As a freshman at university, one of my favorite classes was microeconomics. To this date, I remember learning about the price elasticity of demand. The basic premise is that if you decrease the price you increase the demand and vice versa. It makes perfect logical sense and it works … sometimes.
Then, some 15 years ago, I delved into the fascinating world of Behavior Economics and Behavioral Science principles. Once, I was explaining some of those principles at the company conference of one of the leading premium tire manufacturers, when one of their representatives from a wealthy Arab country said to me “I know exactly what you mean. We had a problem with sales. We spoke to customers who said they wanted the best tire and realized that the price also indicated quality. So we actually increased the price … and sales jumped”. This story for me is illustrative of the difference between traditional economics and Behavior Economics.
Difference between traditional and behavioral economics
Traditional economics operates on the assumption that individuals are rational actors, making decisions based on careful analysis of costs and benefits. However, Behavior Economics, a branch of Behavior Science, paints a different picture. It recognizes that humans are not always rational and are often influenced by cognitive biases and heuristics.
Consider the concept of defaults. In traditional economics, the default option is assumed to have little impact on decision-making. However, research in Behavior Economics has shown that defaults can significantly influence our choices. For example, when faced with the option to opt-in or opt-out of organ donation, countries with opt-out policies tend to have higher donation rates. This demonstrates how a simple change in the default option can have profound effects on behavior.
Solutions to behavioral challenges are often simple, clever and elegant
Think about this: Do you have a behavioral challenge at work?
- Want to make your ad to be noticed more?
- Want customers to click on that ad?
- Want customers to move on to the checkout?
- Want customers to buy your product?
- What to make customers use your products/services more often?
In Japan, they had a behavioral problem. In 2013 there were 221 incidents with people who fell from platforms at stations – a figure that has doubled over the last 10 years. And of that, alchohol-related incidents rose 4-fold.
Conventional reasoning and logic assumed that drunks would wander closer and closer to the ledge and eventually fall off. You can imagine that this is not only a tragic loss of life but it also causes havoc in the transport system.
So how do you resolve this problem? Use flyers to inform people of the dangers of falling off the platform while drunk? Naah… Well, you could install electronic gates and fences that prevent people from falling on the platform, but these come at the cost of 1 billion JP¥ ($9 million) per station.
Then a team from West Japan Railway Co. (JR West)’s Safety Research Institute examined security camera footage in 2014 of 136 intoxicated people who fell onto the tracks and made contact with trains.It found that 60 percent fell after suddenly standing up from benches and elsewhere and then heading straight toward the tracks. The result shattered the common notion that most such accidents are caused by people standing or walking too close to the platform’s edge.
So what solution did they implement? They simply turned the benches by 90 degrees so that they were not facing the trains. See below left for the conventional platform seating and below right for the newly reoriented seating.
In UK, rail authorities had another problem. Passengers used to complain about trains being late. Then the authorities introduced signboards to the platforms to provide real-time information about train delays. They didn’t do anything about train punctuality but the number of complaints dropped dramatically.
Similarly, a hotel had a problem with guests complaining about the elevators being slow. One option was to seek a costly new elevator system that runs faster. Instead, the management installed mirrors near the elevators and inside them… and complaints stopped.
These examples show how human behavior is highly susceptible to context and psychology. In the case with the trains punctuality, one of the principles of the psychology of wait time says that “unknown wait” feel longer than known wait. Thus the signboards alleviate that psychological pain. Another one, as in the hotel example, states that “unoccupied wait” feels longer than occupied wait and when they install the mirrors … well we all know how we can’t resist looking ourselves in the mirror and then time passes by seemingly faster.
There is a lot of psychology involved when it comes to pricing as well. The value that people assign to something comes from comparison. So if you change the reference point, you could push forward the product you want to sell more of without having to touch the price.
How about decision-making? Does the order in which we make decisions affect our choices? Think about buying a car. You may be facing a decision to choose between 4 styles of gear shift knobs, 13 kinds of wheel rims, 25 configurations of the engine and gearbox and 56 colors for the interior. So do you start with the bells & whistles first or with the toughest decisions? Well, a German car manufacturer found that the difference depending on which of these you start first is an extra $1,500 per car. I’ll share this research with you in an article about choice architecture.
As we talk about context and car manufacturers another interesting example comes from Honda. Traditionally, most car-buying negotiations are conducted by a sales person and their customer at a sales desk within the car showroom. Honda, however decided to test a more subtle approach to see if it made a difference to car sales. To test for the effect of the unconscious experience, they created a so-called ‘blue room’; an enclosed blue space separated from the main showroom, with comfortable seating and relaxed ambiance used specifically for the final part of the sales process. Would the blue room with its sub-aural classical music have a positive effect on car sales?
They found that it had no effect in the number of sales, because customers had already made their minds whether they’d buy or not. But, it had an effect on the profitability of sales. Blue Room sales were 37% more profitable than those carried out on the showroom floor! Turns out that making people more comfortable made them hassle less about price and going for a few more extras.
Now think about this question, does the purchase quantity limit (ex. limit of 4) influence how many items from a product you buy?
To test this, researchers worked with three grocery stores where they put a promotional stand with Campbel’s soup cans on display. Over multiple days a sign announcing “Campbell’s Soup Sale – 79¢ / can” (a discount of 10¢ from the normal price of 89¢) was on display with either:
- no purchase quantity limit
- a limit of 4
- or a limit of 12.
Customers who saw no reference to any limit purchased (on average) 3.3 cans of soup while customers who saw a limit of 4 bought 3.5 cans of soup. Where it gets really interesting is the third condition. The limit of 12 signage increased sales per buyer by 112% compared to the no limit per — from 3.3 cans per buyer to 7.0 cans per buyer.
This change in behavior is attributable to two factors:
- Artificial scarcity: The limited availability of items even though capacity exists to supply them.
- Anchoring bias: When individuals use an initial piece of information to make subsequent judgments. In this case anchoring people’s minds on 12 cans made people more likely to purchase higher quantities.
As you can see a slight change in a sign can lead to a big change in behavior. Behavior Science looks to shed light on people’s (ir)rationality and explain why people behave the way they do.
I’ll be writing about more principles of Behavior Science in a series of posts here where I’ll answer questions like:
- What is the one word that gets people to agree with you before you’ve finished your sentence?
- How to convince people who claim they’re not in the market that they actually may be?
- How to prompt people to purchase a product that they don’t see an immediate benefit to?
- And many other scientifically proven ways to increase your leads and sales…