Saturday, 25 July 2009

De-averaging and behavioural economics

From the Bloggers Circle:

John Copps of New Philanthropy Capital is applying lessons from the record industry to charitable donations. Just as record companies are creating a wider range of distinct products, in an effort combat illegal copying and generate more revenue from devoted fans, charities should be doing the same to maximise their donations.

An anonymous commenter points out that this is just price discrimination - and many industries have been doing it for decades. True enough, but there are lessons to learn from this.

Price discrimination is less visible in either commodity or high-growth markets.

If you sell commodities, it's harder to use price discrimination - although you will still see it on a smaller scale. The petrol market is fairly competitive, without many proprietary products, and thus there is far less diversity of price than in, say, the retail market for coffee. But because it is high-volume and the margins are small, 5p per litre of extra revenue for "premium super unleaded" makes a big impact on proft.

High growth markets, on the other hand, are all about generating and delivering volume. The advice from Geoffrey Moore's Inside The Tornado, one of two seminal texts about high-tech sales and marketing, is "Just ship". No matter what, your job in a high-growth, high-demand market, is just to get product out the door as fast as possible with as little customisation as you can get away with. In this environment, margins are already high and there is much less to gain from price discrimination. Indeed if you do, you run the risk of confusing your market, diluting critical mass and losing momentum.

Where differential prices and products do emerge is in mature markets, especially those - such as music - where the product can easily be differentiated from your competitors and where growth is slow enough that you need to focus on managing margins instead of getting maximum volume. This is why the charitable sector presents an ideal opportunity for the technique.

We at Inon are working with several charities to help them structure their offering to maximise donations. Some key considerations are:
  • What does the donor get out of giving? Every action is motivated by something - whether material or psychological - and altruism is as subtle and multi-layered as is self-interest.
  • Giving is influenced by standard behavioural economics insights such as signalling, social proof and hyperbolic discounting. These effects have different strengths in different people, at different times and in different social contexts.
  • The disruptive power of financial motivation is especially important in charities. Several experimental results show that people are often demotivated by financial reward rather than being incentivised. It's especially important to keep this in mind when recruiting volunteers or incentivising donors for a charity.
Charities absolutely do need to tailor what they offer, and what they ask for, to each individual donor. To do so, they need a working psychological model of how people decide what to give, and to be able to work with that to fulfil the emotional needs that each donor reveals by interacting with the charity.

I will ask my clients' permission to post some case studies here, but in the meantime I can recommend some research by Steffen Huck of UCL on donations to the Bavarian State Opera House. The results are in some ways counterintuitive: for example the offer of donation matching by a corporate donor actually reduces giving by the public, while the knowledge that a large unconditional corporate donation has been made substantially increases it. There are lots of useful lessons in this research and in other behavioural findings.

1 comment:

missmarketcrash said...

substantial tax benefits for charitable giving work very well in motivating both corporations and individual donors in America...