5 BE Principles All Marketers Must Understand

 As discussed in my previous posts, understanding the consumer psyche and the irrationality of the human decision-making process is key to developing winning value propositions or product features to test in the market. Here is a discussion of 5 Key Bhavioral Economics (BE) principles (among dozens) that all marketers should not only understand but internalize. 

Power Of Free: Can reducing the price of two commodities by the exact same amount, compleletely reverse consumer preference of one over the other? Traditional economics says NO. But indeed it is possible.

A group of researchers offered participants of a study a choice between purchasing a Hershey’s Kisses chocolate for 1-cent ($0.01) or Lindt Lindor chocolate truffle for 15 cents ($0.15). The participants, recognizing this as a good deal since the price differencial in a supermarket would be larger than 14 cents between the two options, overwhelmingly chose the latter. However, when the price of both was reduced by 1 cent, thus making Kisses free and the Lindt Lindor for $0.14, the preference completely reversed with an overwhelming majority choosing Kisses!

What happened here? Nothing had changed–consumers would still ge t the same amount of incremental joy (consuming an exotic truffle vs. a regular candy) to the same amount of incremental pain (spending $0.14 more). The preference should not have changed. So why did it? Well, our response to price reduction becomes very non-linear when the price reaches “free”. We just love the word “FREE”. It evokes unreasonably positive feelings in the brain. Just the sight of the word “free” releases large quantities of dopamine in our brain to make us feel happy, and we end up responding irrationally.

So how does this play out in the real world. We get inundated with “free” offers every day and may believe that this does not affect us. But consider two economically identical deals– one messaged as ‘buy 1 get 1 free’; the other messaged as a volume discount deal as ‘get 50% off if you buy two’. Which one are you more likely to respond to?

Dominated Alternatives: Can introducing a third decoy option make you more likely to choose the option I secretly want you to choose?

Consider this scenario at the Economist. Potential customers were given the two subscription offers shown below– essentially an ‘online only’ subscription for $56, and and ‘online + print’ subscription for $125.


A large majority of people chose the first option ($56), although the second option ($125)was preferable to the publishers. They then introduced a third decoy option, that they knew nobody would prefer–$125 for print only. As expected no one chose the third option, but something magical happened! An overwhelming majority now chose the second option ($125 for online+print)! The mere introduction of this third option, made option #2 look very attractive–you were getting online version for free now!

What happened here? Well, this goes back to the idea that consumers have a very poor understanding of what a commodity is truly worth. They had no idea what a print or online subscription of the Economist is truly worth in $ terms. The first scenario with two options they had nothing to compare either option to. But with the introduction of the third option, option #2 and #3 are comparable and #2 wins handsdown (you are getting online version for free after all !) . Option #1 has no comparable so it gets left out.

This principle has been demonstrated successfully in many different scenarios. The most bizzarre, according to me, is one of dating. Pariticipants of this study were shown pictures of 3 individuals of the opposite sex and asked which one would they prefer to go out on a date with. Only, there were only two individuals in the pictures, the third was a digitally altered slightly inferior version of one of the two. So think of it as A, B, and inferior B (say B’). An overwhelming majority chose B in this scenario! The idea is the same–no comparable for A, so A gets left out; B and B’ look similar, B being more attractive. Hence B wins in a large majority of cases.

Next time you are evaluating vacation packages, or buying a home, pay attention to how different options are being positioned. These professionals have figured this stuff out through experience, even if they dont articulate it this way.

Irrational Value Assessment: Are you more likely to admire a $5 bottle of wine, if I lied to you and told you that it costs $45? Research says you are. Members of the Stanford Wine Club were invited to taste 5 bottles of wine and rate them based on their liking. Only, there were actually only 3 different wines in those bottles– two wines had two bottles each. Each bottle was marked only with the price tag and nothing else. Some of the same wines were marked at significantly different prices. For example, the $5 wine and the $45 wine were actually the same, the true cost being $5. There was a clear correlation between the rating of the wine and the price tag — more expensive wines got systematically higher ratings. So the $45 bottle of wine got a significantly higher rating than the $5 bottle, although they were the exact same wine!

In another experiment, the same group was asked to rate the same wines again. Only this time even the price tags were absent. The cheapest wine was ranked the highest in this case!

Now, before we start calling these wine-experts snobs, consider this. Prozac was tested against a placebo. Only, the placebo was sold at a higher price ($2.50 per pill) than Prozac ($2.00 per pill). Placebo outperformed Prozac!

Consider another experiment, where students were given a cafeine+sugar rich drink that was supposed to improve their alertness and focus in the short term. Their task was to solve as many puzzles as they can. Half of the group was asked to pay the full price of the drink, an the other half was given a significant discount on the price. The group that got the discounted drink, solved 30% fewer puzzles! This result has been consistent in multiple such studies over time.

So what is going on here? Well, turns out that we inherently expect cheaper stuff to be inferior. This feeling runs so deep, and its effect so profound on our brain, that the cheaper stuff truly ends up having inferior performance. It becomes a self-fulfilling prophecy. So the folks from Standford Wine Club, were not being snobs when they rated the ostensibly more expensive wines as tasting better. They truly did enjoy the wines with higher price tags more. This was demonstrated by the increased activity the pre-frontal cortex of the brain, when a the same experiment was done under an fMRI machine. Consumers of Prozac, deep within, expected a poorer performance compared to the more expensive Placebo. This expectation and conviction was so strong that it did create inferior performance in the body.

Decision Paralysis: Can reducing the number of options available to consumers, actually increase sales? Turns out it can!

In a study to prove this point, researchers sat down in a supermarket with bottles of Jam on display. The expectation was some users would stop by, fewer would taste, and yet fewer would purchase. One group sat with 6 varieties on display, and the other with 24 varieties on display. While more people stopped by in case of the 24-jar display, the number that bought was 10-times less than the 6-jar scenario (3% vs. 30%).

Jars Frank Cooper's jam

Jars Frank Cooper's jam (Photo credit: Wikipedia)

What is going on here? We thought more choice is what consumers want. Turns out, when faced with too many options, we are unable to evaluate them all, and end up deciding not to buy at all. This has been demonstrated in many different situations. In a company with a voluntary savings program the pariticipation in the program fell by 2% for every 10 mutual funds added to it.

At the heart of this finding is our inability to process too much information. This concept is known as cognitive load, which incidentaly does have a magic number — 7 (+/- 2). Consider the study where participants were told (falsely) that they were participating in a study on long-term memory. They were asked to memorize a number, walk down the hall, wait for sometime, and repeat the number from memory to a different researcher in a different room. Half the group was given a 2-digit number, and the other half was given a 7-digit number. But as the participants walked down the hallway, there were refreshments available with a choice of a decadant chocolate cake, or a cupu of fresh fruit. This was the real test — exercising self control when you mind is occupied. The study found that a majority of participans in the 7-digit group chose the cake, while a majorit in the 2-digit group chose fruit.

What is going on here? Turns out that the part of the brain that is occupied with memorizing irrelevant illogical information such as random digits, is the same (pre-frontal cortex) part that is charged with exercising self control. Remembering 7 digits is a tough task–it is approaching our cognitive limit. The brain is so preoccupied with trying to remember those numbers, that it literally does not have the ‘bandwidth’ to exercise self-control.

Attribute Priming: Can just talking to customers about a certain attribute of the product, make them desire that attribute more? Research says YES!

Consider the following study. Researchers approached customers planning to buy laptop computers at an electronics store. Half of them were asked about their memory needs, and the other half were asked about their processor-speed needs. This was not steering or leading by any strech. Simply asking them what their needs were in those areas. Turns out, that the group that was asked about the memory needs ended up buying computers with higher memory, and those in the other group ended up buying computers with higher processor speeds. Just getting them to think about certain attributes of the product affected their decision in favor of that attribute.

In a different study, where people were in line to pick up either yogurt or fruit, half of them were asked how they felt about yogurt, and the other half were asked how they felt about fruit. Later it was found that just talking to them this way, greatly biased their decision about what to eat.

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