Consumer decision making is more often than not – less than rational. That said – it is also more often than not – predictable – and if we can predict it, we can usually manage it or even leverage it.
Understanding predictably irrational behaviour can assist cost-effective marketing. Consider!
To boost sales, present your product as having a specific purpose and benefit, rather than a more generalised benefit.
Imagine two scenarios, each with two options tested with separate samples of consumers:
- Scenario 1 – consumers can purchase a specialist earthquake insurance policy or a general insurance policy which includes an identical level of earthquake coverage – for exactly the same price
- Scenario 2 – the consumer can choose between two travel insurance policies – one with specialist terrorism cover and the other with general cover, including the same level of terrorism cover.
In studies completed by Nobel Prize winner Daniel Kahneman, it was found that:
- People in California (an earthquake zone) overwhelmingly opted for the earthquake only insurance
- People travelling to Thailand (after a terrorism incident) overwhelmingly opted for the terrorism only insurance.
It is folly to expect that when offered two choices – consumers will make a rational choice. Many purchase decisions are less than rational – and it is important to understand the factors at play.
Consumers very often see more value in or have more confidence in specialist products. In doing so, they are behaving irrationally – but predictably so.
When structuring the optimal incentive, recognise that money per-se is often a less effective motivator of human behaviour that goods of a similar value.
Consider the following scenarios, in which two options are tested to determine their appeal to consumers:
- A free ice cream or $4.00
- A slab of beer of $35.00
In studies completed by Dan Ariely of Duke University, both sets of options were tested, and it was found that:
- Consumers will line up for a free ice cream but nit $4.00.
- University students will complete charity work for a slab of beer but nit $35.00.
Given that the cost of the ice cream is $4.00 and the cost of a slab of beer is $35.00, and cash offers more flexibility than an item – both outcomes represent evidence of the irrationality of human beings – including consumers. The fact is human beings do not behave rationally and understanding how this affects decision making is central to developing the optimum incentive programme – and cost-effective marketing in general.
These are four examples, supported in numerous other studies, of human (and therefore consumer irrationality). They provide further evidence that human beings are irrational and Make purchase decisions irrationally. Among other things – these findings bring into question the value of education as a means of influencing human behaviour. Human beings are irrational decision-makers, but as:
- Dan Ariely suggests in his book, Predictably Irrational, while irrational, human behaviour is largely predictable.
- Daniel Kahneman suggests in his book – Thinking Fast and Slow, much of this irrationality is the result of automatic thinking, influenced by cognitive biases.
Predictably irrational consumers will very often prefer a gift to a cash reward. A gift – in the form of a product or service – can be a more effective incentive to purchase.
Leverage the sunk cost fallacy to increase customer engagement with your brand and facilitate subsequent conversions.
When, after deciding the movie you are watching is dreadful, you continue to sit in the theatre because you paid $24.00 for the ticket – you are acting irrationally.
I recently heard an ignorant politician who – when responding to questions about climate change – said it is important not to throw the baby out with the bathwater – that we should continue to invest in coal because of the significant investment in and dependency on the mineral. The ‘ignorance’ I refer to does not relate to the politician’s attitude to climate change, but to the assertion – ‘we must not throw the baby out with the bathwater’.
A colleague of mine once resisted selling for $5000 a piece of redundant equipment worth less than $5000 – on the basis that he paid $80,000 for it five years earlier. A share trader I knew would buy a stock for $1.00 per share a month after buying the same stock for $2.00 – purely all on the basis that she wants to ‘average down’.
These are all examples of the sunk cost fallacy – the idea that the amount we have invested thus far – in-itself – justifies the further future investment. Human beings will often stick with behaviour because of investment to date – something which can be leveraged by marketers to drive brand loyalty, among other things.
The sunk cost fallacy can offer very real and practical opportunities for marketers.
Leverage to the power of social norms and social comparisons to cause consumers to behave in a manner consistent with your sales objectives.
A 1995 Harvard University study presented a sample of consumers with two options – earning $50,000 when everyone else around them is earning $25,000 – or earning $100,000 when everyone else is earning $200,000. Astonishingly, half the sample chose the first option – sacrificing $50,000 the be ahead of their colleagues. These finding might be unbelievable had they not been replicated.
Few factors drive human behaviour more than social status and a need to be seen as being bigger and better than one’s peers. Have you ever attended a school reunion and heard the stories being told by attendees – each one trying to out-do the person who told the last story, just about everyone there trying to demonstrate how much more successful they have been that their peers.
There is compelling research that demonstrates a direct link between levels of self-esteem and an individual’s performance in life compared to their parents (and especially same-sex parent) and peers. Most humans want to feel that they are at least as successful, and ideally more so than their parents and peers.
The quest for social status while irrational is predictable and can be leveraged in marketing.
Instead of decreasing prices to increase sales – leveraging the placebo effect to increase prices, margins, and unit sales
A study led by Kaptchuk considered how people reacted to migraine pain medication, testing three groups:
- Group 1 – treated with a branded drug.
- Group 2 – treated with a labelled placebo.
- Group 3 – did not receive any treatment.
The findings suggested that the placebo was 50% as effective as the real drug in reducing pain. A treatment with no efficacy at all was effective in half the cases tested. This clearly demonstrates the power of the placebo effect or placebo bias.
While the placebo effect is most commonly associated with medical interventions, it is equally relevant in marketing – or more specifically, the management of consumer behaviour. The term ‘placebo effect’ is just fancy terminology forb what might be called the ‘expectation effect’’. It involves an outcome occurring because the person involved believes it will happen.
While it was considered ‘false advertising’ by the Australia regulators – there is data to suggest that branding Nurofen medication – ‘Nurofen for backpain’, or ‘Nurofen for stomach aches’ actually made the medication more effective in reducing back pain and stomach aches – despite the fact that the ingredients were exactly the same. Because users believed the medication was more effective – it was more effective. The same principle can apply to just about any category of behaviour or product.
The placebo effect, in addition to having applications in medicine, can also be a useful tool for smart marketers.
Research has variously suggested that human beings have between 25 and 30 cognitive biases that influence them in a manner that causes them to behave irrationally. Much of this irrational behaviour is impervious to information and education because cognitive biases typically impact on Type 1 thinking and education typically impacts on Type 2 thinking.
Cognitive biases that commonly impact on consumer behaviour include:
- Anchoring bias– the tendency to rely too heavily on the very first piece of information we learn.
- Attentional bias– the tendency to pay attention to some things while simultaneously ignoring others.
- Availability bias– placing greater value on information that comes to our mind quickly.
- Confirmation bias– favouring information that conforms to our existing beliefs and discounting evidence that does not conform.
- Halo effect-where the impression of a person influences how we feel and think about their character.
All of these and the many other biases impact on can inhibit sales and can be leveraged to drive sales. All it takes is an understanding of the bias, how it impacts behaviour and how it can be manipulated. Human beings rarely make rational purchase decisions. This brings into question the value of marketing based on intuition.