February 22, 2012 Leave a comment
You know how if feels, last minute purchasing, ordering the product too late, rushed delivery, hurry to the store – all to receive a less than attractive product package. Maybe the package is dented, torn or crushed; or it could have been previously opened or it is missing critical components. Maybe you are a manufacturer waiting for inputs to your process and half of the product is lying on the floor of the truck. This is disappointment. Disappointing experiences are remembered, repeated and attached to our brands.
To those of us familiar with the concept of brand loyalty, we understand that when brand loyalty is damaged, there are consequences. Yet, the concept and its ramifications seem to be intangible, emotional and difficult to express in mathematical terms. When this is the case, it becomes challenging to create a business case for investing and improving processes that directly influence brand loyalty.
Interestingly, I recently came across a study on consumer behavior when presented with damaged packaging. The information I found most fascinating include:
- Perception of a product as a “brand you trust” dropped from 73% to 41% when packages were even slightly damaged
- 25% of the most brand-loyal shoppers question the safety of the product when the package is damaged
- Up to 55% of shoppers discarded the brand, and 36% opted to purchase another brand
These numbers presented are eye opening, but what, then is the financial impact of these data? Taking the information in the study, we applied a hypothetical percentage of damaged packaging into the model and based on the following assumptions, we arrive at the model below.
Sales price = $5
Percent of users switching brands = 36%
Annual Revenue = one $100,000 project per month
|Revenue||Quantity||Percent Damaged Product Packaging||QTY Damaged||Return Cost||Customers Lost Due to Brand Switch||Revenue Lost Due to Brand Switch||Annual Revenue Lost Due to Brand Switch|
Reviewing this model, I notice at the 1% defect rate, my damage is only costing $4,320 per year. While the observation is correct from a GAAP accounting perspective, it does not take into account the costs to acquire new customers, the lifetime value of customers, and attrition rates. Additionally, the perspective does not count the number of people with whom the 72 lost customers discuss their disappointment.
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So, what is the total cost of disappointment? It seems to me, the answer lies more in our approach to the question, than the articulated dollar amount. When we engage in a process that allows us to explore different perspectives including, sales and marketing data, operational data and the experiences our customers are having, we might then obtain an accurate account of the cost of disappointment.