Nov 21, 20184 min read

Is a False Economy Mindset Slowing down Your Business?

Anton Hellkvist headshot

by Anton Hellkvist

So you think you are being smart by penny-pinching in your business? Well, in some cases you could be brilliant at cutting unnecessary costs, but without any benefit to your business due to a “false economy mindset”. A false economy mindset is a major trap in e-commerce. It makes it harder to get a business breakthrough; it holds back sales; and it hinders high-rating reviews, word-of-mouth and customer retention … all the components that allow your e-commerce company to scale faster.

A false economy mindset means you take a narrow-minded approach to the cost column in your spreadsheets. You see how that 1,000 euro saved will mean 1,000 euro more in profit, while ignoring the fact that you just cut off a 20-30 percent growth opportunity.

Five Guys is a Virginia-based hamburger chain which has grown to 1,500 restaurants in the United States, Canada, Europe and the Middle East since 1986.

While most other fast food restaurants aim to keep costs down on their french fries, this particular chain sees their fries as an investment – in customer experience. First of all, they have turned the preparation of their fries into an art form (none of the potato slices has ever been frozen – just cooled – and they are fried in peanut oil following a sophisticated process which you can read more about on Food Republic. Secondly – and this is what has stayed with me since my first visit – is how they overwhelm their customers with french fries, adding extra scoops to already generous servings. Looking at this from a completely rational perspective, it makes little sense to give away stuff for free when you could charge for it. And if you look blindly at the numbers, you are essentially halving your margins by doubling the portion size.

So why do they do this? Well, it’s the perception of value. People love getting extra value for the same price, and people love unexpected treats. For Five Guys, the value lies in the customer engagement and positive perception towards their brand – plus it’s something people might share with friends.

Klarna’s marketing manager Christian Cabau often refers to the importance of emotions in e-commerce. Why? Because the statistics are so clear.

  • If customers are emotionally engaged, they are three times as likely to recommend your products or services.
  • Emotional engagement also makes it three times as likely they will buy again.

This is the game Five Guys have mastered. Instead of falling into the trap of a false economy mindset, their focus is on winning the emotions of their customers.

The false economy mindset is pre-conditioned to ignore emotions. So banish it forever. I have a better suggestion: Start looking at ways to add more positive emotion to your customer’s experience before, during and after the purchase. What would happen if you allocated money from your external marketing and used that money to add an extraordinary “fries” experience (whatever that means for your business)?

Stop everything you are doing today to think about that question. Seriously. Also, ask yourself where you are hindering your growth with a false economy mindset.

Start paying more attention to what other companies do right. Why do you personally choose one company over another? For example, when I needed to sell my old books from university, I chose to do it on Amazon even though Ebay offered a lower fee. Why did I make that choice? Because of my emotional experience with Amazon. They are simple; it simply works. I know that. It’s smoooth.

The opposite experience is very discouraging. Have you ever tried to return a product only to find it involves so much hassle it’s hardly worth it? When that happens to me I get insanely frustrated – not only because of the headache it causes for me personally, but also because I spend so much time with merchants, and know their passion for their businesses. My heart is broken when I see merchants go for the battle instead of winning the war. Being too conservative when it comes to returns is another example of a false economy mindset. Don’t go there. 83 percent of online shoppers are skeptical of the idea of visiting a store again if they have a bad returns experience.

The bottom line is this: return the false economy mindset to where you discovered it. Don’t blindly stare into your spreadsheets and numbers; look beyond them and towards the bigger picture – towards creating the best experience that will delight your customers. More often than you realize, when it comes to shopping, emotion trumps logic. I encourage you to try it, and let me know how it goes.