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Behavioural economics improves digital marketing strategies

Wed, 26/03/2014 - 15:12

Behavioural economics seems to be the buzzword in the digital marketing industry lately. I found myself asking whether this was someone’s attempt at thinking about a concept or topic too much, or trying to find a relationship between two things where there was none to start with. When I started digging deeper, I quickly realized how relevant and important behavioural economics is to digital marketing strategies.

In a nutshell, economics on its own is based on the premise that consumers make rational, informed decisions about which products to buy or services to use. Under this assumption, market forces will result in the best producers with premium levels of service and quality, leading to a society and the economy functioning in the most rational and effective way.

Behavioural economics, on the other hand, is the idea that people do not always make strictly rational decisions, somewhat undermining the models of classic economic theory. That being said, by following the basic principles of behavioural economics, human behavior, and decision making in general, we are able to gain valuable insights into the minds of consumers and their online behavior, which in turn helps us to mold top-notch digital conversion strategies.

1. Default Human Habits / Knowledge Bias

As humans, we tend to fall back on habits and behaviour which we know and feel comfortable with. We do this because these are methods we have followed, tried and tested and, in the end, were successful and required less cognitive effort.

The same principle applies to websites - consumers will fall back on the same e-commerce site as they know the checkout process and they know their order will reach them on time. Trying a new site not only requires more cognitive effort as a consumer needs to re-learn how to purchase online from the new site, but the website also needs to go the extra mile to convince the consumer that the end products/services are worth the effort.

It is precisely this behavior that is so important for businesses to understand in order to turn new users into returning customers on their websites. Websites should have simple navigation, an easy to use layout and, most importantly, the checkout process needs to be as user-friendly as possible, resulting in less cognitive difficulties for new users. This is another reason why trust signals like secure check-out icons and product reviews are so important on a website; they act as a way to convince customers that the risk of using the new site is minimal.

2. Social Proof

Social proof refers to the tendency of people to copy what others do. The majority of consumers will wait for the ‘risk-takers’ to try something new and will only follow once they have the ‘OK’ that everything is fine. So in essence, people assume the actions of others reflect as correct behavior for a specific situation.

Very few people are comfortable being the risk-takers, which is why we would rather ask another person’s opinion of a website, before purchasing items from it. We want someone else to tell us that something is worthwhile before we take the risk.

This behaviour is exactly why customer testimonials are crucial on both business-to-business and e-commerce websites. Testimonials show that your business is trustworthy and that you deliver on your promises. In today’s society, more and more online users are informed users; consumers like to shop around. While doing so, they evaluate the risk of a website without necessarily realising it. Having testimonials on your site can put you ahead of your competitors, because a user will assess the risk of your site as far lower than a competitor’s site lacking customer testimonials.

3. Anchors / Decoy Effect

Anchoring is a highly powerful tool, especially online, because of the lack of social interaction and persuasion of a sales person. An anchor is something that serves as a reference point for further comparisons. It is best to explain this concept with an example:

An online travel site offers two packages to Thailand (which can be bought online) of very similar quality to the general public. Package A costs R9 000 and package B costs R13 000. Studies show that most users will opt for package A because it is cheaper. Furthermore, the price difference between package A and B is not too large, therefore consumers will assume that there is no big difference in the quality of the two packages. Now suppose that the online travel site introduces a third package into the mix, package C, which costs R17 000. Further studies have shown that most people will now opt for package B as it is no longer the most expensive item. Package A now seems too cheap and users will question whether it is of inferior quality, while package C will be considered too expensive.

The online travel site might not have wanted to sell large quantities of package C; their main goal might have been to sell package B. Therefore, by strategically placing a ‘decoy’ package, package B now becomes the preferred option.

This is a great tool for marketers to use, because by anchoring on a med-priced product first, the user will compare all other prices to that product. Therefore, placing more expensive products among cheaper options that you actually want to sell can drastically increase your sales.

Ordering is another important part of anchoring. For example, suppose you have an online book store and are choosing the order of books within a category before any filter is applied. According to behavioural economics, it is best to place the most expensive book first. This is because people read from left to right and top to bottom, so they will anchor on the most expensive book first and compare all other books to their anchor. All other books now appear to be much better value than the original anchor. If you had arranged the books from the cheapest to the most expensive, the cheapest book would be the anchor, in which case the user would compare all other books to the cheapest book, making all other books seem far too expensive.

4. Aversion Loss

Loss aversion refers to the tendency of a person to strongly prefer to avoid losses compared to acquiring gains. Studies have shown that people experience losses in a very different way to gains, specifically, people experience about twice as much pain with a loss as they experience pleasure with a gain, therefore, people are highly loss averse, which influences how people behave and make decisions. For example, if you own a business-to-business signage company and are promoting shop front signage, you could use either of the following text:

  1. You will save money by replacing your shop front signage regularly!
  2. You will lose money by not replacing your shop front signage regularly!

It is best to use line 2. Why? The answer is simple - the second statement is far more compelling because you are drawing attention to the potential monetary losses that a person could face because of an existing situation, bringing out the loss aversion of the person.

This example could apply to an e-commerce store too. For example, if you have a promotion whereby a user can save 50% on online store items over the next 24 hours, you could use one of the following two lines:

  1. Save 50% on selected items for the next 24 hours only!
  2. Don’t miss out! 50% discount on selected items for the next 24 hours only!

Option 2 implies that a user will be missing out, or losing out on the sale. This generates the feeling of loss aversion and because humans do not want to be faced with a loss, it is far more compelling from a sales point of view.

5. The Power of 'Free'

People love free things, whether it is free services or free products. Behavioural economists have even gone so far as to say that people lose their minds when confronted with the word “free”. In the book Predictably Irrational, Ariely argues that “free” is an emotional hot button that short-circuits people’s rationality. In many ways he is quite correct. When faced with a free product or perhaps a task to do in order to win a competition, people will go to extreme lengths.

This behaviour trait can be used to the advantage of digital marketing strategies. For example, if you have an e-commerce store and would like to increase your data base, using free items is a good way to achieve this goal. For example, you could start a competition to win a free product, but in order for a user to enter, they need to refer the site to a friend or sign up to the newsletter. That way, you will expose your site to a new user and gain a new user for your data base.

Another option is the good old “Buy one, get one free” notion. It is essentially the same as a “50% off discount” but it sounds far more compelling and contains the word “free”, which we now know has a massive effect on human behaviour and decision making. Alternatively, if you want to sell more handbags, for example, it would be a good idea to incentivise that product with a smaller free product, such as a notepad or a sunglasses case, if it is financially viable for the business. It is important to make sure the extra free product is related to the hand bag which you want to sell. Users will find more use in the products together and therefore the risk of purchasing the product will seem much lower.

Behavioural economics can explain many phenomena in life - financial decisions, purchasing decisions, and educational decisions. In the digital marketing industry, it is especially important to understand the effect, specifically because there is no sales person who can persuade the customer to buy the product all you have is your website. Through adopting behavioural economics and decision making policies, strategies and principles, we are able to reach our final goal which is to turn new users into existing and returning customers.

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