Wednesday, December 26, 2012

Buyer Beware... of Anchoring!

Sitting tonight watching the news and the topic was the "after Christmas sales".  The story, of course, made me think of transportation but let me digress and tell you what I saw.

The reporter interviewed a young lady at a Chicago mall who was just thrilled with her new purchase.  I paraphrase and here is how the conversation went:
Girl: "I went into a store and the boots were 'regular $900'. I got 50% off, then I got xx% for something I did, then another xx% for opening a credit card... " (you get the idea) "I got a $900 pair of boots for $125!"
Reporter:  "Wow, you did great.  You must be real happy"
Girl: {giggling}: "Yes, I am a very happy girl"
Of course, somewhere there is a merchandiser who popped the champagne bottle and wasn't just giggling but was laughing out loud.  They had anchored the girl and anchored her good.

What never crossed the girl's mind, nor the reporter's mind apparently, is the fact that the boots may have only been worth $5.00.  How do they know?  Why was $125 a "deal?  The answer is simply that they have no idea whether it was a deal or not except in the relative terms to the "retail" price of $900.  The retailer and their all powerful merchandisers had anchored the discussion.  The consumer, the girl in this case, was set up by the merchandiser because they were able to get her to reference her thoughts around the $900.  Anything less than that was a "deal" and certainly $125 was a "steal".

It never occurred to her that the boots were probably made in a factory in Vietnam and cost the company selling them about $5.00 to make.

How does this relate to transportation you ask?  I say: beware of industry "anchoring".   It is that time of year now when the transportation industry executives and the so called "independent" analysts will come out with predictions on what will happen with rates for next year.  They will say "be ready for capacity crunches" and "be ready for at least 5% increases" and they are doing nothing more than, as an industry, anchoring, as a group,  the entire transportation buying community.  By establishing these expectations as "the truth" and giving buyers reasonable cover with what appears to be scholarly articles to reference, the industry establishes "greater than 5%" as the anchor.  Anything less than that appears to be a "deal" and occurs due to the great procurement skill of a buyer somewhere.

I can see the conversations in board rooms now:
Executive: "Mrs. Logistician,  how did you do this year"?
Mrs. Logistician: "Great!  The industry was going to go up over 5% and we were able to hold the increases at our company to 3%"
Executive: " That is great Mrs. Logistician.  You beat the market!  Fantastic!
Mrs. Logistician gets a great bonus and off she goes to Maui for vacation..
Or.. the conversation could end with the Executive asking this:
Executive: "Mrs. Logistician.  How do you know 5% is the right expectation?  The macro economic conditions don't seem to warrant it and with the changes in freight, the lower freight demand, and the fact that we are a very large shipper lead me to believe that you should have actually experienced a rate decrease this year. Shouldn't you have?"
Mrs. Logistician: Gulp!  She wonders if she will ever get to go to Maui!
What the executive did not do is she did not fall for the industry anchoring.  The executive built her expectations from the ground up.  She ignored the arbitrary industry expectation of 5% and started at 0 and then applied good macro and micro economic analysis to build her own expectation.  And, her own was far lower than where the industry tried to anchor her.

The critical lesson here for both the girl buying the boots and the transportation procurement professional is do not fall for anchoring.  Do not allow the industry to set the expectation.  Ignore these predictions and build, from the ground up, what the status and situation is for your own company, your own freight with its own characteristics  what your current pricing situation is etc. etc.  From that you should be able to develop what a very good expectation is for this year, for your situation and many of you will find it is dramatically below what where the industry will try to anchor you.

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