Behavioural economics. How much choice do we have in our spending habits?

We live in a fast paced society where we are constantly being inundated with information. With such a diverse population and so many options out there how can the marketers truly create a memorable impact on the consumer?

The answer is behavioural economics. This is an economic analysis that uses psychological insights to understand and potentially predict people’s spending habits.

It is a nice thought thinking we are completely in control of our decisions. A nice thought, but not a reality. We are so heavily governed by the messages in the environment around us. As scary as this is for the consumer, this is incredibly beneficial for marketers.

As much as we do not make rational decisions when we spend, it’s nice to think that we do.

Behavioural economics has multiple components and tactics within it but I will be taking a more in-depth look at loss aversion. So what are some traits of behavioural economics and where can we see them in day-to-day life?

Loss Aversion

This is a demonstration that people would rather avoid a loss than reap a reward. It’s in human nature to keep progressing and acquiring things and this is why this method is so successful. ‘Loss aversion’ can be a great tool in multiple ways.

It can be demonstrated through creating ownership. A prime example of this is teleshopping. When the insanity workout offers you a 90-day trial you assume it is legitimate, as they aren’t forcing you to keep this product. The fact the company has given you the option also makes you assume it is a worthy brand. Loss aversion works in this case because when the 90 days are up the consumer feels they have lost out and are being left out if they send the item back.

This leads into the second tactic of loss aversion, which is the art of scarcity. Online retailers are great at creating this fear. No one wants to be the person not in the know when it comes to the hottest new trend. And by fear mongering it encourages impulsive buying. For example when someone is buying a pair of shoes and when you pick your size it pops up telling you ‘only two left’. It has been found that this ‘warning’ encourages panic that then encourages the consumer to buy the shoes as they do not want to lose out.

Loss aversion also works when it comes to promoting ‘free items’. A prime example of this is when you are offered buy one get one free, or 50 percent off. Loss aversion theory would argue that the consumer is far more likely to choose the former as the possibility of a free item feels like much more of an achievement than a discount.

Finally a very effective loss aversion strategy is outlining the loss the consumer may feel if they don’t get the item. Often this strategy is demonstrated by comparing the product to two or more inferior ones. By highlighting inferior products’ weaknesses and promoting the gains that buying your product will have, would tell the consumer that they will miss out on something if they do not buy it. Classic examples of this are shampoo adverts that promise lustrous hair and more love interests than for those who use other products.

Once loss aversion theory is understood, you can see that it is everywhere! The trick is to harness that information to affiliate personal emotions to your brand and learn how to contact your audience to create that memorable impact.