The secret of success today is to understand why people buy and how they make a decision. So, when you are going to sell a product or service, you must be aware of why your customers will buy what you are selling.
Mainstream economic theory works off of the assumption that consumers make rational, informed decisions about which products to buy. However, anyone who’s taken a casual glimpse at consumer behavior knows that people behave irrationally.
I urge you to take a moment and think of someone you know who always makes perfectly rational decisions…
Right. That person likely doesn’t exist. So that begs the question: why do we base our economic theories on it as if it were a fact? That question has given rise to a new field called Behavioral Economics. It looks to understand human irrationality; which turns out to be more predictable than once thought.
So what does this mean for your marketing strategy? In this article, we’ll discuss ways you can leverage behavioral economic principles to positively influence marketing outcomes for your brand.
What Are Behavioural Economics Principles?
These principles were compiled by economists to help make sense of irrational behavior. Each principle describes at a high level how the majority of people will behave under specific circumstances. In practice, these principles can help you understand and modify current behavior by leveraging relevant behavioral economics principles at the right moment of decision-making.
Think of these principles as universal research insights that describe the underlying currents your consumers aren’t consciously aware of but are driving their decisions. In the spirit of sharing, here are our top 10 behavioral economics principles for marketers. Let’s start!
1. Habituation and Defaults
The default effect is the phenomenon where making an option the default among a set of choices increases the likelihood of it being chosen.
People tend to choose the easiest option to avoid complex decisions. Defaults provide a cognitive shortcut and signal what people are supposed to do. People don’t like to disrupt the status quo — it’s easier and more comfortable to stick to what we already know.
When we’re used to doing something in a specific way, either because we’ve done it a lot or because it’s a default behavior inherent in us, it takes a lot of mental effort to learn a different approach.
For example, when we go to a website we’re not familiar with, we have to re-learn how to use and purchase online from that specific website. As this takes a lot of cognitive effort, the site needs to go the extra mile to convince us they’re worth that effort.
Precisely because of this behavior, it’s paramount for websites to feature straightforward layouts, simple navigation, and a checkout process that’s as easy as possible.
This ensures there are few cognitive obstacles in the path of potential new customers. It’s also why trust signals such as secure checkout icons and positive reviews are so vitally important for ecommerce websites, to ensure that the sense of risk experienced by a new customer is minimal.
2. Social Proof and Contagion
Another default mindset people revert to is copying what others do. Few of us are comfortable being risk-takers on the cutting edge of the consumer life-cycle. Mostly, we want to wait and see if something is worthwhile, and then follow in the risk-takers’ footsteps.
This is why social proof such as testimonials and customer reviews is crucial. It shapes Consumer Behaviour through imitation, conformity, and consensus. It is one of the most effective tools available to digital marketers. A number of factors enhance the effect, such as when people are unsure how to behave or when they feel connected to the group they are imitating.
Additionally, it shows that your business is trustworthy and that you’ve delivered on your promises for many prior customers. These are strong signals to potential new buyers and can persuade them to take a chance on you rather than on an unproven competitor.
To put this principle into action, you must learn to normalize the behavior or action you’re trying to achieve by presenting it as the social norm. Back up your claim with data to prove its validity and invite the user to participate as part of the majority. As a marketer, you need to understand the idea and the role that social proof plays.
3. The Mere-Exposure Effect
Also known as the familiarity principle, the mere-exposure effect is a mental bias by which consumers make purchasing decisions based on what they’re familiar with. Being exposed to the same thing repeatedly, be it a word or a person or a website, makes us feel accustomed to it and grows a sense of familiarity in us.
In ecommerce for example, this is evident in how we tend to prefer to buy from shops we’ve bought from before. This counts for supermarkets as much as for ecommerce stores, where our familiarity with the store layout and shopping process ensures we have a preferential bias to shop there again.
This is why encouraging return custom works so well for ecommerce stores. Through email marketing, online advertisements, and social media we should encourage customers to purchase again from our ecommerce stores, exploiting the mere exposure effect to our benefit.
4. Decision paralysis
When a default option isn’t possible, marketers must be wary of generating “choice overload,” And when consumers are presented with too many options, they can become overwhelmed, leading to unrealistic expectations, decision-making paralysis, and unhappiness.
The obvious strategic choice was to simplify the number of available options. The goal of any marketing campaign should make your prospect’s decision-making process as easy as possible. Giving your prospect clear instructions also helps ease the decision-making burden.
Let’s say that you’re running a marketing campaign that sends audiences to mobile landing pages. Perhaps you’re asking them to sign up for a product or review their experience with your product. Instead of barraging your users with requests and open-ended questions, make the process easy: give them a few options from which to choose.
5. Endowment effect
Consumers value items they own which they have an emotional attachment to, more than a similar item owned by someone else. Establishing a customer’s partial ownership in an item being marketed through customization can increase emotional attachment.
This is what we called the Endowment Effect. It is an emotional bias that says that once we own something (or have a feeling of ownership) we irrationally overvalue, regardless of its objective value.
It’s so powerful that it doesn’t even have to attach itself to an object that has a deep, emotional backstory; it can happen instantaneously from the moment you put an object in someone’s hand. Subconsciously, we attribute the object with more meaning, quality, and value from that very first touch.
By providing a free trial, companies are giving potential customers the chance to fall in love with their services without any risk. Once potential customers try the service and find it valuable, they claim ownership and quickly rationalize away the additional price. By the time the free trial period ends, their aversion to loss makes it difficult to turn back.
6. Scarcity and Loss Aversion
People might ignore to gain something, but they are not ready to lose anything. So how can you leverage this fear of loss? The answer is simple– keep focusing on losses and not gains.
Loss aversion, which is explained in the Prospect Theory, was the initial theory that proved the irrationality of individuals. It finds that when an individual is to choose between several choices, they will avoid losses and ensure wins because the pain of losing is far more impactful than the satisfaction of an equivalent gain.
On that note, you can use loss aversion work in your favor by telling your potential customers what they’ll lose if they avoid investing in your product or service. Remember, sharing the beneficial outcomes of your product is important, but it doesn’t bring the same results always.
Behavioral economics says that articulating potential losses can be an even more powerful motivator. So use a positive tone while talking to your customers but keep focusing on their losses!
Pre-order deals also play upon loss aversion by providing early exclusive access to new items. Early access creates an ownership people want to preserve. The time frame for buyers’ actions is well determined in pre-orders, as the offer expires on launch day.
7. Decoy effect
If you want to sell more of a product or service, offer your customers a similar, but inferior, at about the same price. It’s unlikely that they will buy the less attractive item, but you should see a jump in sales of the item you are trying to sell— that’s decoy marketing!
The decoy effect is defined as the phenomenon whereby consumers change their preference between two options when presented with a third option. This is under the assumption that consumers’ preference for one option over another can change when a third, similar but less desirable, option is presented.
In simpler 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.
To illustrate the concept, let’s have a look at the following example used by the world’s most renowned brand, Apple. They play with their pricing to lure customers to buy their premium products.
- The leftmost offering includes the basic offer for $1,499.
- The middle includes an advance offer for $1,799.
- The rightmost offering includes the advance offer plus twice the storage for $1,999.
If you already consider buying a better MacBook, it seems silly not to go for twice the storage for “only” $200 more. The middle option (the decoy) is asymmetrically dominated by the rightmost offering and therefore, the decoy effect increases its attractiveness.
8. Framing Effect
The framing effect is the way choices are described and presented in a way that highlights the positive or negative aspects of the same decision, leading to changes in their relative attractiveness.
In simpler terms, framing is about how we make a decision based on how the information and data are presented to us. As marketers, we see different response rates based on the framing of product features and statistics, especially in advertising.
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.
Another great example can be observed in a grocery aisle, where products are organized and displayed by customer preference rather than price. Marketers can influence shoppers’ purchasing decisions by placing promoted products in places consumers are more likely to choose from.
As a marketer, it is essential for you to understand framing because you can use it to be more influential and persuasive when talking to consumers. You can also break down the messaging of competitors and people promoting conflicting viewpoints.
9. Anchoring Effect
Anchoring bias is the human tendency to put more weight on the first piece of information offered than everything that follows. During decision making, consumers will rely heavily on the first piece of information offered, and use it as a reference and benchmark for other decisions from that point on, whether it makes sense or not.
Marketers can present a high price for one option that can influence subsequent consumer purchases by making other options seem cheaper. For example, an online store could offer a $399 product that’s been marked down to $99, creating the idea that an expensive—and therefore more desirable—piece of product is now a great buy! It’s all because consumers will feel like they’re getting value for money.
Another classic tactic used by software firms that exploit anchoring bias is the “monthly vs annual plans.”
Obviously, it’s far better to get an annual payment of $149.90 from users upfront than a single $14.99 payment each month. But when it displays the annual price at $12.49 after the monthly price, it seems like people are saving money by signing up for a year even though they’re paying $134.51 more and tying themselves into a year-long contract.
10. Pain Of Paying Principle
The Pain of Paying principle explains the psychological link between payment and pleasure for the experience or product we are paying for. The simple fact is that people don’t like to part with their money and so making a payment can reduce the pleasure taken from making a purchase.
It has been proven that spending money actually activates the areas in our brain that are associated with physical pain and feelings of disgust. It’s also based on the principle that it hurts more to make some purchases than others. Therefore, the more a purchase hurts, the fewer people are willing to make it. After all, who wants to experience pain, no matter how much you think you want something?
As one example, it hurts more to use cash to pay for things than to use credit cards. When your consumers fork over their cash to buy something from you, it hurts them more than if they gently swipe their card.
In marketing practice, however, you must know that allowing consumers to delay payment can dramatically increase their willingness to buy. One reason delayed payments work is perfectly logical: the time value of money makes future payments less costly than immediate ones. Even small delays in payment can soften the immediate sting of parting with their money and remove an important barrier to purchase.
There You Have It!
Behavioral economics is a powerful field of study, and you’ll be able to apply most of what you learn almost immediately to the benefit of your business or your profession as a marketer.
Although, as with any other marketing tool, there is a fine line between using behavioral economics to improve customer’s experience, and using it to manipulate consumers. Remember, the way marketers use cognitive biases does not ALWAYS lead to added value for the customer.
While we find that these 10 behavioral economics principles are among the most useful for us marketers, there are many others to help you in your work. Dive into the world of Behavioral Economics, continue to explore, and let us know if you find any principles that are especially relevant to you. We would love to hear about your experience!
Also, if you’d like to learn more about behavioral economics, including practical applications, and challenges, contact us or leave a comment below!
Thanks for reading!