How behavioural economics affects consumer buying and alters their purchase patterns?
Ever since high school, economics has made a bold assumption: consumers are rational, which means they act in their self-interest to maximize their satisfaction while making economic decisions. However, the very notion of behavioral economics rests its case on the idea that people are not rational and more often than not, take decisions on a whim. Consumers are driven by the “perceived” value of a commodity and this “perceived” value of a commodity has a quirky relationship with the price of the product.
Fundamentally, a product will be purchased if and only if it is perceived to be giving the greatest possible benefit to the consumer, in relation to its cost, or in other words, the product is value for the money. Motivational psychology plays a key role in the marketing process: if firms can dive deep and decode the consumer’s decision-making process, they will (if they are rational) exploit the same for their benefit.
Consumer motivation is the “drive” behind a specific purchase. This “drive” is often subjective and is quite easy to understand, but at the same time difficult to master. As income levels rise, the role of perception of value creation becomes more relevant. Perception is defined as the way a person views, processes, and interprets an idea. Perception of one’s identity and that of the product go in tandem to affect the final consumption decision. For example, if a person views themselves as a ‘hardcore patriot’ and faces a consumption dilemma of two products- one which is local and the other which is a global brand, the person in ‘national interest’ is likely to prefer the local brand, even if that is mathematically not granting them an equilibrium state or maximum welfare, because they get a sense of contributing to national development. Another example can be the one when a person who perceives themselves to be rich and status-conscious faces a dilemma of two car brands: BMW, a luxury brand, or Hyundai, a middle-class brand. Via the classical cardinal approach, they should buy Hyundai as that grants them maximum welfare, but they choose the BMW solely to maintain or further develop their status in the society. In the above examples, national interest and status were the “drivers” of the decision-making process.
Having understood the notions of perception, motivation, and the significance of psychology in our context, the following are a few brands that use behavioral science to impact consumer decisions:
Nike is a great example of creating a solid perception. When we think of Nike, we equate it with high-level sports and sports stars. Adding to this is their tagline, ‘Just do it,’ always leads to a subtle sense of motivation or the urgency to “do it”, ‘pushing’ the consumer!. Although one can argue that the nature of the industry and its competitors is much alike, Nike has sustained itself with relatively higher prices than its peers. In a survey, the same was reflected as around 71% of the sample population reported Nike as their preferred sportswear brand over others, the price is constant.
Amazon is infamous for using behavioral science tactics to induce consumers to spend more. During the time of their bi-annual sales, Amazon markets a sense of urgency that creates an urge within the consumer’s mind to spend more. “If you purchase this within the next x hours, you get 40% off,” rationally, if you don’t spend at all, you save 100%! But consumers get tricked and spend more, predatory pricing aside, offering a myriad of services like Prime, free delivery, and pantry under one umbrella leads to a sense of worthiness among the consumers. Further, another interesting trick they use is the “Decoy Effect” wherein a few bad and unattractive choices for similar products lead to more sales of the better product. As it has a large number of sellers under its operations, it positions the better available products with the unattractive ones and leading to better sales.
Another very significant and profound observation of the decoy effect is in the cinemas. Usually, popcorns are sold in three different quantities-small, medium, and large. These are priced so smartly that there is very little difference between the medium and large size popcorn. What this does is leads to an enhanced sense of value in relation to the large popcorn with respect to the medium one that consumers are willing to sacrifice an extra payment for the largest share. Also, there is a very common example of Starbucks, which uses a similar tactic with a different objective. They offer a “grande” size coffee, which is highly-priced, and 2 other size options with a stark difference in price. Most of the consumers choose the middle option as it seems a great bargain as compared to the expensive “grande” coffee. A lot of traditional restaurants also use this to good effect. Along the same lines, the Nudge theory is often used to a good effect by marketers, economists, and even politicians. A very interesting case study, in a subtle way, explains Nudge Theory, in UK people with tax arrears, were sent messages with social normative themes like 9 out 10 people in your area have paid the taxes; this made the non-payers feel like outliers and thus instilled a sense of urgency and indirect motivation to do the needful.
Economics is touted as the base of all management theory and behavioral economics is now gaining steam as a potential disruptive theory that is now making marketing more fun and effective than ever before. Economists and Marketers now understand that we are emotional beings after all and our emotions “drive” us far more than our rational brains do. Case Studies of giants like Amazon, Starbucks, and Nike give us an insight as to how simple and intuitive changes in pricing and branding strategies can potentially inflate sales and create a USP for brands in today’s hyper-competitive globalized world.
Nudge Theory- Nudge is a concept in behavioral economics, political theory, and behavioral sciences which proposes positive reinforcement and indirect suggestions as ways to influence the behavior and decision making of groups or individuals.
Article by: Sarthak Dave (firstname.lastname@example.org)
Edited by: Aarushi Kataria