BEHAVIORAL ECONOMICS
Key Points:
Choice depends solely on consumer perception not actual quality
Perception depends on how an object is described
People don’t consider objective reality, only perceived value
Lower reference points (or relative values) increase the perceived value
Immediate benefits are more highly valued than future rewards
Loss-aversion is a powerful motivator
Always present definite rather than possible loss-avoidance or gains
Discover the “herd mentality” to avoid rejection
Simplicity increases conversion rates
Perception
When a consumer is presented with information comparing your brand with the competition, the choice depends on how that decision-maker describes the brand, product or service to himself. We are vulnerable to how choices are described, so if you can invest in an approach and presentation (this could be advertising, your website, brochures, your elevator pitch etc) that frames the choice in a way that is perceived as having “more immediate value”, that frame will skew the buyer’s decision.
Decision Making
It has been shown that in situations with increased pressure or ambiguities, experts use intuitive decision-making rather than structured approaches — arriving at a satisfactory course of action without weighing alternatives. How this relates to your business is that people, in general, also take an intuitive approach when it comes to purchase decisions… and there are ways to present your benefits in such a way that prospects don’t even consider the alternatives.
Framing With Relative Values
A powerful way to increase the perceived value of your product or service is to “frame” the information by setting a reference point (often through “formal data”/statistics). For example, “the average sales conversion rate in your industry is 3-5%, but our proven methods offer conversion rates of well over 10%”. There might be cheaper and better options out there, but because of the use of an acceptable reference point, your option is perceived as the best.
Loss Aversion
Sometimes is is better to present benefits as a means to avoid losing something rather than a means to gain something, as loss-aversion is a powerful motivator, as well as framing information in a way that highlights “no-risk” outcomes (as opposed to “probable gain” outcomes). Some studies suggest that losses are twice as powerful, psychologically, as gains. For example, swap “get a $5 discount” (simple gain) with “avoid a $5 surcharge” (loss-aversion).
The Old School VS The New School
The traditional view would advise things like making a product that people like more, or charging less for it perhaps. Whereas, behavioral economics teaches us the importance of ideas such as convincing retail stores to display your product at eye level so people will see your brand first and grab it. There needs to be as much (or more) consideration regarding how people will perceive your product, service or brand as there is thought about how to actually make that product, service or brand better that it’s competition.
Herd Mentality
Because successful sales and marketing messages match up with existing majority views, it is important to understand that “re-educating” a person won’t work. You can’t tell people, ‘You’re wrong, and here is what to think,’ as people tune out or forget things that are inconsistent with their beliefs. This is why a “niche” approach is such a great one, because you’re heavily focussed on a specific targeted group of consumers who already agree that what you’ve got is important, useful or worthwhile.
“Now” Versus “Later”
Where ever possible, benefits should be presented as an immediate gain to the consumer due to “intertemporal choice” where people tend to value immediate rewards higher than future rewards. There’s a fundamental tension in people between seizing available benefits in the present, and being patient for benefits in the future. People definitely want instant gratification, but also desire future outcomes. If you ask people, ‘Which do you want right now, fruit or chocolate?’ they say, ‘Chocolate!’ But if you ask, ‘Which one a week from now?’ they will say, ‘Fruit’.
Equal Energies Produce Real Results
So you can see (I hope) that there should be as much intellectual energy devoted to these design and phrasing choices as to the choice of the product/price details in the first place. Behavioral economics can help us design these choices in much more effective ways, which lead to genuine top-line improvement.
For more information about how Behavioral Economics can vastly improve your sales and advertising efforts, please refer to “Future-Proof Brands”.
Matt Cumming is a branding consultant, graphic designer, website developer and online marketing specialist based in Melbourne (Australia) who works with clients globally to create truly successful, profitable, high-profile businesses. For more extensive information about this topic, please refer to his book “Future-Proof Brands“.
