Years ago, when studying to become a stockbroker, my classmates and I were discussing the relationship between risk and reward among investors. Our instructor gave us a useful rule-of-thumb:
“Between two investments of equal return, the rational investor will choose the one with a lower risk. And, between two investments of equal risk, the rational investor will choose the one with a higher return.”
That’s sound advice from the early lessons (although it is shocking how often investors prove themselves to be irrational… but that’s besides the point).
I was thinking today about the concept of the “equality of the offering” and the rational consumer. Here are two of my experiences as a consumer:
Equality of hotels: Recently I was traveling to meet with a client. They had booked me into the Best Western; a decent hotel from my various traveling experiences. After my stay ended, I was asked to fill out a survey online comparing this experience with previous hotel experiences. After much thought, I told them frankly that this experience was incredibly unremarkable: There was nothing during my stay at their hotel that made me say “wow” or might induce me to return. In fact, just last year, I stayed at their competitor’s hotel across the street and the stay there was almost exactly the same. The service was mediocre. The complimentary breakfast was passable. The high speed internet connection was there when I needed it. The only difference was the room itself: last year’s hotel room was slightly larger and had a couch.
Will I go back to the Best Western? It’s doubtful. Because the experience was so unremarkable, I’m willing to stay at another hotel, and another, and another until I find one that I like.
Between two (or more) hotels that offer an equal stay, the rational guest will choose the nicer room (particularly if they’re not paying for the room, as was case).
Equality of home renovation box stores: Recently I’ve been renovating a couple rooms in my home. I outsource the projects I can’t do but I’ve been enjoying the work I can do. The part I enjoy the least, however, is the trip to the home renovation store. There are two near my house: Home Depot and Rona. And the experience is nearly equal: terrible service from typically absent staff, overwhelming selection with little guidance to make appropriate choices, and long line-ups to reach minimum-wage cashiers. And let’s not forget about product return procedures that are unwieldy at the best of times. So how do I choose? Well: Rona is closer but Home Depot has a self-serve checkout (which never has a line-up). So if I go during the day when the store is quiet, I’ll go to Rona because it’s a faster trip to and from my house. But if I go after 5pm (when more people are walking through the store), I’ll go to Home Depot because I can get in and out o the store faster.But that’s it. That’s how I decide where to go. That’s not customer loyalty!
Between two home renovation box stores, the rational consumer will choose the store that offers the least amount of pain.
If Best Western, Home Depot, and Rona asked for my advice, it would be this: Find ways to be different. Separate yourself from the pack by taking a chance on something that your competitors won’t do. It might mean alienating some customers but it may mean winning even more customers who desire that additional difference. And I believe the added cost will be swallowed up by increased customer loyalty.