Indie Retailer Response to Unsettling Times: Loss Aversion Analysis
Loss aversion is a cognitive bias where people feel the pain of a loss more strongly than the pleasure of an equivalent gain. This often leads to decisions that prioritize avoiding losses, even if it means missing out on potential gains. For example, losing $100 feels worse than the joy of gaining $100. This bias can lead to irrational decision-making, such as avoiding risks even when the potential benefits outweigh the losses.
How the fear of losing money affects the choices Indie Retailers make during uncertain times, like whether to cancel orders or accept goods, will be explained in the following section.
Key Takeaways
Indie Retailers are likely to be strongly influenced by loss aversion in uncertain times.
The stronger fear (supply disruption or overstocking) will dictate their actions.
Understanding these motivations is crucial for predicting and responding to retailer behavior.
A More Effective Strategy
Instead of letting your emotions dictate your business decisions, it's crucial to find a more reliable and logical approach.
Creating a financial budget and adapting it to changing circumstances is crucial. When you track spending by dollars, you can monitor customer habits and gauge whether demand is increasing, decreasing, or stable. Management One forecasting provides this service, responding to your specific situation while benchmarking it against similar businesses in terms of geography, demographics, and industry.
Begin by analyzing your total on-order retail for the next six months and compare it to your forecasted sales for the same period. Then, repeat this process at the class level. This will allow you to assess whether trending classifications are sufficiently stocked and if classifications that are neutral or trending down are overstocked. By taking this measured approach, you can avoid making emotional decisions based on loss aversion bias.
This exercise uses your retail on order as it is easily comparable to sales. Remember to include your on hand inventory in this equation. Also, consider that your on order stated at retail, if converted to cost, will show your future payables. These payables, along with your expenses, should be compared to your expected revenue.
The objective is to leverage data to facilitate logical and informed decision-making, and to mitigate the influence of biases in the decision-making process.This is a simple process that will reduce stress and keep you in control of your future.
If you would like more information or discuss your own situation feel free to reach out to me or Management One.
Onwards and Upwards,
Marc
