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Behavioural Economics – why the way you shop is irrational

Ever wonder why shops offer three sizes of a product, or why the word free is so powerful, or why a customer won’t drive a couple of miles across town to save £25 on a product, but will cut out the Tesco voucher to save 25p on a tin of baked beans? Used mainly by marketers to sell goods and services, Behavioural Economics tries to understand why consumers act the way they do, often trying to make sense of the irrational behaviour many consumers have.

Behavioural Economics

BE covers a wide range of areas and this article is unlikely to provide the in depth analysis that some with a deeper interest may want. Instead it provides a flavour of what the topic is about and may provide some food for thought.

All the examples contained within this article are real examples and have been tested by behavioural experts and professors, some from Harvard and MIT.

Relativity

Relativity is perhaps one of the most important tools for anyone involved in BE. As humans it appears that we are unable to decide if a product or service is of any value unless we can compare it with something similar. Think for a minute about how much choice is available for just about any product or service that you buy and why there is so much choice. After all, surely it is cheaper for producers to make one product instead of having to make several. Yet if we think about it in more detail, we can see that while it might satisfy a customers’ desire to have a greater choice of product, it also works for the supplier and here’s why.

Some years ago, a department store started to sell bread makers and chose a make and model from a supplier that they thought their customers would like. After several months, sales of the bread maker were very poor and they couldn’t understand why. After hiring a marketing consultant, they added a second larger and more expensive bread maker to the range and almost immediately sales of the bread maker took off – why? Well straight away customers could compare products; they could see the relative value of the smaller lower priced model was better than the larger more expensive model. It also took up less space in the kitchen.

While the example above may have helped the shop to sell a product, other techniques are used to get customers to spend more. It appears that as humans we like to be guided into making a decision, therefore having ‘landing lights’ to help us make the decision makes the process easier. Marketers understand and use this knowledge. By having the least expensive and the most expensive as a guide marketers know that as customers we are more likely to remain in the middle ground. For this reason many products are sold in small, medium or large. Sure, the shop would like us to buy the large, but what they really want is for you to trade up from a small to a medium.

Another example of this was used by the Economist magazine some years ago. The economist ran a promotion where they had a subscription offer that allowed customers to buy an online subscription for £59 per annum, a magazine subscription for £159 per annum and an online and magazine subscription also for £159 per annum. Now why did they do this? Was it a mistake or a clever marketing ploy? Well as consumers, we look for value and here we can see that while we are spending £100 more per annum, we believe that we are getting a bargain as we are getting the online subscription for free. We aren’t really thinking about the fact that we have had to spend £100 more.

This technique is also used by many restaurants. Producing a profitable menu is not just about what the chef thinks will sell, it is a carefully crafted document designed to make customers buy more.

Many people may think that the most expensive item on the menu would be the most profitable for the restaurant, but they would be wrong. The most expensive item is there to set the marker. Sometimes they are outrageously more expensive than the second most expensive item, why? Well evidence has shown that customers tend not to choose the most expensive item. They are more likely to choose the second most expensive, which usually has the highest profit margin.

Making the decision for you is also a common technique. Often restaurants will have a menu item and next to it they may recommend a wine that they believe would be a good accompaniment. The wine will probably be a good accompaniment to the meal, but it may also be the most profitable to the restaurant.

Free

“Free” is possibly one of the most powerful words in any business. Using the word free appears to create an irrational behaviour in people that can be hard to control. Some years ago, Hoover advertised free flights to the US if a customer bought over £100 of goods. Sales exceeded all expectations and almost bankrupt the company.

Hoover bosses were sacked and the company was taken to court for breach of promise. They really did not expect demand to be so great. But free can work in much smaller ways as well. Imagine you were buying a new TV and you were struggling to make a decision between two similar TV’s, the salesman offers to throw in a set of HD cables if you choose the more expensive one. Which one do you choose?

Value

In today’s world we all look for value, yet we make irrational decisions that social scientists and observers are still trying to understand. Imagine you are buying a new suit or outfit for work. You are in the shop and have chosen the one you want, but as you are about to take the item to the cashier, a customer tells you that the same outfit is £25 cheaper in a shop a couple of miles away in another shop. Experiments carried out by a Harvard professor found that the majority of people did not travel the few miles to the other shop and buy the item for £25 less, but carried on with their purchase, yet the same people will cut out vouchers to save 25 pence on a tin of beans. Why?

Well it seems that several things are going on here. First, the customer has made a psychological decision to buy and is seeking fulfilment. By not carrying on with the purchase that fulfilment isn’t met. The second and slightly related reason is that we seem to make a mental calculation about relativity. £25 on a £250 outfit does not seem large, which it isn’t at only a discount of 10%. However a 25p voucher for a 50p tin of baked beans represents a 50% saving. It may sound crazy, but humans actually think like this.

Honesty symbols

Perhaps some of the most interesting work in BE has been around honesty and how you can use symbols to encourage it. At Newcastle University, administrators had a problem with the theft of bicycles from a student bike shed. CCTV cameras were expensive to install so instead they painted on the wall overlooking the shed a pair of eyes looking down. Following their introduction thefts reduced by 66%.

In another experiment, three groups of students were asked to sit a general knowledge test. The questions were the same for each group and were designed to test difficult mathematical, aptitude and general knowledge questions. The first group completed the test in the normal way and handed their papers in to be marked. The second group were told that they could mark their own papers and give their results to the adjudicator and take their papers away. No one else would see their paper. The third group could also mark their own papers, but honesty symbols were placed both in the room and on the question paper. This included a painting of Christ on the wall, symbols of justice and even a pair of eyes, similar to the example above.

The results were startling even to the researchers. The second group who could mark their own paper and take their paper away with them marked their paper over 20% higher than the control group who had their papers marked by the tester. The third group who could also mark their own paper, but had a number of symbols placed around the room and in the question paper marked their paper less than 5% higher than the control group. It appears that when we are reminded by symbols of honesty and truth we are more likely to behave accordingly, whereas if we think no one is watching or we can ‘get away with it’ some of us will be tempted to see if we can.

This shouldn’t really surprise us. Perhaps the best example of this is a confessional in church. The symbols themselves do not need to be big or ‘in your face’. They just need to make the person pause for a moment. It seems that if we feel that we are being watched, we modify our behaviour.

Conclusion

So what can Local Government learn from these examples and this research? Well it appears that central government has picked up on this research and some years ago set up the Behavioural Insights Team to look at how we can influence behaviour. One study looked at reducing fraud and error in the public sector and has used some of the techniques mentioned above.

As an example, in North Somerset and Redcar & Cleveland, we have added an honesty symbol to many of the documents that we use. We have also moved the declaration to the top of the form instead of the end. The theory being that if you have to go to court, you don’t give an oath to tell the truth after you have given evidence. We want our customers to be honest about the information they provide, and if we can remind them that there are consequences to providing incorrect or fraudulent information before they provide information we can help to reduce fraud and errors.

The next time you are out and about, see if you can spot where organisations have used BE. I recently went into a busy shop to buy some stationery and as I walked down the aisle, I saw a full size cardboard cut out of a Policeman standing in the corner; a simple technique to reduce shop lifting. If you have any examples or ideas about how to use BE in the public sector we would love to hear about them.

Author

Neil Ranadé MBA is Customer Strategy Manager, Service and Solution Development, Local Government, with Liberata.

5 comments

  1. I enjoyed reading that Neil, it’s very relevant to some books I am reading at the moment. TESCO are the masters of BE and took shopping to new levels using data collected on clubcards.

  2. There was a famous study done on a tea club that is funded by an honesty box system. Out of the blue a poster appeared above the box with either a bunch of flowers or a set of eyes above it. The results were concrete, a definite increase every week the eyes were used.

    We are watching you ;-)

  3. Nice article Neil but it feels slightly sad that we should all be so manipulated. All of my youth was spent learning the value of honesty and openness and we are encouraged to be ‘transparent’ in local government. Accepting this is the real world, I can’t help feeling disappointed!

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