Behavioural economics in marketing
Marketers are in the business of persuasion. Sensibly, but perhaps too optimistically, marketers try to appeal to the rationality of their audience, inundating them with a myriad of rational reasons for why exactly they should buy one product over another. Technical superiority, improved design, better results, a lower price-point… but everything seems to fall on deaf ears.
Unfortunately, the blunt truth is that people are not always rational. If irrationality shapes consumer behaviour, what then is a marketer to do?
This is where behavioural economics comes in. While marketers have access to data to tell us what people do, that same data cannot tell marketers why they do it. The study of behavioural economics mixes human psychology research with neuroscience to understand why people make certain decisions that seem out of line with rational behaviour. BE seeks to understand the disparities between actual human behaviour and the theoretical behaviour predicted by classic economic theory. In other words, behavioural economics makes irrationality more predictable. Marketers can take advantage of certain well researched BE concepts to understand why a certain marketing tactic is working, and why another is not. Understanding the way people make decisions and how they respond to small differences allows marketers to make subtle tweaks to their work, unlocking significant value at a low cost.
Decision paralysis
While Samsung boasts of its customisable Android interface, Apple laughs all the way to the bank. The dictator, Steve Jobs, is a man who has understood the perils of decision paralysis. Behavioural economics has revealed that when consumers are overwhelmed with choice, it in facts deters them from purchase. This is in spite of the fact that sales should increase since, technically, there is something for everyone. A classic field experiment set up two stands selling assorted fruit jams; Stand A sold 6 varieties and Stand B sold 24 varieties. While Stand B drew more consumers to sample the jams, fewer made purchases. By contrast, although fewer consumers stopped to sample the jams at Stand A, purchases made at Stand A were more than five times higher than that of Stand B.
Sheer choice overwhelms consumers and deters purchasing in two ways. First, a greater number of options make the consumer work harder to find their ‘best fit’. The universal human truth is that everyone is a lazy arse and no one wants to work harder if they can avoid it. If you’re going to make me work to give you my money, no thanks. I’d rather spend it elsewhere. Second, behavioural economics reveals a concept known as the ‘negative halo effect’. When there is a large array of choice, this increases the likelihood that each product will have a ‘negative halo’ cast on it — a heightened awareness that choosing one option requires you to forgo some desirable feature in another. Therefore, reducing the number of options makes consumers more likely to reach a decision, but also more satisfied with their choice.
Price perception
Instead of spending a small fortune on a celebrity sponsorship or increasing the quality of the product, in some cases, marketers can get away with simply dressing up the outside of a product and plastering a higher price tag on it. Although in theory it would seem that the price demanded for a product reflects the value attached to it, in practice, this runs backwards — we savour what we pay more for. McCafe can crow about their coffees beating Starbucks’ in blind tests, but few in this world truly traverse completely blind.
Mast Brothers of Brooklyn, New York, make beautifully packaged chocolate — Harpers Bazaar gushed that unwrapping one of their chocolate bars is like unwrapping a gift. Although the general consensus is that their chocolate tastes… like shit, Mast Brothers charges a cool £17 for its 200g bar. To put it in perspective, a 200g dairy milk will cost you £2 at the supermarket. Yet, Mast Brothers has seen incredible commercial success. The Observer suggests that for Mast Brothers, taste was never in fact the point — the point was to use price perception to make something worth giving as a gift. Bringing a £17 bottle to a fancy dinner party will make a guest look cheap — it’s better to bring what everyone will recognise as a £17 chocolate bar. The fact that it looks better than it tastes is irrelevant. For some, the hefty price point may even make the chocolate magically taste better than it is.
The power of ‘free’
‘Free’, the magical, four-lettered f-word has powers beyond a marketer’s wildest dreams. Dan Ariely introduces the concept of the ‘zero price effect’ — that is, when a product is a free, consumers perceive it to be intrinsically more valuable.
A study revealed that when a free chocolate was advertised alongside a 14 cent one, consumers regarded it as disproportionately more attractive than when a 1 cent chocolate was compared to a 15 cent one. This was even though rationally, they had the same price difference of 14 cents and should thus have provided the same magnitude of change in incentive to choose the cheaper product. The ‘zero price effect’ is linked to the affect heuristic — where options that have no cost trigger a more positive response. Even 1 cent makes a difference. Thus, the key learning that marketers can take away from the ‘zero price effect’ is that simple rephrasing can work wonders — ‘buy one get one free’ rather than ‘50% off your bill’ can evoke an irrationally great difference on the consumer.