Consumption Assumption

3.5 minute read...

Thanks to all for your patience as I focused on releasing Assumption Hacking Essentials. It was gratifying to get it completed, and even more gratifying to receive the positive feedback that I have so far! 

And now, welcome to today’s Assumption Hacker’s Advantage…

My husband Danny recently came across an unusual article featuring the pitfalls of out-of-control shrimp consumption. The victim? Red Lobster. The cost? At least a portion of their 11-million dollar operating loss for the respective quarter and projections of losing 6 million dollars more than they had expected for the year as a whole.

_{Image by Mike Mozart.}

Being married to me, Danny immediately realized that he was reading a juicy assumption hacking opportunity. But first, some background for context…

For 18 years, Red Lobster offered an all-you-can-eat-shrimp special at their restaurants once a week. It was a highly successful promotion that brought customers in on Mondays, an otherwise slow day in their business. Last year, in an attempt to increase traffic during the relatively slow fall and winter seasons, the company decided to offer their Ultimate Endless Shrimp for $20 all day every day (instead of the usual once per week). Compared with one of Red Lobster’s regular meal options, which run from $22 to $50, this new deal was clearly a great one for hungry seafood lovers. 

Seafood Surprise!

Red Lobster expected to see a nice increase in traffic and a positive impact on their financial performance as a result of the promotion. And they did experience a slight 4% boost in traffic, albeit a smaller bump than they had hoped.  

But the impact of the promotion on their financials was unexpectedly terrible. As in losing-millions-and-millions-of-dollars terrible.

Red Lobster obviously believed that their offer would lead to increased traffic and better financial performance. Otherwise they wouldn’t have made it. But what assumptions led them to that belief in the first place? What was the faulty assumption at the core of this outlandishly bad outcome?

Hacking Red Lobster’s Assumptions

Red Lobster made two core assumptions when they moved forward with the decision to offer all-you-can-eat-shrimp every day. First, they assumed that the offer was attractive enough to bring in more customers during the rest of the week. If it helped them fill their restaurants on Mondays, then certainly it would help to fill their restaurants Tuesday through Sunday. This proved to be a valid assumption, though to a smaller extent than they had anticipated. 

The devastatingly incorrect assumption, though, was that the offer would have no impact on most of the people who already went to Red Lobster, and consequently these customers would make the same decisions when ordering from the menu as they did prior to the launch of Ultimate Endless Shrimp. 

As Ludovic Garnier, CFO of The Union Group  (one of the company’s major shareholders) said, ”The proportion of the people selecting this promotion was much higher compared to the expectation”.

Why was this assumption the cause for failure?

This is where thought experiments are helpful. For the purpose of illustration, I’ll make up some numbers. Let’s say that the all-you-can-eat offer sells for $20 and the typical alternative meal options sell for $25. Further, let’s say that the average cost for all meals on the menu is $18. This means the deal generates $2 toward the company’s bottom line while the other meals generate $7. 

If you’re doing the math, that’s $5 less to the bottom line every time an old customer switches from other meals to the all-you-can-eat deal. Which means for every old customer that switches from a $25 to $20 meal, 3 new customers (presumably taking the offer) would be needed to overcome the difference. 

If the only outcome of the offer was a 4% increase in traffic, Red Lobster’s financials would have improved slightly. But because it had such a significant impact on the ordering habits of its existing customer base, the company lost millions instead.

Applying the Mystery Analysis in Retrospect.

At the beginning of the year I did a free webinar on a tool called a Mystery Analysis. So what if Red Lobster were to use the Mystery Analysis here? Check out this short explainer video breaking down the Ultimate Endless Shrimp debacle using a Mystery Analysis (analysis starts at 40 second mark).

Consider All Stakeholders

Once we’ve identified our faulty assumption, the next step in the Assumption Hacker’s ABC’s is Deciding what to do next. Red Lobster made the decision to increase the price of their all-you-can-eat shrimp offer. And it was reported last month that Thai Union Group is seeking to sell its stake in the chain.

Red Lobster neglected to consider that its current customer base would change its behavior when faced with a great deal. If they had considered that putting such a deal in front of all their customers might end up changing current customer behavior, it's possible they would have rolled things out more strategically and achieved their objectives. 

If you only take one cautionary tale from this shrimp saga, here it is: When considering a change, it’s better to take that extra time to consider the potential impact of a change for all stakeholders. You might want a given change to affect only your sales team or only a given target market, but as evidenced by Red Lobster’s experience, sometimes changes do affect unintended stakeholders and sometimes that can come with significant unintended consequences.

Till next time, 

Lisa

Whenever you're ready, here are a couple more ways I can help you:

• Assumption Hacking Essentials. Dr. Eliyahu Goldratt said in his forward to The Goal, “The challenging of basic assumptions is essential to breakthroughs.” In this digital course, I'll take you through a five step process for challenging those basic assumptions and creating breakthrough in the process. You can learn more about the course here. →
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