Saturday, November 1, 2008

Coining a New Edge

The bill came to $17.30. I had a fifty-dollar note and, sigh, only twenty cents.

Doesn't this take the wind out of the buying process? When both you and the guy at the counter realise that a huge load of coins have to change hands?

Bills aren't too bad. But for the customer to be handed ninety cents in change - that's at least four separate pieces of metal to store in one's pocket - is less than paradise, isn't it?

So here's an idea: How about a shop which promises no exchange of coins? Customers get the better end of a decimal-oriented receipt. E.g. if the bill comes to $5.40, we'll let the 40 cents go. If it's $7.99, we'll sacrifice the 99 cents.

Foolish because then the store loses a fraction of a dollar for every sale? But think about this:
  • Customers will plan to make purchases which 'add up' to the biggest decimal possible; e.g. if two Cokes cost $2.60, heck, why not get a third to make it $3.90 and gain that 90 cents? So the shop gets $3 for three Cokes instead of $2 for two? What's the big problem?
  • Customers smile more because they get to 'beat the system' and rake in rewards of their own making; this translates into repeat business (and if the items are generally north of $10-20, what's the big deal about 'losing' 99 cents -tops! - for a receipt?). Oh, and in case there's a concern about customers requesting separate receipts for multiple items - why, put a floor to any receipt to which the 'game' applies (e.g. "Only for all purchases above $5")
  • This sets the store apart, especially from those (like 99 SpeedMart) which has a mean poster upfront announcing, "If bill comes to $5.49, receipt is rounded UP to $5.50" - how friendly is that?

No more irritating coins. Pleased shoppers. Good buzz from word-of-mouth. What more can a CASH-ONLY store want?


U-Liang said...

Actually your suggestion isn't new. There's a government policy of rounding of bills to the nearest 5 cents. (And this includes rounding UP). This affects everything from phone/internet bills, electricty, water and supermarkets bills (even restaurants if I'm not wrong).

My guess too large rounding down tends to make business raise prices in the long run, never mind the immediate customer satisfaction. Here's my reasoning:

(You can do a simple statistical experiment. 10000 'customers' and the number you want to calculate is

LOSS=Sum_n=1^99 (A_n) X (n cents)


A_n=# of customers with total purchases ending with n cents.

The numbers A_n can be obtained by using a simple normal distribution. The point is that this total represents the loss in revenue the business sustains. And the worse part is that there is no way to counter balance this loss again more purchases since there is no rounding up.

Observe that in the experiment above, LOSS is independent of sales revenue. However clearly we have

(Total revenue without rounding)-(Actual revenue caused by rounding DOWN)= LOSS

It is in the interest of business to minimize the Ratio= LOSS/(Actual revenue caused by rounding DOWN) .

since we clearly have from the formula above:

(Total revenue without rounding)/(Actual revenue caused by rounding DOWN)= 1 + Ratio

Any # on the LHS > 1 is bad for business as too large say >1.1 (and assuming that the store marks up by %10) will obviously mean that the store is making a loss.

But since LOSS is absolute, the only way to minimize Ratio is to of course increase (Actual revenue caused by rounding DOWN) and this simply means higher prices in the long run=inflation.

Definitely not good. )

For me personally, I don't mind the small change. Especially useful since I rely on public transport to get around. But if it really bothers you, just use your c/card to pay lor....

Alwyn said...

Thanks for the impressive stats, man! :)

I know what you're saying. 10,000 customers is potentially '10,000 x 99 cents' in losses, right?

But this formula doesn't take into account the rising sales due to customers *buying more* i.e. without this 'promotion', the 10,000 may be purchasing only Y amount of goods, but now they're purchasing more...and so revenue rises as well and as long as it rises more than a portion of 99 cents per customer, it's a gain.

Include the *rising number* of customers due to the gig plus the positive word-of-mouth, and hey it may still work?

(Note: I'm well aware that rounding up isn't a new idea. What's 'new' is voluntary loss-taking or consumer 'value-saving' from rounding up. It's almost like Borders Buy3-for-2 promotion...)

U-Liang said...

Hmmm....might be. But of course this is just a simple model. Those who are so inclined can build more sophisticated models.

But of course the best way is.... start a business using this business model. If it is sustainable, sure beats any mathematics I can throw at it. Haha...

But then again, are there any companies adopting this practice in real life?

alwyn said...

I am very sure there're one or two small shops in the States trying this - that's where such 'wild' ideas usually take fruition.

In Asia? I don't know...the low-costs-at-all-costs mentality may still be reigning supreme.

Closest example comes to mine is a store at SS2 (near where I stay) in which virtually all goods at $'s not doing too well, because the owner obviously had to select only $5-applicable products. And this limits variety.

Timothy Lee said...

what abt if the shop dont have cents, all round up figure only. coke rm1, wantan mee rm3, barley rm1, chap fan rm3..