"The Logic of Life: The Rational Economics of an Irrational World” by Tim Harford. In this book Tim argues that rational behavior is more common than most people believe. Rationality means that rational people (and he believes that most of us are rational, the majority of the time) and simply “respond to incentives” When something becomes more costly or less convenient we will tend to do less of it. While an activity that becomes cheaper, easier or more beneficial we’ll tend to do more of it.” He provides a number of examples, including examples from gambling, smoking and dating. A couple of the more interesting examples include the following.
For small business owners, this book should help to make the types of product and service tradeoffs that our customers are likely to accept, easier to anticipate as we understand their underlying decision processes. Where possible reduce the prices and when you can’t do that, work on ways to make things more convenient and more beneficial for your customers. I think about the transition that service stations or gas stations made over the last decade or two. Gas stations couldn’t find sufficient value to support the price premiums that they were charging on their gasoline (we didn’t really need someone to wash our windows, check the air pressure and oil every time that we filled up), so the profit margins in gasoline were driven down to the point that many companies couldn’t stay in business. Can you identify a full service gas station in your city? What kind of gasoline price premium do they charge per gallon of gasoline for that service? – (it’s 5 or 10 cents per gallon in Boise, where I live) When did you last go there for your gasoline fix? (never, is my answer). Now gasoline is an additional function that convenience stores provide – although the prices of the milk, soda and potato chips are more there than they are at a supermarket, most of us are willing to pay the premium on certain occasions. And viola – an old business is converted into a new business that provides greater convenience than going to two stores to accomplish the same tasks. Just a little food for thought, Chris
