The rival's latte price is the first number most teams look at each morning. Is it the number that should set yours? This week you look for the habits and biases behind real decisions, your team's included.
Learning objectives. After this week you can (1) model a habit as a stock with a steady state; (2) recognize anchoring and reference prices; and (3) spot the sunk-cost fallacy, loss aversion and status quo bias.
Remember this: money already spent doesn't get a vote. Only what comes next counts.
1) Habits are a stock
Behavioral economics studies systematic, predictable departures from the perfectly rational buyer. The first is habit. Your Regulars count works like water in a tub: new regulars flow in from the customers you serve, and some drift away each day. The level settles where the flows balance:
Steady-state regulars = new regulars per day ÷ daily drift-away rate
With made-up rates, 8 new regulars a day and 5% drifting away daily settle at 8 ÷ 0.05 = 160. Your report doesn't print the rates, but the Regulars line shows the stock moving. Habit is worth building because a habitual customer pays less attention to price. The loyalty card gives away about 10% of drink revenue to build it, so judge it by comparing that giveaway with the contribution from the extra regulars it keeps. And the stock needs feeding: stop serving people well and it drains.
2) Anchors and reference prices
Anchoring is judging a value against a salient reference point instead of the fundamentals. Customers judge your $5.00 latte against the prices they are used to seeing. Teams anchor too, pricing a dime under Common Grounds because it is the biggest number on the report. With a $4.60 latte and ε −1.6, MR = $4.60 × (1 − 1 ÷ 1.6) ≈ $1.73, still above a $1.20 MC latte. The rival's price never entered that calculation.
3) Sunk costs
A sunk cost is spent and can't be recovered: a renovation, a machine, last week's losses. Good decisions compare future costs and benefits only. "We can't move, we just renovated!" is the sunk-cost fallacy. A move should compare future profit there with future profit here, minus the costs still ahead: the $1,500 lease-break fee and the regulars who won't follow.
4) Loss aversion and the status quo
People feel a loss about twice as strongly as an equal gain: loss aversion. After a red day, the urge to slash prices "to win it back" is loss-chasing, not analysis. Status quo bias is never revisiting your Day 1 prices. The cure for both is a decision rule your team agrees on before the day goes wrong.
Quick self-check
(a) 10 new regulars a day, and 5% drift away daily. Steady state? (b) "We can't drop the student discount, we've had it for two weeks." Which bias? (Answers: 10 ÷ 0.05 = 200; the sunk-cost fallacy.)
Common mistakes
- Thinking you're the exception. Biases are strongest in people sure they have none.
- Valuing the loyalty card by feel. Its cost and its benefit are both computable.
- Treating regulars as permanent. The stock drains unless you keep feeding it.
This week in the arena
Find your worst Net today this week. What did your team change the next day, and why? Write down the next day's Net today too. Then be honest: was the change driven by a number on the report, or by the sting of the loss? Write one decision rule your team will use instead.