Sucked in: Hoover loses £50m
In 1992 a bizarre chain of events unfolded culminating in Hoover, the vacuum cleaning manufacturer, losing £50m, 3 key executives being fired, the UK’s biggest consumer scandal in 25 years, and even one of their delivery vans being kidnapped.
And all because of a simple and common decision making error: the failure to check on their own assumptions about promotional redemptions.
The story goes a little like this.
Sales weren’t going well, there was a backlog of stock clogging their warehouse so the marketing team decided they would roll out a consumer promotion to increase sales.
Up came the rather neat idea of offering 2 free flights to Europe with every Hoover purchased. This had strong consumer appeal, and the financial returns were predicated on 3 assumptions about how consumers respond to promotions:-
- Although the minimum purchase was valued at only £100, it was estimated that the sales reps could upsell consumers to the higher price models in store
- Consumers fail to redeem offers in up to 99% of cases. For example, even with gift cards with a cash value, up to 10% never get redeemed, making a massive profit for their providers.
- For those consumers who did go to redeem, the enlisted travel agent would be able to upsell them with accommodation and other profitable extras.
As the promotion got going, consumers immediately loved it, sales went through the roof and Hoover had to put on an extra 75 staff at their depots to cope with demand. One of the three assumptions immediately started to unravel: consumers with a nose for a deal started buying the product only for the free tickets, so it was impossible to trade them up to more expensive models.
This effect then snowballed as the redemption rate far exceeded their estimations, as people bought for the tickets and just tried to give their Hoovers away.
And in turn the travel agents’ jobs became a living nightmare with a huge number of people calling to book tickets.
The situation was already somewhat spiralling out of control. But two further decisions made it worse. On one hand, before the problems became crystal clear, Hoover expanded the promotion to offer 2 free tickets to the USA (it was just Europe initially), and promoted it on TV. This had the effect of not only bringing in a whole new bunch of customers, but also reminded previous buyers to book their Europe tickets that they might not have got round to yet. At more or less the same time, they decided to make redemption harder via the travel agents, who suddenly didn’t return calls, and worked to the letter of the Ts and Cs to try and stop you getting your tickets.
A consumer backlash built up. As huge numbers of people couldn’t get their free tickets, they went to the media and this paradoxically increased further the number of people buying Hoovers, and as the voices got louder and louder, the hoover holiday Pressure Group was formed, the BBC then investigated using secret cameras and scooped proof of the deliberate policy to stop people redeeming, which in turn fuelled an even bigger outcry.
It all culminated somewhat farcically with a disgruntled customer named David Dixon from Cumbria kidnapping a Hoover van and refusing to give it back until he got his tickets. He ended up portrayed as national hero and Hoover the villain. Again.
The PR disaster only came to an end 6 years later after all the court cases had wrapped up, the sackings of Hoover execs, and the fire sale of the company, and even the loss of the seal of approval of Her Majesty the Queen.
I want to highlight some of the decision making errors they made, and how they could have avoided them. I see two major classes of errors here.
Initially there was the failure to test and check their assumptions about how the promotion would go, coupled with their failure to forecast what the Heath brothers refer to as “bookends” – the best and worst case scenarios, which can then be mitigated against. This failure to challenge assumptions is actually very common error which we all make, easy to see with hindsight, and I actually think the one that was easiest to see at the time might be risky was the redemption rate, assuming that the number of people who would forget to redeem free flights worth hundreds of dollars would be substantial.
Then with their backs to the wall, they made some high pressure decisions which would not have fitted with corporate values – to try and trick consumers out of being able to redeem their flights by making it deliberately too hard. This backfired badly as they got caught out as being completely dishonest. Company values are something that we all know about, but which rarely get used to actually influence decisions. In times of crisis, companies like Johnson & Johnson, with a strong set of values, actually make their decisions accordingly such as the famous Tylenol recall in the US where they backed their values to the tune of $100m. This ends up strengthening the company’s reputation in the long term. But Hoover didn’t take this path. They panicked, threw any values out the door, and in the process their own company got sucked down the drain.
Key lessons in summary:-
Carefully check your assumptions, or better still get an independent expert to do it.
Forecast best and worst case scenarios and plan any key contingencies for them.
If you’re the CEO, make your values so meaningful that they can guide your decisions in times of crisis.
…and don’t get sucked in by bad decision making.