Sunday, July 11, 2010

Irrational Consumers

Sometimes I want to weep for the human race. For example, take a peek at Christopher S. Penn's recent blog post "The sale is better because the sign is bigger." Chris is absolutely right that marketing can manipulate the mathematically challenged. And in his specific example, that is likely the correct analysis.

But what if we take a wider view? The field of behavioral economics has really taken off in recent years. It's best considered as a fusion of economics and psychology, and one of the more interesting veins of study involves irrational decision-making (see Predictably Irrational* by Dan Ariely for a great introduction). Classical economics has traditionally believed that people make decisions rationally (in other words, they choose the option that is objectively most advantageous for them); Ariely and others have shown that this is not the case. People encounter so many stimuli in everyday life that they have to take shortcuts when they made decisions. Otherwise, they'd be paralyzed by indecision. And those shortcuts mean that often the easy choice is not always the right choice.

There are many messages to take away from this. Here are a couple:
1. The human mind is truly amazing, with the myriad stimuli attended to and calculations made in a single day, often subconsciously. But it is also tremendously fallible and prone to manipulation.
2. When you are coming up with offers to incentivize customer action, it's important to test! Customers don't necessarily respond rationally. For instance, I am reminded of a company that did an email offer test of $50 off vs. 15% off. $50 was 15% of  the average order value ($350), so the offers were basically equivalent. The dollars-off offer pulled 170% more revenue than the percent-off offer, even though rationally a % off is better because the more you buy, the bigger the savings.

Think about it--what can you do to make your product/service the easy choice?

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