaper when it's slightly more expensive when it's surrounded by £2 and it looks cheaper when it's surrounded by £10. This might be why Rolls Royce are known for serving their cars at yachting conventions, because next to a luxury superyacht, a Rolls-Royce looks like a good deal. So going back to this lady who speaks for myself, she asked her about $3 million, which is obviously a lot. She got 640 K, which is still well above the norm, and particularly the skin graft only costs 11 K and academic researchers have found that the amount awarded in the case is often anchored towards what lawyers ask for. Similarly, negotiations for salary. The more you ask for, the more you get. So this is a heuristic known as anchoring, where, as I said, we don't make judgments in a vacuum, but rather relative to other things. To give you an example in action, a store in California sold CDs next to t shirts. Customers could pay whatever they wanted for the CDs. When the t shirts had a big sign saying $10 and willingness to pay an average for the CD was 729. When the t shirts were $80, this went up to $9 because they were anchoring to this irrelevant, unconnected sign. Right. Sign for the t shirt. So of course, you could use this to make prices look more attractive if you need to increase the price. You could use a reference price to to make the increase less harsh. There's also the decoy effect when people are given the choice of two microwaves. In this study, they on average tended to choose the cheaper one rather than the more expensive one. So how do you get people to choose the more expensive one as you necessarily perhaps increasing your prices in these economic times? How do you get people to choose that more expensive option? Well, in this study, what they did was introduce a third option, a decoy. An even more expensive one. And what happened was that truth shifted to what used to be the more expensive one was now the middle option. And people were much more likely to buy it. So you can introduce a decoy to make other things look better value by comparison. So this is largely reference prices. It was £10, not £5. Probably not new to anyone here, but there are certain psychological techniques which can make reference prices even more effective. For example, the congruence effect font size matters. So if you have the smaller price in a smaller font, that smallness of the font gets kind of misinterpreted re-interpreted by the brain as the smallness of a number. And obviously you want the sale price to feel smaller than the older price. So when you have the sale price in a smaller font purchase intentions were significantly higher, which is interesting because retailers currently tend to do the opposite. They currently tend to do less on the left, whereas perhaps on the right and they work better. There are also certain principles of numerical cognition. This is how we perceive numbers. For example, we tend to perceive numbers with lots of zeros as being bigger because we tend to round bigger numbers. So researchers have found that if you make the price precise, people perceive it to be smaller than if it has zeros in it. Even if the precise, precise price is actually higher. Similarly, if you make it physically shorter by removing zeros, that makes it be perceived as smaller because there's less digits and and no zeros as well. So getting rid of the decimal places can help. And also removing the pound sign of the currency sign, as restaurants often do, removes the perceived pain of paying. It doesn't remind you of losing money like the currency sign does. And that's been shown to increase sales. I'm sure you also know about the 99 ending effect. Research has found that if you increase the price to a 99 ending, that can actually increase sales, even though it's more expensive. And there's a few theories as to why that is. One is that for whatever reason, we've been conditioned to associate 99 endings with discounts, so they assume it must be a deal. Another is anchoring where we read from left to right. So we tend to anchor to the first digit. So 399, you're anchoring to three rows, 4 to 4. So even though this is one penny difference, it feels a lot less. Obfuscation is where you can make the digits on the right in the smaller font. So obfuscate that and that exacerbates the right bias. Right. Digit bias which you just talked about, the anchoring bias. And finally, phonemes are interesting. This idea that certain noises that we make are associated with largeness or smallness. So kind of sharp, high pitched noises think like a teeny tiny are associated with smallness. A 99 obviously sounds quite similar to teeny tiny. It uses those small phonemes, so perhaps that causes people to perceive a place to be smaller. Putting a price on a yellow label. Also, research has shown results in better value perceptions, at least in the UK. Maybe it's different in other countries, but people associate yellow discounts. Giving the things away for free, it tends to be quite attractive. So in this study you can see that when a Hershey's Kiss was cost a cent, only 8% of people chose it. When it was free, this went up to 31%. So even though it's a difference of $0.01, the choice impact was not proportionate. So there is something attractive about things being free, but there are certain caveats to that, such as it can decrease the perceived value of the product. So if you give something away for free, people might assume it's not good value. So there are certain workshops with the value of free. There's also time discounting or present bias where we prefer things today. So we prefer pleasures today and pain tomorrow. This is why Buy now Pay Later is so successful. In this study, when people were given the choice between an enjoyable movie and a serious movie, they should watch a kind of Oscar winner, a documentary or something. Most people chose the enjoyable movie to watch today and the serious movie they should watch in the future. So we want nice, good, enjoyable things now and painful things later. And then the final thing I want to make a point about is price fairness. So we have a very strong hardwired bias against unfairness. We hate being treated unfairly. And it's so hardwired that it's even found in primates, as you see with this video, with captured monkeys. Basically, there's these two monkeys. There's one on the left, one on the right. They're both. Trained to do a task. One of them gets paid in cucumber for the task which it eats and is fine. Then the other one. It's angry because we don't like being treated unfairly. So when the price is increased, people tend to assume it's unfair. They tend to assume there's a profit seeking motive. They tend to assume bad intentions. But there are certain things that can be done to negate that. So price transparency, for example, laying out the components of the cost, this much for labor, this much for materials, it's much more profit. Being transparent using placebo information is. So using specific information like saying the price is going up because dot, dot, dot doesn't really matter what the big cause is, but just its presence there makes it more acceptable. Particularly if the reason is the price has gone up, such as inflation up beyond the seller's control. People are more likely to accept the price increases. It's basically about being transparent and explaining.
Patrick Fagan: The one on the left is the monkey who gets cucumber. The one on the right is the one who gets grapes, the one who gets cucumber. Note that the first piece of cucumber is perfectly fine. The first piece he eats. Then this is the other one getting grape. And you will see what happens. So she gives a rock to us. That's the task. And we give her a piece of cucumber and she eats it. The other one needs to give a rock to us. And that's what she does. And she gets a grape. And if the other one sees that C gives a rock to us, now gets again a cucumber.
Patrick Fagan: So we are really instinctually wired to hate being treated unfairly or to feel that way. So as prices go up, you're potentially going to get that that that response. But there are ways around it, as I explained. And then finally, in terms of promotion, one really interesting point is that promotions often work because of salience rather than the value of the discount itself. So it's just because the sign, the the signage to display whatever it is draws people's attention to the product. In the supermarket, Tesco in the UK, they have these signs that say special purchase doesn't actually mean anything, but people see it and they assume it must be a good deal so that they're more likely to buy it. So when you're thinking about promotions, just bear in mind it's not really actually so much about the price sometimes as it is about people's attention to the product. So in conclusion. And three points. One is in these tough times, provide a route to status and control products that connect people to heritage and feelings of certainty, able to boost their self esteem and status and so on. Secondly, you give people good vibes, you give them escape from their worries, nostalgia, that kind of thing. And finally use the psychology techniques to nudge perceptions of good value without necessarily decreasing the price or maintaining sales while increasing the price, but using those psychology techniques either way to influence value perceptions. Thank you.
Suyin Aerts: Thank you so much. And seal it with us. Uh, Patrick, because I've got some questions, uh, for you. The first question I was really wondering is in your example of the t shirts and, uh, CDs, why did the price not go like times eight? And it was just a little bit higher, but not like, uh, eight times higher.
Patrick Fagan: That's probably because people have internal reference prices. So people have experiences with CDs before, so they kind of remember how much the CD is kind of supposed to cost. So you're biasing it away from that. But there's kind of two anchors, I suppose, the $80, but also people's intuitive sense of what it should cost.
Suyin Aerts: Something else I wonder is why if we you have many people, when they are buying on the Internet, they for days or months compare prices to buy something at the cheapest price most of the time. And then when you ask them like two months later what the actual price was, they paid for something they were comparing for so long, they completely forget the price. Is that reason why we tend to compare so long and then forget everything?
Patrick Fagan: Well, I think that's two things. One is that our memories are not very good. So people probably just do forget prices in general as as we forget many things. But the other thing is that maybe the psychological or personality reasons, the reason why people spend so much time, price comparing is not so much about the price itself, but maybe it's, for example, for a feeling of control over life in the world, wanting to feel like it's in your hands. Some people like the thrill of hunting for a bargain. That kind of hunter gatherer feeling that people get does one study. I don't know if it was peer reviewed, but it said that finding a bargain produced the same brain response as cocaine or pornography. I'm not sure about that, but for some people it is quite thrilling and fun.
Suyin Aerts: You did not try it. What was the-
Patrick Fagan: Sorry?
Suyin Aerts: What was the colour of your pants again? Sorry. The colour of your pants. What was it again?
Patrick Fagan: The colour of my pants.
Suyin Aerts: Yeah. You said you were not wearing any, but you're joking, right? Okay, um, I have a question for you. Uh, then how can we nudge someone differently? You were explaining somebody who is angry and somebody who is afraid. How can we nudge them differently?
Patrick Fagan: Well, I mean, if you think about it thereafter, different things. So someone who's afraid is after safety and familiarity. So for them, they will respond very well to themes of routine. And as I say, familiarity, Nudges like loss aversion are more likely to work on them. They will respond to messages around feelings of of like personal distress will work well with them and and they will resonate and respond to, for example, attractive messengers that might be someone who is physically attractive or something that is attractive to them in the need they have like a, you know, a doctor or a financial expert, whereas someone who is angry for them, it's going to be about not being passive. It's going to be about making your make, making yourself known. So for them, much more edgy language is likely to work. Nudges around not adhering to social norms. As I say, that intense and edgy language, quite confrontational language, and depending on your brand, actually swearing might work. You know, obviously that's probably more going to be better for fashion brands and beer rather than your bank, although maybe so. So there are very different nudges that you can pick up on them.
Suyin Aerts: And would you then say if you sell something online, you would first need to try to figure out what the feeling of your potential customer is and then lead them to, um, a certain way to attack them as the afraid buyer or the angry buyer.
Dan Thwaites: Yeah, there's different ways you can do that. I mean, you can you can profile your customer base. You might find that a customer base has a certain type of person. More likely, you can design ads that link to specific motivations. So you could come up with a a fear nudging ad versus a anger nudging ad or search term or whatever, and then customise accordingly.
Suyin Aerts: And how can we use those nudges in an ethical way?
Dan Thwaites: Yeah, it's a good question. I know Patrick has a point on there. I think there was a I'll just add something that was an interesting study that showed if you tell people that you're going to nudge them, they actually respond more because in certain areas, particularly like financial services, you know, perhaps if you're thinking about your pension or if you're thinking about some things that you should buy but perhaps won't, they appreciate it. I think the other thing is probably around just being transparent about it. What you think Patrick?
Patrick Fagan: Yeah, absolutely. It's all about autonomy, so giving people the power to know what's happening to them, being transparent, giving them the ability to opt out, listening to their concerns and so on. As Dan said, when you give people autonomy, you actually reduce what's called reactance. It's a bit like reverse psychology. When people feel that they have control, they're actually a bit more receptive to nudging, funnily enough. And then also there's things be humble. Bear in mind who nudges. The nudges were all the rational, so just bear in mind there could be negative consequences of nudges, despair, all that in mind. And of course, empathetic. Try not to use fear or shame or anything like that.
Suyin Aerts: Okay. Well, um, thank you so much then for being with us here on stage. And thank you so much, Patrick, to be with us remotely. Um, if I'm not mistaken, you will also stay with us this afternoon for the panel discussion. So if people have questions, I'd like to remind you, if you scan the QR code, you can, uh, drop your questions already in the slideshow. So make them very difficult ones, please. Those questions for our panel of all the speakers that we will still have on stage, uh, this afternoon, we will now take a short break of about half an hour. I would like to have you back in your seats if possible, at 230. So enjoy a coffee or a refreshment and give them. And Patrick, a last applause.
Suyin Aerts: Welcome back, everyone. I'd like to introduce you to our next keynote speaker, who is Heleen Buldeo Rai , and she's an expert in e-commerce, urban logistics and sustainability. And she obtained her PhD in 2019 in Brussels at the Universitat Brussels, and she's now a researcher in Paris in the Université Gustave Eiffel. And she's very, very interested in the impact of all the new retail trends on mobility and on our environment. She published a book 2021, where she shares a good way, a Practical Guide on Sustainable Online Shopping. And she told me she has been nominated this week for the PIM Marketing Literature Press. So hopefully this will turn out very good for her. In her talk, she's going to share ten insights for eCommerce. The eCommerce, of course, of tomorrow. Please welcome Heleen Buldeo Rai.
Heleen Buldeo Rai: Hi. Good afternoon, everybody. I'm delighted to be here. Thank you for the introduction. So my name is Heleen Buldeo Rai. I'm a researcher originally from Belgium and living and working in France at the moment. And so I will talk to you today about e-commerce and sustainability. I published a book on the topic. You can see the cover here. And so the goal of this book was really to summarize the learnings that I did during my PhD to really grasp the size of the environmental impact of e-commerce and also to give practical strategies for the industry moving forward. So this is what I will talk to you about today.
Heleen Buldeo Rai: Now, we know these are figures from Belgium, but they will get the message across. Don't worry. We know that in 2010, um, the Belgian consumers received one parcel every 64 days. Ten years later, 2020, they received one parcel already in 212 and a half days. So this was a parcel volume that one times four. And we know that ever since parcel volumes have not really come down. And when we look into the future 2025, we expect that about 30 to 50% of the stuff that we buy as consumers will be bought online. So it's really time to look into ways of how to organize this supply chain, the e-commerce supply chain, more efficient and more sustainable. And this is what I want to talk to you today about in this keynote, and I will share ten insights.
Heleen Buldeo Rai: First of all, when we read about e-commerce, environmental impacts in the press, it's often portrayed as something negative, a catastrophe for our environment. But what we found, what we found in our research is that, in fact, when we compare it to traditional shopping, going to stores, it doesn't have to be that bad. And quite on the contrary, in a study that we found comparing Belgian consumers shopping for shoes either online or in-store, we find that the CO2 impact was up four times less than when consumers bought them online compared to when they went to stores. And this isn't an isolated finding we compared. And we pull together statistics and we pull together information from other studies, similar studies carried out around the world in other product types. And we kind of found similar results of an environmental impact for e-commerce lower than for store shopping. Now, before everybody grabs their smartphones, there are two important conditions that are at the heart of these findings and that aren't really discussed that much. The first is almost all of these studies assume that people going to store will go there by car. Now, we know in 60 to 70% of trips that we make for purchases in the Netherlands, in Belgium, in France, this is this is the case. But of course, urban inhabitants among us, they might go by foot, cycling big in the Netherlands, but also taking public transportation. And this is, of course, still preferred over shopping online. So if you live in a city and this is how you get your goods, please continue doing this in this way. The second condition that is at that is explaining these results, that is the fact that and it is a more complicated one, is the fact that these online purchases are seen as a substitution for going to stores. So it means that we don't do a browsing, we don't go to stores to check out the assortment, try out some products and so on, get the look and feel. We also don't go to stores to to pick up the items that we bought online. And we also don't return what we have bought online. So this leaves about 50% of online purchases. So it is quite important as a condition to take into account. Now, regardless of the comparison, there still is an environmental impact that we want to reduce as much as possible. And so where our efforts can be focused on is actually on this last, last part of the e-commerce supply chain. We call it the last mile. The delivery is to consumers homes. And so this is actually remarkable that this last part of the supply chain, the shortest part, because most of the things that we buy are not produced locally, but they are produced very far away, weighs the heaviest on the environmental impact of e-commerce. It means that it weighs heavier than, for example, supplying lighting and heating warehouses, then packaging as well, which to consumers is the most the most frustrating part of the online shopping experience. And also then using data and using Internet, which of course has an environmental impact as well as we know. However, there is one big issue, and that is the fact that mostly consumers are in charge of their delivery option and their delivery choice. So retailers buy delivery options with parcel companies. Retailers offer them to consumers, but it's consumers who make the final choice. And so we did quite some extensive consumer behavior and consumer preference research, really, to find out how what consumers want and what they would be willing to do. And so we found, unsurprisingly, that consumers are not really willing to pay for delivery. The standard today is really a delivery without a fee, but they are willing to wait longer or collect their online purchases. So we did this based on a representative panel. These are Belgian consumers. But what's interesting is that at the same time that we did our study, Dutch colleagues did a similar study and our results were published at about the same time, kind of confirming each other's findings. And they have been repeated afterwards in countries like Bolivia, China, Brazil and so on. So really showing the robustness of these results. So what we found is that the delivery option that is preferred by most consumers is actually free next day delivery at an address of choice. So this is mostly home delivery and with a free return in a collection point. So 80% of consumers would prefer this delivery option. So we wanted to find out, okay, this is the preference, but what if we change it a little bit? Our consumer is still willing to choose for it. So we did change the delivery speed from next day delivery to delivery within 3 to 5 days. And we found that still almost 80% of consumers would choose for it. We did a similar thing instead of home delivery, we chose for collection point delivery and here as well, we came to the similar result saying that almost 80% of consumers would still choose for it. So this leaves us with two interesting ways of making this delivery more efficient, more sustainable. It allows us to bundle parcels in time and in space. So leaving lowering the delivery speed makes us group parcels for for a similar neighborhood and in this way delivery in a more efficient way. Similarly with collection points, if we can drop off like 30 parcels or 100 parcels in a collection point instead of delivering them one by one at one address, it leaves for the delivery worker more time to deliver, to make deliveries, and also to fill up its van more efficiently. So these are two good ways. And also thinking about increasing cross-border e-commerce, for example, having more time to deliver your the parcels, the goods that have been ordered online also reduces the need to go for airfreight instead of more sustainable transportation options. We did a similar thing with the price of the return, and instead of free delivery, we changed it to 5.95. And there you see a remarkable difference. Only still 50% of our consumers will choose for this delivery option. And we think that when we would do this in not a survey environment or service situation, but in an actual retail environment, that this percentage would even be lower.
Heleen Buldeo Rai: So it's not a very surprising result, but it does give us some tools, some leverage to motivate consumers to choose for a delivery option that is more sustainable, instead of choosing for a delivery option that is less sustainable. So a changing pricing could be interesting. But because of this price sensitivity, we also wanted to find out what other ways there are available. And so we wanted to know if we give consumers more information about how the delivery process works, what is efficient and sustainable and what is not, whether this would change their choice behavior. And we find that informed consumers they make more environmentally friendly choices in the checkouts. We did this by using an experiment again focused on choose, and it was a very straightforward delivery option or delivery choice that we gave consumers either free delivery next day or free delivery within three days. Only 9% of our initial respondents in our control group would choose for this slower delivery. So we did a number of things. In the first experiment, we we simply moved to change the choice architecture, as it's called. We just simply switched the two options, which had already an impact 24% of our respondents chose for a slower delivery. We consider that might also be due to the fact that we are in a survey environment that consumers might be just wanting to really to go quite quickly throughout the different questions. Fair enough. So we looked for other ways as well. In a second experiment, we added a did you know, and we explained consumers that if we have more time to efficiently group parcels, it makes it possible for us to cover less transport kilometers which is better for the environment. And so this had an impact on consumers. Almost 60% of them chose for this slower delivery option. In a third experiment, we added a social media campaign. We didn't explain why slower delivery is more environmentally sustainable, but we did say that it was, and we gave them the option to share their environmentally friendly choice on social media if they would choose for slower delivery. It convinced a bit more than 50% of our respondents. And then in the last experiment, we used the same social media campaign. But we added that already 1000 people before them made the same choice. And this had a remarkable results of almost 70% of our consumers. So it really shows that when we talk to consumers, when we talk to people, and when we explain them and give them options, it really has an impact on their choice behavior and ultimately on us, on the efficiency of our supply chain as well. Now, I mentioned delivery speeds, reducing or slowing the delivery, but I also mentioned collection points and we have been doing way more research on which situations and which circumstances this is actually more sustainable, better for the environment.
Heleen Buldeo Rai: And so we found that the story is quite nuanced in fact, with collection points, they are they are more efficient delivery location compared to home delivery, but mostly in urban areas. And so we did the research working together with a big retail group who had three different brands with three different densities of network and well densities of network, and also explains different consumer travel choices, so depending on how dense the network was. And so obviously when comparing or when when looking into store network, this is not as dense as the collection point network that the delivery companies have. So it's kind of an extreme case, but it really shows, well, the different considerations that have to be made. So we not only compared the different densities of the store network, but we also looked into different area types: in urban area, suburban area and the rural area. We show the environmental impacts that are associated with the logistics part of it and also with the consumer part of it, traveling to the store front and back. So we found that in urban areas, home delivery seems to be the less environmentally friendly option. Consumers have quite a dense store network where they can go to and they mostly travel by foot, by public transportation and by bicycle. This was less true in a suburban environment, and it was definitely the case in a rural environment where consumers have to travel quite far to go to the store, making the equation in favor of home delivery. Now, regardless of where we receive our parcels, they always will be packaged. And so we looked also into ways of how to make this story better for the environment more sustainable. Now, packaging is important, a parcel on an average parcel journey, it falls down approximately 17 times. So removing the packaging is quite hard. It also contains up to 130 to 230 packaging and padding materials. So when you put this in perspective and the 1 million parcels that are delivered every day, it's quite remarkable how much material has to be used. So there must be better ways. Also, up to 40% of a parcel contains air. So it doesn't only give us this ridiculously large boxes and all the padding material that's so frustrating for us as consumers. But it also makes that the delivery van is filled almost up to half with air. And so that's not a very efficient way. So we've been looking into options that are provided by packaging machines, bol.com, for example, as a number of these machines and allow them to make packaging that is more fitted to a product. So reducing the the air that we really don't need and want. But there are also other options that go a little bit further into the sustainability journey. And these are reusable bags, reusable bags and boxes. Now to make these reusable bags, we need way more material in order for them to be used one time, two times up to 100 times. And so they also need to be cleaned and they also have a supply chain of their own to go back to the retailer to be reused again. So researchers have been comparing the impact of reusable bags in made from plastic and from recycled plastics with cardboard boxes and with bags that are non-reusable, also made from plastics and recycled plastics. And so they found that only that already after a few cycles, the environmental impact of reusable bags was way lower, even only after a few cycles, and knowing that most of the products that are on the market today can be used up to 100 times. This is really an interesting solution. Also, given the fact that the most of the things that we buy online are fashion, it means that there's really an important opportunity here to move forward in this solution.
Heleen Buldeo Rai: I referenced the delivery van a few times in my story, and it's it's really what we think about when we talk about e-commerce is delivery van. Now living in cities we know that there are lots of alternatives available: cargo bikes in all sizes and in all colors, we have electric vans as well driving around. But there's actually a more sustainable transportation option for every vehicle that is used in a classical e-commerce supply chain. So we can think of the cargo bikes, we can think of the electric vans. They come in all sizes and in all shapes. So that's really interesting, and they are used today. So this is really not something of the future.
Heleen Buldeo Rai: What is of the future are the trucks and the electric trucks that are made today. They are not as mature as events that we have, but they are tested as we speak. One good example, I feel, is the Volta truck who are making trucks, but they're also redesigning them to make these trucks better fit for an environment. Also not only zero emission, but also reducing the the risk of accidents and so on. Because in the future we will still need trucks, some transport people refer to it as the bus for goods. And I think I mean that could be an analogy that I can get on board with. But also think of maybe less sexy options. And that's the train we've seen in the last few weeks. A number of parcel companies transferring or reintroducing the railway into their cross-border e-commerce systems. They use these swap bodies, as I showed a picture of filled with with parcels to deliver, for example, a parcel from the Netherlands to Norway. Personnel has been working with these DPD and so on. So it's really something that seems to be fit and a better solution than for example, trucking.
Heleen Buldeo Rai: So what about autonomous vehicles? People love this topic. We we love to talk about drones and we love to envision them in our cities of the future. Now, the general consensus is that drones won't be a very much or a very interesting solution for parcel deliveries in cities. But it doesn't mean that there are not specific use cases where we can use them for. But are they a more environmentally friendly solution? They might be, but only when we compare them to the the conventional transport modes that we have today. Because these autonomous vehicles are electric. They do have a lower environmental impact. But when we compare them to the electric non autonomous vehicles, it doesn't really it's not always the case. So researchers have been looking into this and they have compared a number of autonomous delivery systems with electric delivery systems, and they found that for bigger vehicles there might be a benefit to it. And this is mostly because removing the driver out of the situation allows for an eco driving that is that is well that has an important environmental benefit. Now what about the drones? As I mentioned, they are used today not in cities but more in mountainous areas. There's dpd, for example, that uses these drones two times a week to deliver the odd parcel in mountainous areas in France. But also think about pandemic situations we've seen in California, in China throughout the pandemic, millions of tests done with these autonomous vehicles to deliver necessities and food, for example, to people who were isolating during the lockdowns.
Heleen Buldeo Rai: And to conclude, I will share two insights about returns. I know that there are some marketing people in the room, and so I find it really important to share this quite interesting view. And that's the fact that the marketing tools that are used today for increasing sales, they might also be increasing the return rate and in the end not really making you a profit. And so it means that returns as a KPI is really important to take into account also for marketeers. And we know that this is not always the case, so I would plead for that. Now, not all marketing tools are are as detrimental to the return rate. We know free shipping when shipping isn't free, for example, has a big impact, but also paid search and newsletters. They really increase the percentage of returns that is coming back from items that are bought online. But there is also good news affiliate advertising, everything that is blogger marketing or for example, influencer marketing. They don't have a detrimental effect to returns. So that might be something that you could still continue. They do, however, not reduce the percentage of returns, but there are other ways to do that. And based on the numbers that we found, up to 70% of returns can be prevented by more and better product information. Some ways to do this virtual fitting rooms. For fashion specifically, they have been tested and they do show to have a really important effect on the number of items that is sent back. Customer reviews as well, but not every customer review. What we need is information about what the customer thought of the product, but also some information of the customer itself when it concerns, for example clothing, it would be interesting to know if the person is particularly tall or particularly small, for example. Product advice coming from the retailer has also been shown to have a really good effect in reducing returns where, for example, a retailer warns customers when a dress falls particularly large or particularly small, some technology as well giving way more information about the material that is used. But interestingly, alternative product pictures, so adding more pictures of products, they don't really reduce the the amount of returns that is coming back. And the reason is that most of these pictures are really presenting very aspiring situations, models, beautiful situations, raising the expectations that consumers have. So in this this could be this could be, well, a motivation for not only asking customers to add a review, but maybe as well a picture of them using the product or wearing the product and in this way adding more product information but not raising expectations too high. And then the last one, which is an interesting one as well, is visual packaging. So we as consumers are really weird in that way. When our packaging looks nicer, we tend to keep the products, we tend to keep the product instead of returning them when compared to packaging is not really nice. So referring back to the reusable packaging that I talked about today, when you are going for this option really good, but also maybe choose the nicest option of reusable packaging.
Heleen Buldeo Rai: So these are the ten insights that I wanted to share with you today. I'm really excited to talk to you today about it. Let me know which ones you are going to take home. I know that in the insights I talk about marketing tools, I talk about customer experience, and I also talk about logistics. So it's really a solution or an opportunity to engage with your colleagues on this topic. So let me know, and if you have some questions, feel free to talk to me later in this day. Thank you.
Suyin Aerts: Thank you. Thank you so much, Heleen. You say okay, you give different options. Possibilities. What do you think would be the best option? If you want to move to sustainable transportation being a retailer?
Heleen Buldeo Rai: Well, you know what? This is an extremely difficult question because it really depends on the product that you're selling your your current operations. And also, what is an important difference here is whether you're organizing your supply chain yourself, whether you're doing the deliveries yourself or whether you're outsourcing them. So I think if you're doing your deliveries yourself, then it's really important to well, to get all the information together. And based on the analytics that you have on the efficiency of your deliveries, give customers this this option and say to them that this is more efficient and this is more sustainable and they will follow you and this will really make it way more interesting for you and also more efficient, which in these, inflation times is also interesting.
Suyin Aerts: And would that be the first question to rethink eventually if you're doing your deliveries yourself eventually think of was that a good, step I took maybe some years ago and rethink the fact of maybe giving it to a transportation company who's maybe more efficient.
Heleen Buldeo Rai: That's a really good point. And, um, I guess the retailers that are insourcing or keeping their logistics in house, it's mostly in the food department, which is a whole range of different challenges, but definitely working with a specific delivery company that is really big in your areas, maybe working with several ones depending on how large your geographic area is, is a really good way of really filling up these delivery vans, I would say.
Suyin Aerts: Okay. And if the people in the in the room were thinking like, okay, she makes a point. Heleen, what would be the first thing they could start doing as from tomorrow, let's say?
Heleen Buldeo Rai: Well, I'm really passionate about the reusable delivery bags. I think it's, it's definitely not for all products, but I do think that for many of the products, it's a really good idea. And it really it could really replace the things that you have that that you're using now. And also when thinking about the future, the circular economy and so on, I think in the future, reducing really the number of single use materials will become more and more important. So doing it now gives you a strategic advantage over your competitors as well, learning how this works and learning how to improve it. And I think, well, the time is now for this.
Suyin Aerts: And do you think that, depending on the age of your consumers, your customers, um, different choices need to be made and younger people tend to find it more important, that is sustainable or is this just something that we all assume is true and that it's not really the case? Is it's everybody going towards a more sustainable way of living?
Heleen Buldeo Rai: I think that's a really good point. So in the we did quite extensive, uh, customer surveys and we didn't really found an extreme difference in age, for example, or in gender. So we see a difference in ordering behavior, for example, but we don't see it in, in how we can encourage consumer or the willingness to choose for another delivery option that is more efficient. But for example, asks you to go to a collection point or asks you to wait a bit longer. So that's I think, interesting. I guess there's we can get lots of more people on board than we often think.
Suyin Aerts: Okay. Well, thank you so much. You will also stay with us for the panel discussion later on. Thank you so much. Give her an applause and we'll move on.
Suyin Aerts: Thank you. And I'd like to introduce you now to, David Sloff. He started his career some time ago at Procter & Gamble, and he worked in various marketing, sales and strategy roles over 12 years. He was working in the Netherlands, but also in Switzerland. And this included the commercial leadership of the whole Procter & Gamble portfolio at Amazon. And this on a European level. He's not working there any longer. He's now a commercial director of the Northern Europe for Diageo, overseeing the business of Diageo across 11 markets. I think we can say he really has got a passion for e-commerce and he's also in many advisory boards, also of a group of e-commerce focused agencies. He's also an angel investor and he's investing in clean energy and tech companies. And he will join me on stage for an interview. And we want to find the intersection between retailers and brands. And I have prepared some questions for him. And in case you have more questions, feel free to also drop them. Join me on stage. Join and you can still drop them in the in the Slido of course. And I've been told that you've been doing a great job already because you already got many questions from all of you. So thank you and welcome on stage, David.
Suyin Aerts: I have the feeling with everything that I heard already, this afternoon, that a lot of variables play a role if we think about pricing. I'm very curious what your ideas and if you could unpack a little bit your view on pricing for us so we can understand what your very broad experience can help us with.
David Sloff: Thanks, first of all, for the introduction. Well, definitely a lot of variables are at play. And and I guess that starts with answering the question, what is price? Because, I mean, while that sounds like almost a ridiculous question, actually price can mean many different things at the same time. Also depending on which lens you look at price. So let me first start there. I think mostly when we talk about price, we talk about consumer price. But even then the question remains, what is that? Because we have to recommend that sales price, which is something brands or brand owners do within a legal framework, by the way, so they're allowed to do so once or twice a year, but that refers to shelf price, but also to promo price. And that, for example, c an mean something very different across industries. May maybe people will recognize that if they go to the supermarket today and they do so again next week and the week after, the price of a pack of detergents, let's take a brand that I've worked on "Ariel" doesn't doesn't change week on week. We can change, but probably not. A TV changes daily, maybe even by the hour. So dynamic pricing, which of course is very much at the heart of the software that that Omnia has, I think is at this point at least super relevant for electronics. And I've worked in electronics as well in my P&G days where we have the "Braun" and the "Oral-B" portfolio, and that is a very different dynamic. So then you could even look at price from a point of view. What is the average price? Which is then important or and then of course you have a retailer acquisition price, which is basically linking to the transaction between a brand owning company and the retailer. And even there, one could say there are many different versions of what a price is. In many cases, brands publish a list price, which is not the net net price that retailers actually acquire a product for. That leaves us with the question what is the net net price then? And that that really is a question that can be answered in many different ways. But the most common way for me would be to indeed after that list price seek for what type of rebates. And a brand owner will look at those rebates as an investment in the retailer,actually lower the list price to the net net price. Now, a common way of looking at that would be logistical rebates. So basically where a brand owner rewards a retailer for efficient logistical operations, maybe payment terms, so for efficient payment or early payment and then commercial terms. So actually an opportunity for brand owners to invest into the retailer ecosystem. So let's make that very simple. I would like to be, I think an example was given earlier of sweets being sold that at the cash out. But the cash out is also an area for brand owners actually to fight for that space. And retailers are very good at commercializing that space. Now that means that place is to a certain extend might be for sale. That sale comes with a transaction and one might argue that transaction feeds into price. Finally, retailers are more and more also marketing themselves, rightfully so in many cases, as a media platform. Again, if I then invest in media, does that also hit the hit my price? That is almost an accounting question. I might argue no as a brand owner, because in my accounting for which I am responsible, I say no it comes from a different path the retailer mindset might say, yes, I do count that as part of your price as a manager. So as a consequence, if you were to take that money away, I see that as a price increase. So prices, many different variables indeed, and different definitions.
Suyin Aerts: So it's very important that if we discuss price, we try to find out whether we are discussing the same thing when we talk about pricing. After all this, a price is not very often depend on what a consumer is willing to pay for a service or good?
David Sloff: Well, for sure. I mean, while I just try to paint a picture of how complex a matter is and that's important, sometimes you respect the complex of of a topic. It's also important to then be able to make it as simple as as possible again. And if you were to make price simple, I think the consumer is always at the heart of things. Because, well, let's take the core of academic economics, I think still the first model that you learn when you study economics, which I did many years ago, is that supply and demand determines price. And demand is driven by consumers, but also by retailers. So there you go again. But I do believe that the consumer is at the heart of pricing. But but still, then the question is, what does that mean? Because, as a brand owner not selling direct to consumer, I'm not responsible by law for the consumer price. I can advise that it's at the discretion of the retailer. But let's simplify the world a bit and indeed say, okay, I'm building a strategy for certain price points for a certain product. Consumer is at the heart, as you just said, but still, that can be mean many things because let's look at it through the lens of objectives that I can have. I could have the objective to price for profit. Well, that that is more a bit more internal. So then I'm going to probably seek for really the maximal price that I can ask from a consumer in order to drive my profit. Does that mean profit per product or does that mean total cash per profit? That is the question. But I could also formulate my pricing strategy more from a top line point of view. So I want to win market share. Do I want to win it? Maybe very short term. Then I have a volume strategy. Then I probably want to undercut my competitors. Very important variable in pricing strategy, of course, to the market environment. So what does the competitor do? Important for me being a brand owner, that's normally the position or mostly the position that I've taken in looking at pricing, but also for retailers, I could price for loyalty. Let's think about like Amazon and where they have a by default additional discount to reward for loyalty. I could even price and I have many examples but I could price for to accommodate my high-low strategy and we've seen some of that actually hitting the press recently also linking to Amazon. But it's very common in the Dutch market, actually. So let me let me link back to the example of "Ariel": a pack of ten capsules of "Ariel" on an Albert Heijn shelf of today's, I think, 9.9€, but that is hardly the price for which it's sold. But what we also know is that because 90% ofdetergents are bought in promotion and people really respond to the deal, feel the 50% , then maybe if if my profitable point of selling is €5, then artificially that has been the reason why €10 was a price point on shelf, simply allowing me to reflect 50% this discount and then selling at €5. Amazon: we've seen that in press prices go up a bit before Prime Day, allowing them to reflect the higher discount in Prime Day. Now, not super strategy in the end, but yeah, yeah.
Suyin Aerts: And you've been talking about, about Amazon. What is the value of Amazon and what is the the difference when technology and data are stepping in and does that really change the relation between brands and retailers?
David Sloff: Well, Amazon has proven to be a super disruptive for the retail landscape, e-commerce in general. And then in specific, I think Amazon a bit more, obviously in the Dutch marketplace Amazon hasn't been present from the start, but if I take a European view, Amazon has been super disruptive. And in order to understand that is probably very important to realize that Amazon is different than a retailer and that that links to a few things. Their platform: So they're not a retailer actually, but they do act on that platform as a retailer themselves as well, but also allow for third parties to sell. Bol.com does the same, for example, in Netherlands. The second point is that they are machine driven, so they are obsessed with taking out human interaction in any decision that they take. So they want their prices, not only consumer price decisions, but also actually acquisition decisions they want them to be and they are 100% machine driven. So let's let me explain that shortly. In my European job in at P&G managing Amazon, the decision to buy a product was either from P&G France or P&G Spain or P&G Germany was 100% triggered by an algorithm. That had visibility for the price of that unit across P&G offices, but also across wholesalers, and simply triggered the order there where the price was the lowest, taking into account logistical costs. So if it was in Poland, it took into account okay, that requires me to bridge of course a longer distance and probably to store it. And that triggered the decision and it was a severely career limiting choice for someone within Amazon to actually override that algorithm. Yes to the extent immediate job loss. So because otherwise the algorithms will never learn, was the theory.
Suyin Aerts: Okay.
David Sloff: So yes, super, super disruptive made the other maybe the other point is that of course Amazon, in any market where they operate, has had a deflationary effect. Not because they are necessarily price leading, because that not what they what they want, because also being price leading is not super easy if you want your pricing decisions to be done by algorithms. But because they have chosen a price following strategy that is super aggressive, which is we follow every lowest price in market, either being on our own platform via a third party or anywhere in market, and that being the promo price or whatever, we don't care, just lowest price. So that where we knew before high-low or everyday low price, they simply came with everyday lowest price. And that has a deflationary effect for everyone in market.
Speaker 2: If you're a brand, what would be your suggestion? If you want to work with Amazon? Write your own artificial intelligence and let the machines defeat each other.
David Sloff: Well, no, defeat, but the first point I very much like. So first of all, I think the initial reaction of many brands has been also under pressure of their more heritage Go-to-market, of course, because that there has been a lot of pressure from traditional retailers to towards brands when they went, for example, D2C, which is explainable, very logical or when they went to Amazon. But they are simply a force in market. So the first step is not to fight the machine and not to fight the existence of Amazon. They they are a factor of importance in every market and increasing importance. So first answer to your question write a strategy how to participate on the Amazon platform. Linking to many questions: Do I go first party i.e. Amazon as a retailer or third party? Do I indeed also ship in to the Amazon Media Company? But you need to have a strategy in order play to win, allowing you to fit that within your global Go-to-market. Because if you leave it there and pretend it doesn't exist, your product will enter Amazon just as well. But you don't control the variables so it will be there your product, for sure.
Suyin Aerts: So it's better to think about it before your product ends up at Amazon via another party because you will earn less?
David Sloff: Well, you don't, you don't control the variables. I'm not even sure, if you earn less. I think eventually you earn less as well. But somewhere that product that ends up on the Amazon platform has entered your P&L (Profit and Loss statement) because somewhere you've sold it, right? You've sold it to a wholesaler whatsoever. But in the end, your success in market is also dependent on your Go-to-Market, which is a bit of a fancy commercial word. But but your ability to formulate and execute on a commercial strategy. That needs to be based on fair level playing field principle. So does every retailer get access to the same amount of support? If you just let it be Amazon to many other retailers, it will feel like very inconsistent from the brand owners - What I see from you on Amazon versus what you're offering me so I would rather always advice to control the variables on Amazon.
Suyin Aerts: Okay, other than pricing, how else can we control for costs?
David Sloff: Many, many different ways. And I think now is the time for any company. But but let's stick to brand owners after a huge prosperity, years of prosperity which as a consequence always leads to us having a bit more fat on the bones. Right. And that's good. We've all had a good time. And and now it seems like or it actually was proven, if I had the graphs we saw previously on the screen that we're in there entering a different period and as normal actually. And with that I think the obligation and the necessity comes to really look through your P&L line by line. Look indeed at your total cost structure, not only at price, look at opportunities for mix. We've actually seen already in the presentation, so I'll make a link to two things we've already seen in the presentation. One was actually that luxury products tend to benefit in periods of economic downturn. I would like to even extend that a bit. A brands. we've seen that in the pas, so A-brands that really play at the upper end of the category framework or category corridor, they have been proven to be prosperous in periods of economic downturn. Why? I think many reasons, but but if I were to summarize it, because they have their value equation in order, it's not only about price, it's about your ability to transfer towards the consumer and the retailer. Why your price is at a level where it is? Which could also be a higher level than it where it was yesterday. If you have difficulty in justifying your higher price today, you're in trouble. Because your price probably needs to go up to a certain extent, compensating for your higher input costs, commodities whatsoever. And if you don't have a product or a brand equity or an innovation pipeline that justifies your higher prices, you're in trouble. So actually, if you do have that in your DNA, in your brand, go for mix. So actually try and go even a bit more in selling the higher end of your portfolio. You're a bit more funky TVs or you're a bit more well performing detergents. So that mix.
David Sloff: The other link is on sustainability I think in general as an industry, we have a huge problem and a huge responsibility to address the footprint that we that we have and and that links to many factors. But one of them is packaging. And and I think that's one of the other. Areas where we really need to think, okay, it's all that packaging that eventually leads to waste. Is that really needed? And if you take it out, that could even address costs as well while it addresses sustainability. Maybe the last point is while you while you look at price, it could also be that you simply allow consumers to sell / to ship-in your products via addressing the out-of-pocket for your products. And we see that a lot on shelves right now via Shrinkflation. So maybe a pack of "Ariel" still costs €10 today as it did yesterday, but you're just getting a few capsules less. That is pricing, obviously, but you're not addressing that, at least the the exact amount per purchase.
Suyin Aerts: And do you have to tell the consumer that there is less inside?
David Sloff: I mean, you don't have to make a huge fuss out of it, but it is of course, required to put that on pack. I wouldn't hide it because consumers are smart. Right.
Suyin Aerts: Not hide it, but do not highlight it.
David Sloff: Either. I wouldn't I make it a huge campaign. But but I wouldn't hide it.
Speaker 2: No. If we take all the things that you've pointed out, the mix that is important to you, what can still go wrong when you are price negotiating. If we take the mix really into account, what can happen that we did not foresee in your perspective?
Heleen Buldeo Rai: Well, what can go wrong? Everything can go wrong. Unfortunately. And for that, again, it's super important to to first answer that question in the sense of what do we negotiate about, when we negotiate about price? Because a lot of your questions I've answered through the lens of consumer price and now we talk negotiation and I don't negotiate the consumer price. So what I negotiate when I'm in a year deal talk, for example, with a retailer are acquisition prices. So the prices that a retailer pays to me in order to obtain my products. Now what can go wrong? And that is not new to this cycle but I think this cycle will have those dynamics a bit on steroids. We see that we see that already in the press is that it leads to a disruption, it leads to a conflict, potential conflict between retailer and and suppliers, brand owners. And that is logical because it's historical.They always the question is always how much of the value do they share? And maybe today the question is how much of the inflation do they share and absorb in their cost? And that's why those fights are definitely not unogical or stupid or whatsoever. But we also know and that that is common fact that one of the very visible fights right now is with one of the markets that I take care of. Germany biggest supermarket retailer, EDEKA, are in a huge fight with Coca-Cola, all over the press. They are known doing that. But what we know is that those fights, especially for the brand owner (Coca Cola), I must say, but also for the retailer (EDEKA), don't really translate into value. So answering your question, I do believe that the dilemma remains the same, and that is that for consumer, for brand owners and retailers to realize that they are serving one and the same entity, which is the end consumer. And with that they have a joint dilemma. And even though times are tough, they will need to find a way out of this together.
Suyin Aerts: Do those egos negotiate things have to think about a more sustainable way of negotiating maybe? Or is sustainability not only about being it green but sustainable on the long term, taking into account in between the retailer and the brands at this moment?
David Sloff: I need to address first the ego part, I think, in your question because I also really want to show respect for also my my counterparts in these cases retailers, because ego plays a role. But it's also it's also fighting for your P&L. It's fighting for your right to exist. Many retailers operate at a net net profit of four 4%. So it's also a necessity. And negotiation in that sense is required. But you're also right. Sometimes the ego takes you over and that's never super good. So I guess that links to my first answer, right that that in the end always joint dilemma sharing. And as a consequence value creation remains the center. The second part of your question is more sustainable negotiation. Yeah that has entered the playing field far more. In my current job, I also take care of Nordics markets. They are at the front foot there. So sustainability plays a huge role and there's actually more a disqualifier. So in certain retailers in the Nordics, your products will not be listed unless they comply with criteria A, B or C or something. So, yes, it enters a bit more. It will be interesting. So your question is quite interesting. I think are parts of dynamics today that will accelerate sustainability, but a part of it might slow it down, right? Because we are all when it's tough times. Oh, especially listed companies become pretty consumed with their short term P&L. And that's also a watch out for sustainability. So there's there's two conflicting effects, I hope dearly that the first one prevails. Of course.
Suyin Aerts: Okay, I'm checking time and I want to ask you a last question. Actually. Let's say you have to give an advice to the people in the room. If we look from now until two years from now, what would you suggest to people in the room to pay attention to if we talk about pricing perspective?
David Sloff: Well, first of all, three things. First of all, again, it's about value creation, because the story is simply becomes very short sighted, if it's only about transferring input costs. So this is through the eyes of a brand owner. Again, if I go as a brand to a retailer and my story is only centered around "yeah, but my costs went up, now I need to increase prices". Well, first of all, and we saw that in the presentation where we went through macroeconomic development, this makes you super vulnerable when energy costs go down again, right? So I think it's also not super smart. If I were a retailer, I would immediately be hanging on the phones and think we need to renegotiate. So that's the first one. So I would always center it around value creation and reasoning for strength. So why would it be justified for my portfolio to be sold at a higher price point? And what investments am I bringing to the marketplace in my brand in innovation in order to support that value creation?
David Sloff: Point number two, I think these times really require and I'll link that again to a bit of the macroeconomic context that we saw at the beginning, is to take a mid long term view. We tend to be super pre-consumed, especially listed companies with the month, the quarter at most the year and then always in comparison to last year. There is a stupidity in there that at one point I think needs to start to fade. But especially now because inflation is expected to go back to 2% levels in one year whatsoever. So if you now start to build a strategy or at least an intervention that is apparently based on a very disruptive - because I don't want to undermine it- but very disruptive and yet relatively short term development, that by default almost is wrong. So I would really think about, okay, what is my three year, five year round plan. And how can I can be a winner in this dynamic in which the cards will be reshuffled again- there will be winners and there will be losers.
David Sloff: Last point, we already touched on it. Take a holistic view. So yes, input costs go up. Maybe the most obvious line in Europe now to look at as a composition is price is true. But there are so many other lines on the P&L, there are so many other factors at play. And we touched on them that I think are required to take into the mix. Yeah.
Suyin Aerts: May I thank you for all your very valuable insights, David, really great, give him an applause, ladies and gentlemen. And I'm going to leave you to take another coffee or something fresh, it is waiting for you downstairs. And can I ask you to be back at 3:50pm? That we can continue with our last speaker and then we will dive directly into the round table discussion. Thank you.
Suyin Aerts: Yes. Ladies and gentlemen, take your seats and we're going to take a seat next to you to introduce you to do things sometimes a little bit differently. Because I'm very happy to present to you our last keynote speaker, and that is Hermann Simon. He's the founder and honorary chairman of Simon-Kucher and Partners, and they are actually the world's leading price consultancy. They have 41 offices and 1,600 employees. It's quite a bit. He's an expert in strategy, marketing and pricing, and he is the one and only German in the Thinkers 50 Hall of Fame. And if you wonder what that is, that is the most influential management thinkers out there in the world. You published over 40 books in 30 languages and you research that price is the most effective profit driver. And this applies, of course, to e-commerce and retail even more than to all the other sectors. I'll first give you the floor for a short keynote, let's say, of 1520 minutes, and then I'll be back taking my seats as I have also some other questions prepared for you. And after that we ask all our other speakers to join us. Enjoy your talk.
Hermann: Thank you very much. Guten Mittag. I apologize for sitting. That's my first lecture I give on so far. The reason is simply that I broke my leg a couple of months ago and so I can stand for a longer time. So let's start through profit pricing and inflation. And we have two parts. The first 15, 20 minutes I share with you my thoughts on true profit and the role of pricing. And then Suyin is going to interview me on how to beat inflation. Of course, the hottest of all topics for the time being. Now, what is true profit? True profit is what the company can keep after the company has met all contractual, agreed claims of employees, suppliers, banks and state, or more mundane, what is net profit after all costs, taxes, debts, obligations. And when I talk of profit, I'm only interested in true profit and not the whole deception which you experience every day. EBIT earnings before interest and taxes. A very common number is not true profit. You have to pay interest. You have to pay taxes. EBITDA includes depreciation, you have to recover your costs for your infrastructure, etc. And this goes even further off. In the last couple of years, 84% of the companies which have gone public in New York make no profit. But they use all kinds of indicators. For instance, we called it community adjusted EBITDA, which includes marketing expenditures or Uber. They call it core platform contribution margin included customer acquisition costs. And so it goes on. Recently I saw a publication in Belgium where there was an are for restructuring, so they counted restructuring costs as profit. Of course, these figures may signal future profits, but they have nothing to do with current profit. So when you talk of profit, please do not be deceived by operating income and 100 terms they use. Try really to understand question what is meant. And the only relevant number is what I call true profit. And an additional view of profit is what? What is profit in the substance? Profit is a cost of survival. So if you don't make a profit. Repeatedly, the company is very unlikely to survive. Profit is a cost of survival. Less than one true profit is only what the company can keep after it has met all contractually agreed claims of employees, suppliers, banks and the state. Don't get deceived and don't deceive yourself by dubious profit definitions and never forget profit is the cost of survival. Now, how profitable are companies, countries, industries? And first, we look at what the consumers think. And we did three studies in Germany, the US and Italy, and ask people of €100 in revenue. What remains after all costs and taxes. In Germany, the average answer was 22%. In the US, even higher. And the record holder is Italy, 38%. I would expect that in Holland, in the Netherlands the number would be similar to Germany. The reality isn't the right column. Germany over many years 3.3%. The US and Italy a little higher. So here we have a. A difference of a factor of about 6 to 7. What people think. And what the reality is, I have no explanation for that. Actually. People have no idea what the true profitability of companies is. Maybe that's due to the education system or envy or whatever it is. It's it's unbelievable. Now let's look at profit. Always sees net profit margins across countries and you see huge differences. The average is 5.7%. And some high risk countries like Brazil, Russia actually have very high profit margin, also Switzerland, because the taxes are lower. And when you look at the Netherlands, they are below average and Germany is the second worst. And that has been reconfirmed by very recent numbers. These are the net margins of the Fortune global 500 companies. So the largest companies in the world grouped according to country. And again, you see Netherlands and Germany at the lower ends. Even these large companies where most people think that they make make huge profits, that's simply not true. Now, let's come to your sector retail. And you see here for food retailers, generally retailers, the margins are in the range of 3%. David said 4%. That is already a very high region. And so the margins in classical retail are very, very small. And if you connect that to inflation, the margin is a buffer against inflation. It's only two or 3%. Interestingly, in other retail sectors, see, I took the fast fashion sectors or IKEA, the profits tend to be higher. That's interesting because they have low prices, but they have high turnover and integrated supply chains. So you can make for IKEA, it's usually also higher. 21 was a bad year for IKEA. And that's interesting that in this sector they usually earn between five and 12%. And that's true across countries. Zara Inditex is Spanish, H&M is Swedish, Uniqlo is is Japanese. Now how about e-commerce? In e-commerce, we have to differentiate. You see here for Amazon, a high margin, 7.1% and the same for Alibaba. There is Zalando and Polycom in the Netherlands. They are again in the range of the typical retailers. We saw two 3%. So Amazon is not an e-commerce company. The profit comes from Amazon Web Services, for instance, for the second quarter, Amazon Web Services reported second quarter of this year. 6 billion in. Operating income and Amazon as a whole 3 billion. So Amazon e-commerce actually makes a loss and Alibaba is like eBay. They don't touch the products. And perhaps in the discussion we can come back to this. The fundamental difference for me is what are the marginal costs? If you have a purely digital business, the marginal costs are zero. If you handle products, transport them, have warehouses, etc. you are not a digital business. And then just to compare that to the tech companies you see here, unbelievable numbers. Apple, 25.9%, Facebook even 33%, and Microsoft 36% net profit. And that's only one side of the coin if you combine that with the size of these companies. See, anybody has an idea about the revenue of apples. 380 billion. Anybody has an idea how much Google gets from advertising income alone. 208 billion from advertising in a purely digital business. So I should actually show a rectangle which combines the percentage with the size. And this is really a problem for Europe and the world. These extreme superstars in profit. The best 10%, That's a global statement now of the superstars harvest 80% of the global economic profit. Economic profit is a profit which exceeds the cost of capital and 1% harvest 36% of the global economic profit. We have never in history seen such a concentration. It's in the tech sector, in energy and in banks. And on the other side, we have the losers which destroy as much profit as the others harvest. Listen to the profit. Differences between countries, industries and companies are huge. The points to the is that points are the fact that some companies are getting it right and others are getting it wrong. If you are in the wrong industry, you cannot make 20%. So there is a real chance that within your industry you can be a profit leader or loser. It depends on you. Even within industries, we see huge differences. What are the profit killers? And they go very quickly through that wrong goals. Revenue volume, market share market dominance, etc. instead of profit orientation price wars. In our global pricing studies, we find that about half of the companies are volume oriented. For instance, Volkswagen pursued for years the goal to overtake Toyota in the number of cars, but the margin is only half that of Toyota and the market cap. Also, only one quarter is truly profit oriented. Price was another profit killer. 59% of thousands of companies which surveyed say they are in price wars. That is the most effective profit killer. And other closely connected to that is overcapacity. If you have overcapacity in your industry, you have no chance to make a good profit. So you must first deal with the overcapacity which we have, of course, in many sectors of retail and also e-commerce. Lesson three Profit orientation is the only meaningful goal because it is the only one that observes both the market side and the cost side. Revenue Market share. Observe only one side, only the market side. So you have to observe both sides. Elimination of profit killers is the most effective way to profit improvement, but it can be very difficult to reduce overcapacity etc. to to end price wars. This is especially applies to price wars and overcapacity, since they are the most dangerous profit killers. Now, how effective are the profit drivers? Profit is a very simple formula. Equals price times volume minus cost. So we have only three profit drivers. And to address the question, which one is the most effective? I ask what happens to profit if we improve one of the profit drivers by 1%? So if we can increase price by 1% without losing volume, which is quite realistic, if you do it skillfully, and then we get the following result for a typical industrial or service cost structure. If you can improve price by 1%, profit usually improves increases by 10%. So the profit multiplier of profit is ten. In theory, we call that the profit elasticity of price for the economists among you. For cost. It is six. So if you can reduce cost by 1%, your profit usually increases by 6% for volume it's for. Why is it so low for volume? Because if the volume increases, you have heard of marginal costs, costs go up and they eat up about 60% of the increase in revenue. So price is the most effective profit driver with a multiplier of ten for cost. The multiplier is six. For volume, it's four. And just to give you that, it's actually from a from a retail project we did, there are many, many levers by which you can influence it here, pricing for long term customer loyalty, guidelines for discounts, etc.. Overall, in this case we achieved an improvement 400 basis points from 2% to 6%, and that was actually sustainable over a couple of years. So you really have to go into the details, not just increase the lower price. It's a whole process. Pricing has to be considered as a process, not as a single decision. Listen. Five. Price is the most effective profit driver. Its profit multiplier is ten. For cost, it's six. And for volume, it's only for profit improvement. If you really go into the trenches, it's usually 200 to 400 basis points. So 2 to 4 percentage points. In short, my personal story, Julian mentioned that already. We are the global leader today in pricing and.
Suyin Aerts: You.
Hermann: Set six and on it we pay October one. We have 2000 employees. We are growing, we have 42 offices in 27 countries and pricing is our at our heart. In summary, true profit is only what the company can keep. Many popular profit divisions are Definitions are deceptions. Profit differentials across countries sectors. Companies are huge, which you may consider as an opportunity if you're on the right side. There is latitude and leeway. Profit margins in retail and e-commerce tend to be rather low, and that's getting more serious with inflation. Elimination of profit killers is the best route to profit improvement. Price is the most effective profit driver. The profit multiplier of price is ten for costs. It's six for volume. It's only for. So thank you very much. These are a couple of books on profit and pricing. And the right one is my autobiography, How I Find It. Simon-Kucher and Partners. etc. Thank you very much. I kept my time of about 17.5 minutes, so, Suyin.
Suyin Aerts: Very good. Very good. Thank you. If you tell a German what the timing is, they keep the timing. That is very something that is very sure. We have, of course, heard in the first keynote of this afternoon from Aline what inflation is in her perspective, but I'm very curious to find out what is the definition of inflation for you.
Hermann: When you ask people in the street, and I don't know what the other speaker said, they say goods are becoming more expensive, prices are increasing, but that's not the cause of inflation. The core of inflation is that money or more precisely, fiat money loses its value. Fiat money? The term comes from the act of creation. God spoke Latin and he said Fiat locks, be it lite, as the central bank says today, be it money, they create money from nothing. And if you take a different kind of money, you understand that the goods are not losing value, are becoming more expensive. Take gold for an ounce of gold you got. The custom made tunic 2000 years ago in Rome for an ounce of gold, you get a custom made suit. Today. It's the value of the goods and the product has not changed. What is changing is the value of money. And that means one concrete consequence. You have to collect the money like perishable fruit as quickly, as early as possible and then get rid of it. And entrepreneurs understand that I got an invoice from a craftsman, a couple of electrician a couple of days ago, and for the first time in years I have seen 2%. Squanto We call that. We also call that Squanto. If you pay was in eight days, I paid immediately. I haven't seen Squanto for for the last ten years because it didn't make sense with no inflation. And then I called the guy and say, You are a smart guy. And he said, I took some money immediately and bought some new equipment because So you have to collect money quickly and you have to get rid of it and invest it in nonperishable goods. That's inflation.
Suyin Aerts: Okay. And what are then the consequences of this higher inflation for corporate money management?
Hermann: For money management is, as I said, catching as quickly as possible and get rid of the money as quickly as possible. For pricing, it means that you have to be to increase your agility. You have to calculate your cost on replacement costs, not on historical cost. That's, by the way, a discrepancy with the tax system. You make what we call phantom profit because, for instance, in depreciation you are only allowed to depreciate on the procurement costs and not on the replacement costs. So inflation does not only affect pricing, it affects all functions in the company. For instance, if you think of purchasing, the normal roll under under stable conditions of purchasing is to get the products company needs at the lowest possible price under the current situation. The problem is very often to get some products at all. If you have to buy electronic ships or if you are looking for a craftsman's, they say in three months, as I just ordered, what is a storm generator, a power generator to be on the safe side when the when we have a blackout. And the guy said I can deliver in March. So I offered him a little more and then he will deliver in three weeks. So purchasing has now the overall responsibility for the functioning of the company, not just for the lowest price. And that applies to the supply chain and it applies also to the CEO. You have to change the culture of a company. And one point is where I say we have seen the margins are very low, not only in retail but in the Netherlands, in Germany, and people think the margins are very high. And these are also our workers, our employees. So I suggest more transparency with regard to the true profit margins. If if your people understand here that you make only two or 3%, they will behave differently than if they wrongly believe that you make 20%.
Suyin Aerts: So becoming more agile and becoming more transparent throughout your whole companies.
Hermann: And trying to really create awareness that we are in a very dangerous and difficult situation. Think of profit as a cost of survival.
Suyin Aerts: But of course, if we talk about price, I think we agree that whether you are a consumer or an industrial buyer, um, a higher price annoys everybody at the end of the day. What can we then suggest retailers to do? Do we need to hire the price and annoy the customers, or do we?
Hermann: I mean, your trade as a retailer is, of course, already determined in your purchasing process, procurement process. And what David said is absolutely right, that negotiations are getting much tougher between the suppliers, the print owner and the retailer. That's unavoidable, and I see two effects. He also mentioned the first point, which I fully agree value improvement, value creation that concerns the value you deliver, but it also concerns. The communication of the value because only the perceived value counts. And so training for your sales force, etc. is, from the supplier point, very important of your negotiation and purchasing guys from the retail side. And you also have to do something to improve, increase your value towards the customer. Let me give you one one example, which I think is totally neglected in retail. Friendliness. I, a friend of mine, is the best hotelier in the world. So you say, Oh, Hermann, you are showing off. That's Horst Schultz. If you ask anybody in the hotel world who is the best hotelier he or she will meet, he's a hot shot host. Schultz Is that's the guy who created Ritz Carlton, which is recognized as the best hotel chain.
Suyin Aerts: How is he dressed? Why is he the best?
Hermann: I give you one little example now, which applies equally to retail, at least not to e-commerce, but to retail where you have personal contact. And he said one of the challenges is I have low paid employees, people with very simple, basic backgrounds. My customers are the high society, rich people, ministers, public figures, stores, etc.. How can that work? You start it starts with the language we invest a lot of and I teach them. For instance, a doorman who was unemployed before he started with Ritz-Carlton. You don't say hi or hello. You say welcome, madam. Welcome, sir. And it puts them in a good uniform. And when you have delivered a service and they say thank you, you don't say okay. You say. My pleasure, madam. My pleasure, sir. Just as a little example. And I can only say. In in retail. There is such a huge improvement potential on this front in the in the direct customer contact. We talk of value creation. And let me give you one other story. Of course, the most important aspect of pricing is value. And the old Romans, which I started with the Tunica a couple of minutes ago in Latin, that's the same word for value and price, namely premium. Presume equal lag in precious principal equals value equals price. So if you take that equation, that is the fundamental equation of of pricing. If you take that home today, it was worth visiting the seminar. Presume value and price must be in balance. And so this means for the inflation, if you want to increase your price cost is not the decisive factor. You ask that question. But is a willingness to pay is a perceived value. Apple has no problem in increasing its price by 10%. But if Huawei or show me or Samsung do that, they will lose 50% of their customers. They have a price elasticity of of 3 to 5. Apple has one of practically zero value. We call that pricing power. Pricing power is the ability to increase your prices so that you achieve decent profit.
Suyin Aerts: And with the frequency of the price increases be an important parametre, is it better to increase your price? Very often, but with little steps rather.
Hermann: Yeah, and I describe that in detail in my inflation book in German, that's the inflation slogan and the English one which is coming out in I'm just reading the proofs. It's beating inflation. It's also already out in French and Italian. We will not have a Dutch version because everybody can read English here or German. And under stable conditions, we had an extremely low inflation over the last ten years in Germany, 1.4% on the average of that zero inflation. It meant that once per year you increased your prices and you had what we call the annual talks, yields and cash pressure, and you increase it by a very modest amount. Now. You have to increase your prices frequently. You should do it more frequently and not wait. Get rather ahead of the cost wave and not trail the cost wave. So it means that life for for people who have to argue price becoming much tougher. I expect many resignations in sales forces, etc.. Yeah. So more frequent smaller price increase. I talked to a baker in my home region in the eifel. He has a couple of of of branches and he said I always made the mistake waiting too long and said I have to increase the price massively by 50% for bread or so. And my customers are furious here. I said, Do it in small steps so I wouldn't mind the small steps. And you don't lose the margin over this delay until your next price increases. And we see in some sectors, for instance, Michelin and Continentals have already increased the prices four times this year. IKEA also, and they have announced more price increases for the food. So instead of. Infrequent high price increases, more frequent, smaller price increases.
Suyin Aerts: And are there prices that customers are particularly sensitive to?
Hermann: Yes, it's huge differences. We did studies at Simon-Kucher and for instance, in retail, food, retail, 54% of the people say that they pay more attention to price and switch to cheaper products, no names, private labels, etc., for vacation. Only 18% say that. And I do my my private test all the time. When I fill up my tank, I ask, do people buy less gasoline? Every every body in the gas station say, no, we don't see a difference. So in spite of the extremely high prices, the car is also taboo. Traveling is taboo. Vacation is taboo. But the the the the willingness, the energy to save is on the front of food products you don't necessarily need, etc.. Again, not like the luxury products. And one aspect of inflation is also it's the most anti-social phenomenon you can imagine because the rich people, they don't care much. The poor people are really affected by inflation. And the joke is that. It's driven by the expansion of the money supply. And by the way, I disagree with David Plouffe on one point, he said. Next year we'll have, again, 2% or so. No, that's not happening. We have. Two categories. And you're right for one category short term drivers, inflation like energy price, oil price, Ukraine war, COVID 19. They will go away within the next two or three years. Even the electronic chips will be available because we have many new factories under construction. But more important category is money supply. The money supply in Europe has increased by a factor of three in the last ten years, and gross domestic product has only gone up 30%. So there is too much money chasing too few goods and that is inflation. And you cannot reduce the money supply within two or three years. It will take 5 to 10 years. So I expect that we will have inflation for the next 5 to 10 years, not at the current level of eight, nine, 10%, but well above 5%. And probably nobody of you, you are also young, has experienced inflation in the 1970s, when we had exactly this for ten years, I was writing my dissertation on pricing and inflation during that time. So I'm the only one in the room who knows probably what inflation is. It will be beep, be prepared that it will be with us for the next 5 to 10 years. And if you prove me wrong, I'm happy that I'm wrong.
Suyin Aerts: But you survived and you have a very successful company. So probably this inflation can also.
Hermann: Make it the company just after the inflation in 85.
Suyin Aerts: Okay. Okay. That is why. May I thank you. And I think the the fact that you say you disagree with one of the speakers is a very interesting point and a very good moment to ask all our speakers to join us on stage for a final panel discussion. But thank you so much for the valuable things you shared with us.
Hermann: You're welcome, madam.
Suyin Aerts: So please join us on stage. Then Patrick. Sander. Heleen, David, Hermann is already here. Maybe. Do you still have the clicker that we want? Yeah. Thank you. Thank you so much. Yes. Thank you.
Speaker 2: Oh, yeah. Oh, yes.
Suyin Aerts: Okay. Do we need to grab a chair?
Suyin Aerts: You have to. Good chair. You're the guest?
Suyin Aerts: Yes. Okay, great. Uh, this, uh, pointer is not working anymore, so if you can put that maybe on another slide. I cannot do it myself. I'm so sorry. And now that you have got a place and a mic, then I would like to come back to your keynote. First, the nudges that we were mentioning before today across for all the countries and in all cultures. Or do we have to address that very different depending on culture?
Dan: Yeah. So two points on that. A lot of academic evidence is is based on economies they call like weird, you know, Western educated, industrial rich, democratic. So you've always got to be a little bit careful. However, different nudges will work on different personality types. So if you take take the weird countries, for example, as I mentioned, people who are high in neuroticism will probably respond better to loss aversion. People who are more conscientious will probably be respond better to nudges around what's called the generate a generational IKEA effect. So if you can persuade them that they're making something themselves, they will like it. But what we also find is between cultures there are very different motivations. So, for example, if you think about West Coast America, where it's very individual, very individualist versus somewhere like China, which is much more collectivist, there will be very different nudges that happen both. So I guess the answer to the question is yes, both in terms of area but also in terms of segments within markets.
Suyin Aerts: Okay. Aline, I wonder whether you think that there is a link between the inflation that we see now and the fact that you were talking about the online returns. Is there a link that you already noticed that it's higher or not at all?
Heleen: Well, we haven't really, um. See? I don't know. Can you put that microphone? Yeah. Oh, no, it's okay. Thank you. You can pass it back. Maybe just put it. Yeah. Um, so not that that I'm aware of. So we haven't really seen a link yet that might be a bit too fresh. Although the the circumstances in the economy and in like, living situations, obviously they, they, we have seen during COVID, for example, that there was a big impact on returns, lots more people buying online. Also people who didn't have the the the habit to do so. So this resulted in a really big increase in returns. Um, but what I do think is that the what it really gives the possibility for is maybe looking into other types of returns reducing measures. I presented some consumer based or consumer experience based instruments that you can use as a virtual fitting rooms and so on. But there are also other types of, um, of measures that can be implemented which might be, well, might work better even in those circumstances. And that's, for example, one that we have seen a number of mostly fast fashion retailers implementing that is pricing the returns and actually don't make not making it as free anymore as it is right now and or and as easy anymore it is right now. So that could be something that is may be interesting and interesting climates to to experiment with. And also it could it can also depend on the type of customer that you have. There is there is dynamic pricing as well for these kind of return measures depending on how how you how your customer behaves and how how of a serial return or he or she might be so. So I guess that will be interesting to see in the future what will happen.
Suyin Aerts: Okay, Sander, I really wonder whether you see any major changes in the behaviour of your customer base, um, in these inflationary times.
Sander: Yeah, I think obviously it's a no brainer that pricing has become even more important. But I think zooming in to our brand customers, what we see in particular that there's a need for more price monitoring. I think what David was discussing, the negotiations between brands and retailers behind a value creation story, but effectively it must lead to higher prices. Brands have a need to track what's happening in the market and the retail selling prices remain always at the discretion of the retailer. But as a brand, it's very important to see, okay, what's happening, Are those prices being reflected or can I expect margin pressure at retailers that will come back to me. So that's I think for the brand, something that's really picking up. I think within our retail customer base, looking at dynamic pricing, I do see changes being made in going to strategies that enable our customers to more quickly pick up on upward trend. So very blunt example would be always being the lowest price in the market will not make you really pick up on trends but looking at a certain list of competitors and going from our securing price points will enable you to more quickly do that. So I think that is something that we do see happening as well. Yeah, Yeah.
Suyin Aerts: Okay. Aline, I wonder whether you think that we should lower our prices when times get tough.
Aline: I really am sorry, but I don't have a view that I'm a macro economist. I look at the big picture. I can't advise individual companies or people what they should do with that price. Indeed, as Herman says, it's all about profits.
Suyin Aerts: So what do you think? Um, Hermann, do we need to lower prices when times get tough?
Hermann: Let me answer that question in a much wider way. There's a whole discussion in in retail and probably also David, in consumer goods from the manufacturers point or brand owner spend a few is to one dimensional. What do I mean by this? You talk about price up or down the music in pricing plays in different fields, for instance, in price differentiation, where you combine variation variants with different prices. It plays in multi dimensional pricing says, let me just give you one example. Amazon Prime or one thing we invented. I don't know whether you have that in Holland is the Bond card, this card of the Deutscher. Railroad supervision costs 500 euros. Why do I buy this card? Because it gives me a discount of 50% on all tickets I buy for the duration of one year. 6 million people have this card. We invented this card. 6 million people. For the second class, it's was first class. Second class. What does this do, for instance, with regard to inflation? It means that for the ticket price, I'm only half affected by the inflation. And to have a two dimensional system, the price for the car, the price for the ticket, you can play in a two dimensional room and not on that goes much further. Freemium systems pay per use where you go for durables more and more to pay per view. So it's also a matter of technology, whether we have sensors. For instance, I mentioned Michelin in a context with inflation. They had a new tyre which lasted 25% longer. You cannot charge 25% more. That was for for trucks with trucking companies. They have an anchor price of, say, €1,000. You cannot go to 1250. So they change the system, go to a price per kilometre. There are sensors and it's accepted that. And of course the truckers, they like it because they don't have to pay anything if the truck stands idle in the yard. So you have to think more in these multi dimensional price space is not just up and down.
Suyin Aerts: Mm hmm. Is that what, uh, David? Is that what, um, marketing experts do when they determine what customers are willing to pay as a maximum? Do they think larger and more dimensional, or do they have, like, one strategy?
David: No. I think largely what Simon says is that many companies look at it pretty one or two dimensional. Second point is, I'm not sure if marketing is always in charge of of pricing. But. But, but but let that alone. What marketing does do. In many companies, net links to the point where Simon made is or trade marketing many is value reframing, which is actually the example that was given. So I worked for for P&G Gillette very, very similar actually, where you had the the innovations and we all know the infusion coming after Mack free. And what you saw is that after every innovation, the new platform had a far lower volume consumption per consumer and that volume consumption was then compensated via price per blade. Now the price per blade is of course what the consumer ships into. So at that point, if you leave it just like that, you're simply asking from the consumer to comprehend at point of purchase the value of that blade, whether it's, let's say, justified to, to pay a premium of 30%, you need to help the consumer comprehend that indeed, fire mileage, for example. So this will this will leave you with one years up to say, a shaving, which is a similar a similar equation. Loyalty systems are also. So recently I bought a new Nespresso machine and I bought it for €1. The only thing I needed to do is sign up for two years of coffee. Of coffee? Yeah.
Hermann: I use the fusion example. It's old now, but I used it always in my presentation. The story of the plate price per plate. I mean, that's an excellent example of, of dramatic increase in value. And even you don't have to communicate it because you, you feel it, you don't cut yourself, etc.. And what Procter and Gamble or Gillette did was really to attract this higher value in higher prices. Yeah, it's a very good case study. Yeah.
Suyin Aerts: Is that something, David? I don't know if Patrick is joining us, if we have him on the line. Yeah, maybe Patrick or. Or or you, then, um, is this something in psychology that you're also using this, uh, this value, this example that both of them are giving?
Dan: Hi again, Patrick. Let me jump in with an example that I've worked on before, and then maybe Patrick can jump in. I think a lot of times we I think the framing point is very relevant. And let me give you a new perspective. A lot of the times is we look at it as marketers and we're all quite well off and you know, we're not unconcerned about inflation, but it's probably not going to mean that most of us won't eat. A while ago I was talking to a brand that was getting a lot of negative reaction in the press because they were charging very high interest rates for people who struggled to get credit to buy things like washing machines. And the press was lambasting them saying these guys are thieves. You know, they're charging if you look at it on a spreadsheet, you know, these people are being stolen. The problem is these people don't have an alternative. They can't walk into a store and buy a washing machine and get ten months interest free credit. And the alternative for them is that, you know, they've got to look after their children. They have to then take their clothes down to the launderette, which costs them time and money and and a lot of money. So the frame of reference is very different. It's not compared to what most people think of as value. Actually, for them, whatever it was, €15 a month was actually incredibly good value because it's a lot cheaper than having to go down to the launderette and deal with all of that. And it not only makes it good value, but it also makes it possible. So I think the context of these things and the framing in the lives of the people that we're talking to makes a very big difference to these pricing. Patrick, anything to add?
Patrick: Yeah, no, not just that. Academically, you know, there's lots of research on how to frame value and pricing. Of course, with charity donations, you can say instead of the lump amount, you can say it's the equivalent of a cup of coffee a week. Of course, there's future discounting where you push the payment into the. It just feels less real today. There's many, many others. But yeah, absolutely. Psychology is all about how to to frame price and value like that.
Suyin Aerts: Okay. Aline, I wonder, um, you look into, um, inflation since a long time. Is there things that we learn from history that could help us now to make other decisions that we maybe made in the seventies and say, okay, let's do this or this or this differently?
Aline: Now things have changed compared to the seventies or ever referred to the labor market, which is much more flexible. So all wage negotiations are very different now. It's also technology, of course, the Internet, much more competition. The arrival of the Internet has changed a lot in global price dynamics. So those are like very important differences. And and also we have now independent central banks. So central banks have their inflation targets. So instead of being maybe afraid of of a very extended period of long inflation there at the moment, there might be a high risk of of more interest rate hikes. And so a deeper recession, so central banks being more active to meet their targets. That's so at a at the macro level, what's driving the global economy is everything is also very much globalized. So something that happens in the US has an impact on price levels here. So everything is globalized. That is so the whole dynamics in that macro environment has has changed a lot. So that's so therefore, I am a bit less worried about how high inflation will stay for a very long time. As I explained, and actually this is also the other consensus view and a view of not only I. So yeah.
Suyin Aerts: Okay, I got an iPad where they send me all your questions, so let's see what you wanted to know. Um, first question, which is actually, uh, an interesting one. Uh, Hermann, did the sales of your books decline due to the current economic situation, or did it actually boost sales because of the profit focus?
Hermann: I don't know, honestly. Was the reporting of the publishers is is very mixed. But I think in general that sales of books has been declining over the last. I have exceptions. For instance, my hidden champions books in China have in China have been sold more than a million times. But I observe that younger people don't read any longer books or newspapers, and I'm asking myself whether I'm completely out of tune out of the times by still writing books. And it's it could be much more effective to to communicate through different media. I do that also. But to have blocks or whatever, digital media instead of writing these books. So I don't know. Of course, a book like the inflation book now is flying because it's so hot. But in general, my impression is that sales of books have a trend, a long term trend to decline.
Suyin Aerts: Okay, I have a question. And the person asking it says maybe Herman or Aline can answer. What is your advice as to companies lower margins so lower the prices because of this inflation or keep the margins and set a higher price because of the higher costs?
Hermann: That depends on the willingness of the customers to play. It's naive to simply pass on costs. The customer doesn't decide on based on your cost. So you really have to do your utmost utmost to understand the changes in the willingness to pay. So you could express differently in your pricing power. Of course, in your case you have the retailers in between which form a barrier. And of course, theoretically, the the meaningful way would be that the retailer and the brand owner agree on the best overall price in the first step so that they make the cake as big as possible and then they fight for the share of the cake. But that's all mixed. And that leads to the situation you described, which is inimical and very tense and not really productive. And I also say that you mentioned Edeka, the Sea of Edeka is Markus Moser, and that's really an aggressive, combative guy. Whereas, for instance, the Aldi people are hard, tough, but fair.
David: Yeah, and he has his friend Mr. Ferrari as well. But, but maybe to chip in on that one and to build on the point you mentioned earlier, which is a lot of especially in big companies, a lot is a lot is dependent on which KPI as you said. Right. What are what is your target setting volume not being the right one. If you if you steer towards profit and you dig a bit deeper and that links to the question there, you could, in my view, also be off in terms of how you set the target, because if you set it at percentage page margin, gross margin, which is a very common metric to look at and you go for margin maintenance, that's a percentage. I mean, you can't put a percentage into your bank account. So maybe then you maintain your gross margin, but you don't sell any longer. That doesn't leave you with cash profit. So that makes the whole story in general a bit more complicated. Mm hmm.
Hermann: That would also be naive to control after the margin. It's always a two dimensional thing. It's price or margin times volume. Yeah. That if your margin is higher, price size volume is low. You haven't made anything.
Suyin Aerts: Mm hmm. Let me read another question and see who's got a good answer to this one. Do we see eCommerce business going down with pandemic being over and people going back to the stores? And what is then the future of online business?
David: I have a short term and long term view on that and then maybe short term we are and I said it also in my brain, very consumed with the first last year measure. And as a consequence, if if there was a sort of an externality which we had via COVID where growth accelerated. Yes, maybe short term versus last year, dynamics of income growth will will at least stall, maybe even lead to a short decline made long term income is here to stay. And to quote Mr. Bezos, it's still day one. Maybe they do, but no, there's so much leeway still. My my view, I agree. And I think there's differences between regions and also category. So I think if you look at Brazil, for example, there you had a massive increase that sustained. And I think in the more mature countries you see that e-commerce penetration goes a bit back to the mean in many countries it still is on sustained higher levels. And then I think it also depends on the category. So for example, in groceries, which typically the majority of the sales are still in physical stores due to certain circumstances, there was a massive shift towards ordering online during the pandemic and that really led to a forced habit change and also sustained higher level. So that really I think the common threat is that if you really need to drive penetration either in a category or in a more immature market in terms of e-commerce, this really had a huge effect. If you take it more mature markets already, it depends a bit, but it's definitely at least going above the mean that was there before.
Suyin Aerts: Yeah.
Hermann: I think the most important criterion to judge the future of e-commerce. Is the cost tied? My, my. My son lives in Berlin. I have a small babies. I order everything. And sometimes they order one bottle of wine, which is then brought by gorilla or somebody that can never be economical. It's impossible. And. The same is true for quite a few other ecommerce activities. It's it's labor intensive, it's logistics, etc.. So if you we have had in the DAX in Germany, so the index of so large, we have the delivery hero and tallow fresh and everything and some of them have already disappeared. So if you look at the business system from a cost perspective, you, you. That helps you to predict the future of this specific business.
Suyin Aerts: Mm hmm.
Hermann: Low, low labor costs, etc., and exploiting people. Guerilla is now sold to a Turkish company, and most of these businesses are not viable. That's very different for for Amazon if you look. Walmart has been the largest company in revenue terms for for many years. Last year Walmart made I just looked it up 2 hours ago 572 billion in revenue and Walmart for 88. So they are very close in two years. Amazon is overtaking Walmart and becoming the biggest company in the world. They have all the economies of scale. And I think, David, you described it that their system is really, really optimized technologically data wise. So we will probably see a concentration and the cost efficient ones, they will survive and the others will disappear.
Suyin Aerts: Somebody has got a follow up question for this one. Uh, actually, I think Pat will be able to answer this one. Patrick Sorry. Would music on the website improve sales as it does in a real store?
Dan: I'm not sure about that because people would hate it. Probably it would impose itself upon people and then you would probably get reactance, which is where people might leave just just to have their own kind of will. Well, they might just mute it. But if it can be done in a way that's congruent and subtle, then yes, it should do. So I did an experiment for eBay a while ago where we played background noises, including classical music, to see if it would influence behavior, at least in this mocked up experiment. And yes, classical music, increased perceptions of quality of the products. Listening to birdsong made people more likely to buy barbecues and outdoor kind of products, listening to kids screaming or roadworks made. People just want to get through it quickly. So if it can be done in a way that doesn't annoy people, it should be effective. Yes.
Suyin Aerts: Okay. A question for Heleen regarding free delivery. Is there any investigation regarding the threshold value?
Heleen: Um, you mean the max value? The max. But you can ask for paid delivery. This is a really difficult one. I. I normally don't tend to advise companies to totally abandon the free delivery part. What I do think is that there has to be pricing differences. And remarkably, even retailers, online retailers that are very different in kind of their strategy and their sustainability point of views and that the products that they sell and so on their checkout screens often seem so similar, which is quite odd to me. And so I would suggest just differentiating in price make the most environmentally sustainable, the most efficient one, which also costs the least mostly for retailers as well. I would make this one free maybe, or the cheapest that's possible. And then the other one I would make them pay especially for, um, very fast deliveries or um. Yeah, other types of perks that you can give to customers such as time slot delivery and so on. So I would differentiate, but I would be, I mean, depending if you're like how the size and how many competitors you have, but if you have big competitors, then it might not be the wisest decision to totally abandon it altogether. Okay, clear another.
Sander: Maybe, maybe to answer that, I think that's yet another example where where sustainability and financially healthy business can go hand in hand, because typically, of course, average order sizes are influenced by that threshold. So if you remove it altogether, orders will shrink, which is very poor for the for the environment, but also for your financials. So I think there's a the threshold that you apply has a huge impact on both. And I think you need to optimize for both hand in hand.
Suyin Aerts: Mm hmm. Let me ask you another question. Uh, Sander, how do you plan to remain competitive in the price monitor business? Keeping in mind the increase of crawling, scraping price monitor providers.
Sander: Oh, that's that's an interesting question indeed. So I think that points to one of the mistakes I made or we made as only so we had the impression ten years ago when we started that data would commoditize. So we decided to only focus on building them, pricing software and source the data from others. But the contrary is actually true. It is becoming very difficult to deliver high quality data, and I think the most interesting challenges still need to be tackled. I spoke with someone from HP earlier today who was inquiring about more like for like matching with products with other brands. A comparing private labels with each other. So there's a lot of difficult problems to be tackled in scraping, and there's a huge benefit of having that together with the software that consumes it. And that's really what we believe in. And that was one of the pillars also one of the logic of the the Patagonia and Omnia joining forces.
Suyin Aerts: Okay. Um, somebody apparently is interested to know, um, the difference when you nudge people, um, depending on nationalities, how would you nudge people from Great Britain versus Germany for example then, or. Patrick.
Dan: Patrick We did that study, didn't we? I think it was. We were looking at us versus UK, wasn't it in the one. Do you remember.
Patrick: Yes. Yes. Yes. It was for for a mobile brand of sorts. And there were personality differences between the US and UK, and that translated into messaging and nudging differences. And they were broadly what you'd expect to basically think about the Office US versus the Office UK. So in America they were more likely to listen to, say, influencers to like louder, more exciting aesthetics. People in the UK a bit more muted. Of course, we're talking about averages across populations of millions of people, so of course it doesn't apply to everyone. There's probably more variation within the country than there is between two countries. But on average, these these things do emerge. I could give some guesses as to how UK and Germany would differ, but I'd probably offend both is probably dangerous.
Hermann: Okay, you could try it by nudging the Germans to give up the speed to introduce a speed limit on the highways.
Suyin Aerts: Now we don't come to Germany anymore. The only reason.
Hermann: Dutch seem to observe the speed limit. Because we were driving and nobody overspeed it. That's amazing.
Suyin Aerts: There was a reason why.
Suyin Aerts: Kilometers were just practically standing still.
Dan: Yeah, Although they don't often obey them. So just ask the police.
Suyin Aerts: David, an interesting question, I think, for you. How do you see price erosion when there are multiple retailers in the market? How should brands deal with it?
Speaker 2: Well, first of all, there's a huge legal aspect to that. It's a bit of a tricky question. I guess with legal in the room, I would be inclined to answer not to deal with it. But but in the bigger picture that indeed you need, you need to. It links back to the value creation, actually. So. There's a huge responsibility for brand owners to to build into their go to market an activity system that that brings trust to retailers for them to reflect your recommended sales price because there's value in there. Now that is only part of the story because if you have big brands, so in my portfolio right now there is a brand Baileys. I don't like it to be honest as a consumer. But what I learned in Germany at Christmas, I'm not sure if you recognize the you can't enter a German household without finding a bottle of Baileys. That that dynamic leads to retailers potentially choosing that product to signal to drive the price signal as and in doing so, driving traffic to their stores. At my former employer, Pampers was such a brand, it's not very profitable to sell Pampers, but it is potentially, if you look at the bigger picture, very profitable to sell Pampers as a competitive price because you bring in an attractive household. Bringing that back to the question, what should you do about that? Well, there are many things that you can do in your life. Let me mention one thing. Well, for through differentiation strategy. So so do I play a play, slightly different packaging or different now? Also very tricky because you shouldn't do that just for the purpose of of. Of of going against price erosion. Price He wrote. My last answer linked back part of the answer links back to the my first part. You need to accept it also. Price erosion is part of the deal. It is super healthy also. It is it means that your your that there is a dynamic of competitiveness surrounding your product. That's good. That's good.
Sander: I agree. I think the word is too negative, actually, because it's, uh, I think, uh, I'm not an economist like Ilene, but I believe in the market and actually it's the consumers that ultimately decide the value. Indeed, and pricing for value. So it's a healthy thing and it can also help you. So if you if you misjudge the price as a brand and you are far too high, then sort of hoping that it stays there will only hurt your market share later on. So I think it's a healthy fact that consumers judge the value of your products and it might go down, but it doesn't have to be the negative erosion that's maybe sometimes is attached to it. Mm hmm.
David: Maybe the last point is it does require you also to innovate as a company, because while the price of one of your products erodes, you need to. And I mean, all of our categories are driven by innovation. You need to be able to not reset that necessarily on that product or product, but to reset that fire. Introducing a new platform and or a new or a new to the world products and create new value via doing so.
Suyin Aerts: So we should not forget innovation is what I hear you say. You said that price wars are profits killers. What advice do you have for online retail players in price and transparency markets?
Hermann: That's an interesting effect of the Internet, that the price transparency has increased dramatically at your fingertips. You can get all prices for everything for hotels, for airlines, for food. And this makes it much more difficult to increase your price relative to your competition. So one aspect is can you establish a role or accept somebody role of a price leader? For instance, the German retail market, Aldi is a price leader. River observes the Aldi prices daily and adjust its own private label brands. In another case, in one of our projects, the retailer also huge retailer, they follow closely 600 Aldi prices and adjust to these prices. So it means that Aldi is actually determine the level. That's by the way, a very, very good system if the price leader behaves rationally different from Putin. The second aspect is the Internet also introduces a second transparency. That's value transparency. You have evaluations on everything today on Amazon for every product, on all hotels, on all things and. You should take care of this. Not by by faking, but really by using the communication effectiveness of the Internet. We know by now, in many of our studies that people, consumers pay almost as much attention to the ratings as they pay to the brand relating to your brand. And if you think of yourself, if a hotel has a bad right rating, the effectiveness of price as a competitive web is gone. You don't book this hotel even if it's a low price because you don't have a bad experience. So there are the two effects. Price transparency makes life more difficult for higher pricing, but where you transparencies help you to create pricing power and maybe it'll increase your price.
Suyin Aerts: Mm hmm. Probably a question that followed after what David was sharing with us. And it's a question more for Dan or for, uh, for Patrick. Um, how much more effective from a price psychology perspective is it to decrease the package size from 150 grams to 120 grams, for example, instead of increasing the price if you look at it from a psychological perspective.
Dan: That sounds like one of the questions from my maths exam at school.
Suyin Aerts: Yes. If you if you if you answer correctly, you will get a drink.
Dan: Amazing. I think it all boils down to perception and whether you get caught or not. So if you start reducing the packet sizes, if no one finds out, then okay, fine. The problem is, if you've been doing this for a while and people find out the backlash can be can be quite significant. I think it can you can look at how you position and frame those products so you don't necessarily have to make it smaller and not say anything. You can call it travel size or pocket size or or something like that, or give it an entirely new use that that adds value to it. But I think it's very difficult to say in cut and dried terms. It's always better to do do one or the other. I think.
Patrick: Yeah, I would absolutely concur. There's a study, at least of price, where they found that it needs to change by about 20% for people to actually notice it. Otherwise it doesn't kind of stimulate that noticing. And it's probably the same for package size. Probably the only difference is with packaging. You can look saying you should, but you can be a bit sneaky. So for example, with jam jars you can increase the size of the dent in the bottom so that perceptually people do notice there's less jam with crisps, you can add more air than crisps in the packet, which is very annoying. I'm not saying you should, but you could.
Sander: I think also it depends a lot on.
Suyin Aerts: Yeah, go ahead.
Sander: On where the price point is. So if you take the Pampers example of David before, so if you were at 9.99 and you want to increase prices with 10%, you have to pass that €10 threshold. So then probably it's much wiser to reduce the counts of the Pampers mid-pack then to do an uprising. So that's what typically also is a very common thing in fast moving consumer goods.
Suyin Aerts: Yeah.
Hermann: I actually think it's a very bad trick and it's absolutely useless under inflationary conditions, and sometimes it's combined with real deception. Let me give you an example from yesterday. There's a thing called cost me a brand. Cost me because rather expensive. They had 125 grams in there. What do they in that ten? Now they have 100 grams and the tin is actually higher. Mm hmm. So you think it's. It's more. But there's a lot of air in the tin. And why is it useless? Because you can only do that once when you have continuing inflation. You cannot every year reduce your package by by five or 10%. So under a strategic longer term aspect, it's useful. And Haribo got shitstorm. They went down from 200 to 175 grams for jellybean gummy bears. I think it's simply a bad trick.
Suyin Aerts: But what if they come up with another creative, innovative thing instead of just lowering the price or putting more? Let's say that.
Hermann: Innovation, but it's simply a bad, useless trick. It it works. It may not be noticed. You may not get a shitstorm, but it doesn't help you with a longer term perspective.
Sander: So I think what Herman says also touches upon I think what David said before. It is very important to be open and illness. Also, if you take that Ben Smith back again, the count is very large at the bottom, right? So you need to be upfront about it. But there is, I think, a psychological effect, for example, of of going through the €10 thresholds that is, uh, that will lead to sort of an unfair response of consumers. But the example you gave, I think is way across the line in tricking consumers, which is which will always longtime hurt you. I'm convinced of that.
Hermann: So the diameter is a little smaller. The hate is 1.5 centimeters higher. So you don't notice it, but you see it. 100 garments that are funded in 25 sets a reduction of 20%.
David: But there's the same sustainability angle. They're super important. I think we will move and I'm actually quite amazed that we're not there yet. We will move to a world where it's no longer accepted by consumers, retailers, legislation that we're shipping air and water across the world. It doesn't make any sense. And indeed in this example where they actually made their packaging bigger just for our for our driving and consumer signal, consumer and value signal, but they're shipping air. And I think it will go away. It should go away.
Suyin Aerts: It should go away. A question which I think is interesting and I'm curious to see who is going to answer. Should a product manager also steer towards true profit or should costs that can be influenced by the product manager be taken out the equation? So does a product manager also steer towards true profit or should cost that can't be influenced by the product manager be taken out of the equation?
David: I'm not sure if I understand the question.
Sander: But maybe if, if, if, if, uh, we mean the category manager for example, at the retailer. I do think that, um, the, the targets that they have, I think we touched upon that before. It still happens that they, for example, have a percentage gross margin targets next to the revenue targets, and that can lead really to the wrong decisions. And very often, for example, when we move, uh, when we help a customer go for manual pricing on a large assortment to dynamic pricing, because our customer is able to touch the long tail of products, what happens is actually that not only does revenue increase, but because of the mix effects earlier, you get an absolute gross margin improvement and sometimes even percentage gross margin improvement. I think the absolute is more important, but the percentage can happen because more profitable products of the long tail go in there. So I do think and I do see still that there's two that the KPIs are not always reflective of what's in the best interest of the company as a whole.
Hermann: I mean, in principle this question is easy to answer. Of course, the incentive should be aligned on the various levels, so not only the CEO should be compensated based on profit or long term profit rather than short term profit. But even the sales rep and if the sales rep is compensated on revenue, which is the most popular form and has pricing competence, he will maximize the revenue. And the price which maximizes the revenue is lower than the price which maximizes the profit, so that the misalignment of the incentives and leads to non optimal results.
Suyin Aerts: Okay. I have somebody that sent in a question for you, Heleen. Do the numbers on last mile delivery weighing heaviest include production of the goods in China and shipments in Europe?
Heleen: No, no. The numbers were I that I pulled together to make this graph. Um, didn't necessarily include, um, products that were shipped and were stocked in other continents and then shipped. So obviously, I think this is a really important point that that is made by the person asking this question. Okay. Um, but, but what we're seeing today, um, also post pandemic and, um, and, and then in the current climate, uh, and also for sustainability reasons is more stock kept locally. Um, so we see in Belgium, for example, an AliExpress warehouse and so on. So I think these are, these are good measures to, to, to take, take into consideration and to add because obviously what you don't want is airfreight for individually packaged orders. Mm hmm.
Suyin Aerts: Um, a question for you, Aline. By capping, you were talking about this in your talk. By capping the energy prices in France, is the expected inflation rate lower than in the rest of Europe? Will the unemployment be lower than, for example, in Germany?
Aline: That's a difficult one because unemployment is driven by a lot of other factors. Factors. Um, well, I think the unemployment rate by definition is always higher in France than in Germany. That's just based on how the labour market functions over there. Um, I think, um, well, the economic downturn is so globally driven that it will not make a big difference in the end. In the eurozone you have the particularly the labour market is quite national prone to national regulation. So that makes some differences. But when it comes to the changes in the level, it's probably more or less the same, I would say.
Suyin Aerts: Mm hmm. Maybe another question to clarify what you were saying, uh, before somebody is asking, why is the why is the inflation in the Netherlands outstripping EU inflation? If the Netherlands has the second highest energy price support in the EU?
Aline: Second highest what?
Suyin Aerts: Energy price support?
Aline: Oh yeah. Well, that's that's very much also a long term story. The inflation rate in the Netherlands has been much higher than the eurozone aggregate for a while, also because the economy has been much stronger than the eurozone aggregates. If you compare the level of GDP to the pre-pandemic level, it's much, much higher. In the Netherlands, we've seen much higher growth. Labour market is much tighter, wage growth is higher. That has all fueled extra inflation in the Netherlands. So that's a different economic background story. Yeah.
Suyin Aerts: Okay. If I'm taking the time, we should actually, um, stop this conversation. Unless anybody of you would like to add something valuable before we go into the mingling and mangling of the networking reception. Does anybody wanted to share something else that we did not touch upon? Then feel free to share that with us. No. Okay. Well, then I'm going to thank all of you for the talks you have been giving since the beginning. And for this panel discussion. I still have loads of questions and I'm very sorry if your question was not answered, but I had to choose some of the questions. What we will do, however, is keep all your questions and they will try to sense the questions that were that were asked by our great audience to the speakers that are probably able to formulate an answer and then get it back to you as a follow up of this fantastic event. But first of all, I would like to ask for all of our speakers. A very warm applause, please. And Leon, we have you here bringing some very nice things. But I think we also would like to thank you, Leon, as the organizer and the person bringing this great crowd together. So I think we need a.
Sander: I don't have a microphone.
Sander: Introduce you to.
Sander: The man who made this all possible men behind the curtain and maybe would bring the other parts of the team also up here. So well.
Suyin Aerts: So an applause for the team for Leon. That's the moment when you don't want to forget any names. So where is Maren? Maren is there. Go. Come on.
Sander: It's very pleasure to work with these two guys and especially today, to see this all come together. Very interesting, awesome talks. But also I've seen a lot of networking already going on and I think that will be supported by. One of the other. Thanks a lot for organizing everything and.
Suyin Aerts: Congratulations and thank you so much for this lovely event. Thank you. All the speakers in the on the stage and all of you in the room for your great questions, for your attention. We have on the top floor a great DJ waiting for you. We have canapés, we have drinks, but for the good networking, I will need all of you. So please join us on the top floor and enjoy the rest of the evening here. Safe trip back home. And if you stay in Amsterdam, enjoy Amsterdam. Thank you.