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Feb 02, 2010

Behavioral Economics in Marketing: 7 insights to lift results

SUMMARY: Preview Email Summit 2014 keynote speaker Dan Ariely in this article from the MarketingSherpa archives. Both the article and his keynote focus on his insights as a Professor of Psychology and Behavioral Economics at Duke University and best-selling author.

Ariely delves into the irrational nature of many decisions, and how to apply these behavioral trends to your marketing. Among his insights: focus groups are bunk.
Most people think they have a good handle on why they make certain decisions. Dan Ariely, Professor, Behavioral Economics, Duke University, says otherwise.

"People often think that theyíre making decisions, but in reality their decisions are very much determined by their environment," he says.

Ariely performs simple experiments to uncover why people do what they do. He describes the results of many of those experiments in his book, "Predictably Irrational: The Hidden Forces That Shape Our Decisions." Arielyís research suggests that decisions are less logical and more irrational than we expect — which is bad news for marketers trying to design campaigns to influence a personís decision-making process.

But behavior does follow trends, so we asked Ariely to share some of his most interesting behavioral insights, and what they mean for marketers. You might be surprised how simple changes in your approach can improve results.

Insight #1. Expectations modify experience

Expectations often impact perception. This is why people who to take a placebo instead of an actual painkiller might report less discomfort after taking the pill — they were expecting the pill to work.

This insight applies to how products are marketed in general, Ariely says.

"When you create high expectations, people are going to experience something better. When you create low expectations, people are going to experience something worse."

It is worthwhile for marketers to talk up the benefits of their products and services — but they shouldn't go overboard. Setting expectations too high can definitely backfire, Ariely says.

Insight #2. People are uncertain of a productís monetary worth

Marketers have long known that the price a consumer is willing to pay is relative. Itís the reason why someone would pay $10.00 for a cheeseburger at a sporting event, but only pay $1.00 for the same burger at a fast-food restaurant while driving to the game.

Whatís less obvious is how easily the price a consumer will pay can be altered.

"The way a product is presented to us is going to determine how you end up thinking about it and that thinking is going to influence us for a while," Ariely says.

For example, we recently published a MarketingSherpa case study in which a retailer of childrenís birthday party sets created a page offering "birthdays under $100." The price point was well above the teamís average order value. Orders made through this page had a 35% higher average order value than the site as a whole.

This, Ariely would argue, is because the marketer got visitors to consider paying $100 by visiting the page, and that high price point stuck with them.

Insight #3. People place increased value on their own items

People consider their possessions to be worth more than the same items owned by other people.

"Kids are a good example of this," Ariely says. "We all think our kids are wonderful because theyíre ours."

Marketers can encourage consumers to pay more for products in which the consumers feel partial ownership. One way to do this is through customization, Ariely says. Customization is often thought of a way to make a product match a customerís preferences.

"Where I think customization can be much more useful is to get you to put more of 'you' in the product and make it more valuable."

Insight #4. People hate losing things

Through his experiments, Ariely noticed that people dislike losing things more than they like gaining things, he says.

Marketers can apply this concept to bundling. When trying to sell customers a bundle of products, donít let customer assemble products on their own. First, present a complete bundle and ask customers to remove the items they donít want.

When you frame it as "giving stuff up," Ariely says, customers will likely buy more items than if you asked them to gather the items they wished to purchase into their own bundles.

Insight #5. Donít put too much value in focus groups

Ariely has little faith in peopleís understanding of their decisions. This is why he considers focus groups to be a risky prospect.

"One of the things marketers do is get a group of 12 people who know very little about their business and ask them deep questions about it. And that, I think, is a recipe for disaster."

Intuition is flawed, Ariely says. Instead of asking people for their opinions, experiment instead. Run tests that will conclusively reveal peopleís motivations and reasoning.

"Don't rely on what people tell you. Rely on what they actually do."

Insight #6. Reach consumers at the right time

Arielyís team ran an experiment in which they stood outside a grocery store handing out coupons for a product sold in the store. They then went in the store and handed out the coupons.

The team found that coupons handed to consumers before they entered the store had a dramatically improved response rate. "This is because when people are outside the store, they donít have a plan. Once they get in the store, they have a plan," he says.

The experiment underlines the point that marketers need to reach customers at the right moment in their decision making process. Once a decision is made, it will be very difficult to sway it in another direction.

Insight #7. Look at customer communication areas

The key places to test behavioral concepts are in areas where consumers interact and trade information with your company, Ariely says. These will be areas where you will have the most impact on consumer behavior.

Also, these lessons are applicable to more than just a companyís marketing. For example, Ariely ran a test for a major car insurance company concerned that customers were lying on their forms about accrued mileage.

The team tested asking consumers to sign the forms before filling them out. They found that people who signed first reported 2,700 more miles driven per year on average. This is because they considered the implications of signing the form before they completed it.

To see Dan Ariely give his keynote address on this topic, learn more about MarketingSherpa 11th Annual Email Summit 2014, held February 17 through 20 at the Aria Resort & Casino Las Vegas.

Related Resources

MarketingSherpa Email Summit 2013: Using buyer behavior in email campaigns

Marketing Data: Using predictive analytics to make sense of big data

What is Data? A discussion about getting value from your marketing analytics

See Also:

Comments about this Other

Feb 03, 2010 - JD of UCCI says:
Shouldn't the second sentence from the bottom of Insight #5 read: Run tests that will conclusively reveal peopleís motivations and reasoning. (It seems to me that the word "inconclusively" was used by mistake.)

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