What is the Paradox of Choice?

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The paradox of choice, popularized by psychologist Barry Schwartz in a 2004 book, is the theory that having more options, or choices, makes it harder for people to make a decision, potentially hurting their well-being in the process.

The theory has been tested and analyzed in many different ways over the years. Perhaps the most popular experiment, when it comes to business, involves samples of jam at a supermarket.

In this experiment, researchers arranged free samples of a brand of jam, and asked people to try different flavors. In one scenario, there were 6 different varieties. And in the other, there were 24.

Traditional thinking would have you believe that more options is better, because consumers can pick the one that best fits their needs. However, the results of the study showed something else happened entirely. Although more people tried the jam when they were presented with 24 options vs. 6, much fewer ended up buying the product.

And so the paradox of choice theory tells us that there is a point at which offering too many options makes it difficult to make a decision, and that consumers may not make a decision at all as a way of coping.

Paradox of Choice and Your Business

Though this theory has been applied to a number of different areas of our lives, the implications for companies is clear. The more variations of your product or service you offer, the more you risk crossing this line and turning them off.

Often, this way of thinking runs counter to what most of think of as good product development. If we see consumers asking for new features, or different styles, or if we observe them turning to a similar product that our competitors offer, we naturally come to the conclusion that we should offer something that fits what they’re looking for. We want to have something for everyone.

But when this strategy is taken to its logical conclusion, we end up developing a large number of variations on our products that are so similar it makes the consumers’ job (and the marketers who have to convince them) much harder.

Pushback on the Paradox of Choice

It is fair to say that in the years since his book was first published, there have been a number of criticisms of Mr. Schwartz’s conclusions. Subsequent studies have shown the opposite results, that consumers prefer more choice, and that having different options actually expands the market for certain products.

Today, it is widely thought that the paradox of choice applies in some cases and not in others.

What You Should Do

If you are involved in the decision making at the product level at your company, it is your job to understand the paradox of choice, and test for it.

Think you might have too many different options? Try a split test where you take some away and see if that helps conversion rate. Consider simplifying the decision by combining features of one option with another, and limit the choices as much as possible.

Think you have room to add new varieties but worried about the impact that might have? Again, you can test it out before you invest in the new development. Consumer research and onsite testing can help you determine if there is room to create new options that would sell.

Do You Know Your Margins?

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In general terms for business managers, margin refers to the difference between the selling price of a good or service and the cost to the business that good, most commonly expressed as a percentage of the selling price.

Calculating Your Margin

In practice, this means we take the average price per purchase of any item, and divide the cost of that item by that sale price. For example, if you sell widgets for $20, and it costs you $15 per widget, your margin is 25% (20 – 15 = 5 / 20 = .25)

When calculating your margin, you only want to use variable costs. Variable costs are those costs that change as you sell more goods or services. Fixed costs are things like your building and any staff that you would have regardless of how many goods or services you sell.

For most companies, it’s not as easy to simply say, “we sell this one thing for one price, and it costs us this much every time”. So the easiest way to calculate will be to take total revenue from sales and total variable costs over a period of time. For example, if last year you generated $100,000 from widget sales, and it cost you $70,000 to market, produce, and service those widgets, your margin was 30% (100,000 – 70,000 = 30,000 / 100,000 = .3)

Why Margins Matter

Margins matter because you need to know how much money you make for every item you sell, after costs. If you spend more than you make, you will never turn a profit. The bigger your margins, the more room you will have to grow and invest in the future.

Most businesses or industries set margin targets, or benchmarks. If your margins get too small, you have less room for error. Then it might be time to cut costs or raise prices.

Businesses with the biggest margins and the highest sales volume will end up being the most profitable.

Marketing Contribution

For marketers, one metric we want to know is marketing contribution. This is a form of the margin that ignores all costs except for marketing.

Marketing contribution is similar to ROI, just expressed as a percentage of revenue. It tells you and your company what percentage of revenue you are spending on marketing, so you know how much you can afford to spend on other things – like service and development.

In the example above, let’s say that $30,000 of the variable cost was marketing. That means your marketing contribution is 70%, or that marketing costs represent 30% of total revenue.

Again, it is common for businesses to set targets for marketing spend as a percent of total revenue. It will vary by company size and industry – but general targets range from 20-40%.

Google AdWords Quality Scores: Explained

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If you are an online advertiser, chances are you are familiar with Google AdWords, the platform businesses use to place ads on Google search results pages, Youtube, Gmail, etc. And if you are using AdWords, you are likely aware of a metric they call the ‘Quality Score’.

What is the Google AdWords Quality Score?

Quality Score is a value that Google applies to each ad in an advertiser’s account. It is used to measure exactly what you would expect, the quality of the ad. But quality in this case means a number of different things.

  • The relevance of the ad to the keywords it is showing up for
  • The relevance of the landing page the ad is directing people to
  • The usability of the landing page and website the ad is directing people to
  • The history of the domain name
  • The past user experience with that ad and landing page
  • And more…

Each ad is assigned a Quality Score from 1 to 10, with 10 being the highest.

What is the Google AdWords Quality Score use for?

Google uses the Quality Score when deciding which ads to show on which searches. Since Quality Score factors in how likely someone is to click on your ad, and how likely they are to like what they see when they do, it is a good measure to use to control the user experience for their searches.

Obviously quality score is not the only factor they are looking at. They also take into account the relative bids of every advertiser targeting that keyword phrase, the type of bids, and the closeness of the match between the exact search phrase and the targeted keywords.

But in general, ads with higher quality scores are more likely to show more often, higher on the page, and cost less per click than ads with lower quality scores. For that reason, as an advertiser, you want higher Quality Scores.

How do you improve your Google AdWords Quality Score?

Knowing the factors that go into determining Quality Score also help you decide what you need to do to improve low Quality Scores. In addition, within the AdWords platform you can get recommendations from Google on how to improve Quality Score.

Generally speaking, there are three ways you can improve your Quality Score:

  1. Improve the relevance of the ad to the keyword phrase
  2. Improve the quality and relevance of the landing page
  3. Improve the click-through rate of the ad itself

That’s the Google AdWords Quality Score in a nutshell. Let me know if you have any questions.

Psychological Hacks for Marketers – Part 9

Welcome to the latest installation of our weekly blog series – Psychological Hacks for Marketers. Each week we will introduce a new shortcut that the consumer’s brand takes and how the crafty marketer can take advantage. Last week’s topic was Outcome Bias.

This week we are discussing:

Bandwagon Effect

The bandwagon effect in marketing is the increase in likelihood of purchase based on the number of other people who have already purchased (or their desire to purchase) the same item.

In its simplest form, it’s the “cool factor” – the tendency for consumers to want something because other people want it. It explains the trends and the fads, most popular colors and styles, the products that sell out on day 1.

But the bandwagon effect can also be seen in more basic forms of social proof. For example, this effect can help explain why companies show off testimonials and reviews and ratings on their sites. Other consumers are validating the claims that marketers make.

Take advantage of the bandwagon effect by:

  • If you have a high number of customers or products sold, show a running tally, like the old “Billions and billions sold” campaign by McDonald’s. It’s an indication of popularity.
     
  • If you sell physical products, under-supply the market so that your items sell out. Offer pre-orders and allow people to sign up for updates when something sold out becomes available again to create the feeling that something is in high demand.
     
  • When something is in limited supply, tell your consumers they have to act fast or miss out. Again, this makes your offering look popular and in demand.
     
  • Allow and display user reviews like Amazon and Yelp. Lots of reviews mean lots of other customers chose you over your competitors.

If you can use your marketing to show potential customers how popular your products are, you’ll sell more of them.

Stay tuned next week for another installment of the Psychology Hacks series. Have a suggestion? Let us know.

Cost Benefit Analysis: A Simple Guide

Cost benefit analysis (CBA) is a common tool used in the business world to help in making key financial decisions.

Should we buy that company? Should we invest in this new product? Should we roll out a new email marketing program?

Doing a cost benefit analysis allows you to take a little of the guesswork and personal opinion out of the decision making process.

In order to do an effective cost benefit analysis, you need to start with a realistic prediction of all the costs and benefits associated with an activity. So if you are thinking about rolling out a new product, you will have costs for market research, design and development, marketing and launch, etc. And you will have benefits – sales of the product.

Once you have them all listed, you must assign a monetary value to them. In our example, that is fairly simple because they all represent real costs and revenues. But you will also want to assign a cost to things that are not so clearly monetary, like time and new technology requirements.

Finally, you simply need to compare the two. If the costs outweigh the benefits, you are in good shape.

Most people will apply a time period to the equation, say one year. That way you can take all costs incurred in the first year, and all benefits, and figure out how long it will take to break even, also called a breakeven analysis.

To do that, you would take your costs and divide them by your benefits. The answer, in percentage terms, is how long you can realistically expect to cover the initial costs.