Behavioural economics is the study of psychology as it relates to the economic decision-making processes of individuals and institutions.
Each day, every one of us makes over 3,000 decisions. Most of these decisions are subconscious, many are emotional and many are based on environment, upbringing, culture and even primitive behaviour picked up by our ancestors thousands of years ago. All this leads to us taking mental shortcuts and making irrational decisions because we can’t really process all the information we see. Behavioural economics looks to explain why we make irrational decisions and how we rationalise them.
As an example…
…Did you just start to salivate when you saw the above picture of a lemon? Why? You can’t eat the picture, and would you even want to eat a lemon, anyway? Personally I would prefer to slice it up and stick it in a G&T, but our minds and bodies are programmed to drool automatically over sour food.
So how does this feed into online marketing? Classic economic theory works off the assumption that consumers make rational, informed decisions about which products to buy. Behavioural economics, however, shows this isn’t the case. Instead, we make decisions based on instinct and emotional bias. We also make decisions based on ease and laziness — for that reason Google paid $9 billion USD to Apple in order to have Google as the default search engine on iOS devices, knowing most people won’t make the effort to change the default settings.
There are hundreds of strands and concepts behind behavioural economics, which you can read more about on behavioraleconomics.com, many of these are used by marketers every day without them realising the theories behind them. I’d like to focus on a few specific themes and how they can be applied to marketing.
The decoy effect is a phenomenon whereby consumers will tend to have a specific change in preferences between two options when also presented a third option that is asymmetrically dominated.
In simple words, when there are only two options, consumers will tend to make decisions according to their personal preferences but when consumers are offered another strategical decoy option, they will be more likely to choose the more expensive of the two original options.
An example of this was demonstrated by The Economist’s subscription packages. When they offered a simple choice between a web-only subscription and a web-plus-print subscription, most users chose the cheapest option. Once they added a ‘dummy’ choice of only print subscription most users then chose the most expensive option:
Web Subscription – £59 (68-percent preferred)
Web and Print Subscription – £125
Web Subscription – £59
Print Subscription – £125
Web and Print Subscription – £125 (84-percent preferred)
Consumers started to choose the most expensive option because they thought it represented better value, whereas previously they weren’t fussed about having the print subscription, as well.
Anchoring is a natural bias we create for ourselves based on our tendency to rely on the first piece of information presented (for example, a price) to us when making decisions. Each subsequent piece of information is considered in relation to the anchor, making the anchor very important to the decision. The most common use of anchoring is the process of discounted prices – we’re much more inclined to buy a suit reduced from £200 to £120 because we feel like we’re getting value for money. In reality, the suit cost £20 to make and the retailer is making £100 profit.
And we all know the second-cheapest wine on the menu is the best choice, right? You don’t want to look like you’re completely cheap but you don’t want to spend stupid money, either. Well, restaurants know this about you and tend to put the cheapest wine, or wines they want to shift, at a price slightly higher than the house wine, thus making the most profit. Sometimes going for the cheap option gets you the better wine (you can try that excuse next time you’re on a date).
Scarcity and Loss Aversion
I’ve grouped these two theories as they can go hand-in-hand from a marketing point-of-view.
We all suffer from loss aversion of fear-of-missing-out (FOMO). Studies have shown that losses have two or three times more of a psychological impact on us than gains. If someone is viewing your ad, you may be better off telling them what they stand to lose if they don’t act rather than what they stand to gain if they do.
When an object or resource is less readily available (e.g. due to limited quantity or time), we tend to perceive it as more valuable. Scarcity appeals are often used in marketing to encourage purchases. An experiment in 2012 compared different product descriptions for wristwatch advertisements. The first was “Exclusive limited edition. Hurry, limited stocks,” while the second was “New edition. Many items in stock.” The average consumer was willing to pay an additional 50 percent if the watch was advertised as scarce.
In online marketing, making use of countdown ads in Google is a valuable way of promoting limited offers or short-term sales. The use of limited time discounts through remarketing is also a way to tap into these theories and can generate higher clickthrough and conversion rates.
Choices can be presented in a way that highlights the positive or negative aspects of the same decision, leading to changes in their relative attractiveness. Framing is about how we make a decision based on how the information and data is presented to us. Unfortunately, we’re not very good at analysing lots of data in a short time frame so the decision making is a combination of conscious and unconscious choices.
One of the best known examples of how a product is framed is fat-free vs. fat content. No one is going to promote a food product saying it contains 25 percent fat; however, they will say the product is 75-percent fat free. A subtle difference, but a big impact on perception. One feels very unhealthy; one almost feels good for you.
The way you frame your offers and services can have a big impact on customer response. Normally companies will promote sales as “40 percent off” rather than “pay only 60 percent” because it somehow seems like a better offer. If a competitor offers a cheaper product, you can frame yours in other subtle ways. For example: “X saves you money, we save you effort.”
Social proof is a psychological phenomenon in which people adopt the behaviour of others when deciding how they should act. Generally, users feel safer and more comfortable committing to an online purchase if there is evidence of a larger group of users having done so beforehand.
In online marketing, where possible, provide the user with a review in the form of review extensions. These are available on both Google and Bing, and help reassure the user that whatever we’re offering has been tried and tested by something that’s already widely considered as a trusted source of information – review extensions and seller ratings are both great ways to get this message across.
Another way of leveraging social proof is by showing the popularity of the product. eBay does this by stating how many of the same products have been sold. Hotel aggregator sites often use this to good effect, telling you how many people are viewing the same hotel at the same time (also making use of loss aversion and scarcity theories if it makes the user think they might lose the hotel booking if they don’t act quickly).
Anyone working in marketing will already know that psychology can help discover invaluable insights into consumer behaviour. The theories and research behind the field of behavioural economics allows marketers to optimise these strategies for maximum return.
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