His plan was brilliant in its simplicity. Late in the previous winter, he ran a series of rebate deals in small markets across northern Minnesota and Wisconsin. In some towns, he gave customers a week to turn in their receipts for a rebate. In others, a month. In yet others, he was generous enough to give them six months. He also varied the dollar amount of the rebate, and the amount of paperwork customers needed to turn in to claim their rebates. Informed by the result of these experiments, Johnson identified the rebate sweet spot:
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The rebate deal that maximized profits by . . .
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Increasing sales of snow pants while
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Minimizing the number of customers who claimed the rebate
Johnson’s program took advantage of several well-known behavioral phenomena. For instance, he discovered that when people have a longer time to turn in their rebates, they mistakenly conclude that they will be more likely to do so. After all, if you give me six months to complete paperwork, I should have an easier time meeting the deadline than if you only give me six days. As it turns out, however, such a lengthy rebate causes many people to procrastinate, with such procrastination leading to lost receipts or forgotten rebates. His rebate program also takes advantage of people’s well known tendencies to overestimate their own will power. As I noted in a recent post, those of us who study human nature can influence people’s behavior without them being aware of the influence.
To put Johnson’s story into perspective, let me add a few more details:
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1. There was nothing misleading about the rebate deal. All the terms were clearly laid out for customers.
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2. Many customers bought the snow pants because of the rebate. Without the idea of getting cash back, these customers would not have bought these particular goods.
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a. Without the rebate, they would have bought another company’s pants
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3. The majority of customers believed they would turn in their receipts in time to get their rebates. But Johnson knew, from his experiment, that close to 80% would not follow through.
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a. That means that Johnson’s customers lost money on the deal
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b. Which was no doubt at least partly their fault
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c. But Johnson KNEW the vast majority would fail
One last detail: Johnson is a fictional character I made up for pedagogical purposes, to entice my business students to debate the appropriateness, or inappropriateness, of taking advantage of consumer frailty.
I will give you my thoughts on this case in my next post. But for now, I’m interested in your thoughts. I’d love to engage in a fair-minded debate on the legality, morality and nobility of Johnson’s rebate plan.
Let the comments begin!
