Taking a systematic approach to implementing findings from behavioural economics into a sales cycle can “unlock significant value”, according to McKinsey’sÂ Ned Welch. To help business do exactly that, Welch–in what, at times, reads a bit like a ‘dark patternsÂ guide for marketers’–has written an article looking atÂ four practical techniques from behavioural economics that marketers should use to persuade purchasers. The techniques:
- Make a product’s cost less painful.
- Harness the power of a default option.
- Don’t overwhelm consumers with choice.
- Position your preferred option carefully.
There’s not much new here, but the summaries are nice and succinct. From item four, I found this bit of grocery store choice architecture interesting:
Another way to position choices relates not to the products a company offers but to the way it displays them. Our research suggests, for instance, that ice cream shoppers in grocery stores look at the brand first, flavor second, and price last. Organizing supermarket aisles according to way consumers prefer to buy specific products makes customers both happier and less likely to base their purchase decisions on priceâ€”allowing retailers to sell higher-priced, higher-margin products. (This explains why aisles are rarely organized by price.) For thermostats, by contrast, people generally start with price, then function, and finally brand. The merchandise layout should therefore be quite different.
(If you don’t have a McKinsey account, you can read the article hereÂ or here (PDF).)
PraisingÂ Maurice Allais as the father of behavioural economics rather than Kahneman andÂ Tversky, Â John Kay introduces us to some of Allais’ ideas while simultaneously providing one of the finest arguments against the simplistic view of behavioural economics as the study of irrationality:
The skill of piecing together sense from fragmented and inaccurate information is a central attribute of human intelligence. Literal interpretation, and insensitivity to context, are not marks of rationality but mental disorders.Â [â€¦]
The [behavioural economics] experimenter’s trick is to construct an artificial situation in which normally sensible behaviour gives what he thinks is the wrong result. The “mistake” is detected in a meaningless problem designed solely to elicit the “mistake”. [â€¦]
Allais was less concerned to show that our behaviour was irrational than to argue that the premises of rationality itself were irrational.Â [â€¦]
Allais’ most famous experiment showed that we often treat very high probabilities very differently from certainties, although “rational” individuals would regard them as almost the same thing. But very high probabilities often are different from certainties: very high probabilities are usually derived from calculations whose relevance and validity are themselves uncertain. [â€¦]
Irrationality lies not in failing to conform to some preconceived notion of how we should behave, but in persisting with a course of action that does not work. Sometimes in modern economics and political life, there is a big difference.
The example Kay uses is a bit glib but does serve its purpose.That last paragraph, however, is the crux of it all.Â As you may have guessed, this is the Allais that designed the Allais paradox – an experiment in behavioural economics that shows the above wonderfully.
If the mental calculation required to determine the discount given on a product is difficult then we often misjudge the magnitude of the reduction.
This “ease-of-computation” effect for judging price reductions is obviously related to other recent studies looking at ‘cognitive fluency’ and is another way to manipulate and be manipulated through product pricing.
Consumers’ judgements of the magnitude of numerical differences are influenced by the ease of mental computations. The results from a set of experiments show that ease of computation can affect judgments of the magnitude of price differences, discount magnitudes, and brand choices. [â€¦] For example, when presented with two pairs of numbers, participants incorrectly judged the magnitude of the difference to be smaller for pairs with difficult computations (e.g., 4.97 â€“ 3.96, an arithmetic difference of 1.01) than for pairs with easy computations (e.g., 5.00 â€“ 4.00, an arithmetic difference of 1.00).
via Barking Up the Wrong Tree
Being prevented from obtaining something we desire simultaneously increases our desire for the item and decreases its eventual attractiveness. That’s the counterintuitive result from a study that shows the various surprising effects of “being jilted”.
We show how being “jilted”–that is, being thwarted from obtaining a desired outcome–can concurrently increase desire to obtain the outcome, but reduce its actual attractiveness. Thus, people can come to both want something more and like it less. [â€¦] In Experiment 1, participants who failed to win a prize were willing to pay more for it than those who won it, but were also more likely to trade it away when they ultimately obtained it. In Experiment 2, failure to obtain an expected reward led to increased choice, but also negatively biased evaluation, of an item that was merely similar to that reward.
It seems that by being unavailable our expectations are raised to an unreasonable degree and we eventually become disappointed. I guess this is a warning for those thinking of scarcity marketing.
When there is a medium placed between our effort and a desired outcome, we strive to maximise this medium regardless of whether or not it leads optimally to that outcome (think points or virtual currencies as a medium when attempting to obtain goods).
That’s my attempt at a concise summary of the findings from a study coining the phrase ‘medium maximisation’.
This example taken from the paper (pdf) and presented by The New York Times may help:
Students were given a choice between two simple tasks. One would take six minutes, and the students were told that they would get a gallon of Haagen-Dazs vanilla ice cream as a reward. The other would require seven minutes of work, and the payment would be a gallon of Haagen-Dazs pistachio.
Not surprisingly, since the second option involved more work and a less popular flavor, only about a quarter of the students chose it.
But the researchers also repeated the experiment with a couple of tweaks. In the new version, the six-minute task led to a payoff of 60 points, and the seven-minute task brought 100 points.
The researchers then told the students that anyone who finished with between 50 and 99 points would be given a gallon of vanilla ice cream. Anyone with 100 points would get pistachio.
Practically, there was no difference between the two experiments. But the outcomes ended up being very different.
In the comments of a previous post of mine looking at the denomination effect, the idea that “the greater the level of abstraction, the more ready we are to spend” was mooted. So it seems to be the case here.