Monday 22 October 2012

Feeling Rich on Pay Day?


When launching a new service or product, how do you decide when to launch it? It may be a seasonal decision, it may be when your marketing budget comes in, it may be when your sales team are hired and in place, it may be when current sales are running low.

A recent paper by Dr. Stephen Spiller, an Assistant Professor of Marketing at the UCLA Anderson School of Management suggests we should take pay day into account and more particularly, the frequency of pay day.

You may recall the recent RBS payments IT failure which resulted in employees in several companies that banked with the company not being able to access their monthly payments.This showed that many peoples salaries were paid in the first few days of the month. The queues unfortunately bore this out.

Getting back to Dr. Spillers paper, he noticed that we feel less financially constrained when we have just got our monthly salary. He explains that if you have 2 people John and Mary, John is paid €4,300 on the first of the month and Mary €1000 a week. Both earn €52,000 a year. Up until the last week of the month, John has more cash on hand than Mary.

He feels he has more to spend, even though they have the same income, except for the last week when he can get a little stretched. This affects how John and Mary decide what to buy. Mary always has less in her pocket than John so she thinks through each decision a bit more.

Dr Spiller suggests this is because Mary pays more attention to what else she could do with her money, in other words she focuses on the opportunity cost of missing out on item A if she buys B because at any point in time, her cash flow only allows her to buy one of them.

If you are selling goods which may be discretionary or luxury, then you may consider having your TV and on line advertisements in the first week of the month when the likes of John are flush with cash and feel less constrained in their spending.

For the Marys of this world, it doesn't matter as she is pretty consistent each week. You may need to lay off the advertising of the luxury good in the last week of the month as John won't be able to spend that much and will feel quite constrained.

This may be the right week however to sell John a credit card or a savings plan. Alternatively you could take the opposite view that you need to advertise more when demand may slide in the last week of the month. The point here is that recognising when your target market feel unconstrained in their spending may guide your thoughts on how/when you pitch or market your product or service.

In his research, Dr Spiller conducted some lab based tests which showed that those given small but frequent payments paid more attention to other ways they could spend their money than those given large but infrequent payments.

In a follow up test, another set of participants were asked to report how frequently they were paid and the extent to which they thought about other ways they could use their money when making purchases.

Replicating the lab results, participants paid with frequent small payments considered their opportunity costs more than those paid with infrequent large payments, even controlling for annual income.

So getting back to the RBS payments failure, it showed that most of us are paid week one of each month, if you are on a monthly salary, that is when you feel like spending. If you are targeting customers you know are paid weekly e.g. those on a state pension or welfare or a profession like construction with traditional weekly payments, then you need to be aware that they will consider the opportunity cost of buying your product or service.

Perhaps your next customer research should ask if your customers are paid weekly or monthly, sounds innocuous but it could guide your product launch or marketing spend. It may be interesting to see if your previous sales figures in luxury goods tally with the week one of the month.

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