7 Lessons Digital Marketers Should Learn From Behavioral Economics
I’m a lifelong student of human behavior and a big fan of behavioral economics. For me, the person that made human irrationality real was Dan Ariely in his excellent book Predictably Irrational. There are a number of clear lessons behavioral economics can teach digital marketers about ways to structure online experiences that convert.
Lesson 1: We Are Loss Averse
As human beings, we tend to prefer avoiding losses to acquiring gains. According to the behavioral economists, losses are perceived as approximately 2.5 times more than gains. That means that if there is a coin flip with a 50% chance of winning $100 and 50% of losing the same amount, one would have to offer $250 of potential gain to get an average person to accept the possibility of losing $100.
What does that have to do with marketing, you may ask. Let’s use an example to illustrate. Let’s say you are running a promotion on your website with a discount of 10%. The offer expires tomorrow. I’m willing to bet that what you are telling your website visitors is something like “last chance to get 10% off”. Was I close? Now, keeping the loss aversion cognitive bias in mind, a more powerful message would be “don’t lose your 10% off discount”. This way you present your visitors with an idea that they already have a discount and there is now a chance it might go away.
Lesson 2: We Increase Effort When We Are Closer to the Goal
Imagine you’re running a marathon. After 26 miles behind you, the finish line is in sight. What do you do? You now see the reward and so you run faster. It’s not just you. Even lab rats run faster as they approach a food reward. Along the same lines, we are much more likely to complete a task if it has already been started for us or we feel that we’re making progress.
This idea is called a Goal Gradient Effect. This concept points to a number of ways to improve the online user experience:
- Provide clear progress indicators during checkout or when filling out forms. You can even exaggerate the amount of progress that has been made to get more people to go through the flow.
- Prefill as much information as possible. If you have collected some of the information elsewhere (account registration, email capture, lead form, etc.), don’t make your website visitors fill it out again. Prefilled information feels like the first step has already been taken. That’s why those direct mail credit card offers already have all of your information filled out.
- Break the flow into multiple steps. This will make the task seem less daunting.
The goal is to get your website visitors to make the first step. Even a small nudge will make a significant difference in your checkout and form abandonment rates.
Through better understanding of our decision-making processes and biases, digital marketers can design more effective campaigns and online experiences.
Lesson 3: Too Many Choices Paralyze Us
Our society is built on the idea of having a choice. Ironically, having too many options to choose from usually leads to confusion or, worse yet, to no decision at all. This is known as the Paradox of Choice. If you have 20 minutes to spare, watch this excellent TED talk by Barry Schwartz to learn more about the concept.
Today, most ecommerce websites induce this paralysis with way too many choices. For example, if I’m shopping for a 4k TV on BestBuy.com, I have 150 products to choose from! There are filters on the right side and I can narrow my choices down by selecting a specific size, a particular brand and so on. This is better than nothing but what this experience needs is some guidance, more curation.
Now, let’s look at the gold standard of online shopping experience – Amazon. How do they handle the problem of too many choices?
First, they have the Amazon’s Choice products in almost every major category, including TVs. In other words, they make a recommendation. Second, they let me filter for attributes like value, performance and next gen, which are infinitely more meaningful than just a screen size or a brand name. A shopping experience like this is why Amazon is responsible for almost half of all online retail sales in this country. Save your prospects some time by guiding them through the myriad of options and you too will be rewarded with stronger sales.
Lesson 4: Our Choices Are Relative To What’s On Offer
While too many choices can prevent us from making a decision, the choices we make are usually not based on our absolute preferences. One consequence of this bias is what’s known as the Decoy Effect. One of the best examples I’ve seen once again comes from Dan Ariely. In his TED talk, Ariely describes an experiment he conducted with the Economist on their subscription page. By adding a third subscription choice to their print and print plus digital subscription options, prospect subscribers were able to better assess the relative value of each option.
While Ariely’ TED talk was from 2008, the Economist still uses the Decoy Effect on their subscription page.
It’s clear from the pricing and the design of the landing page that the goal is to get consumers to subscribe to both the print and digital option. In this context, the middle option is priced extremely aggressively and seems like the best value.
Of course, you don’t have to use the Decoy Effect to drive consumers to the middle option. The National Geographic has a great example of a Decoy Effect in popcorn sizes at a movie theater. Simply by introducing a medium option that is just marginally cheaper than a large, most consumers ended up upgrading to a large bucket of popcorn.
Lesson 5: We Get Heavily Influenced By Our Initial Reaction
The next lesson worth learning is that we rely too heavily on the first piece of information we get. This bias is known as the Anchoring Effect. In negotiations, participants who start with the most extreme negotiating position tend to have better outcomes. In marketing, the anchor effect is often used in pricing (original vs discounted price). Amazingly enough, the bias exists even with random numbers.
Here are a few other ways to use the Anchoring Effect in your digital marketing efforts:
- Anchor with a certain product at full price and then offer a freebie in exchange for an email address. The free offer is going to appear even more appealing.
- Offer multiple unit pricing, which has been show to increase the number of units purchased.
- If applicable to your business, set quantity limits for products on sale (for example, a strict limit of 10 per customer). It is both a scarcity tactics and a way to anchor consumers to a high number.
Lesson 6: We Follow The Crowd
The Bandwagon Effect is probably the most well-known and the best studied cognitive bias out there. As human beings, we rely heavily on the opinion of others and try to conform to the (perceived) general consensus. In marketing, you probably know this idea as social proof and customer reviews as the obvious example. This is also where social influencers come from.
A few other ideas for you to try:
- Leverage the quantity in addition to the quality of your customer reviews. Casper does it to great effect with almost 40,000 reviews of their mattress! As the saying goes, quantity has a quality all its own.
- Display the number of website visitors on your site in real time or the number who are viewing a particular product. Obviously, if the number is very low, you are likely to get the opposite effect. Travel sites like Travelocity and Expedia employ this tactic very effectively.
Lesson 7: Our Magic Word Is “Because”
All your childhood, you were taught that the magic word is “thank you”. It turns out that if you want to persuade someone to do something, like buy your product or sign up for your mailing list, the real magic word is “because”. If you are asking for something small, almost any reason will significantly increase your success rate. Since we tend to use “heuristics”, or shortcuts, in our daily lives, the response to “because” is almost automatic. Of course, the request itself has to be fairly insignificant to elicit an automatic response.
Give a reason for why you are asking for an email address, a phone number or any other personal information, even if it not a very compelling one. This alone is likely to improve your conversion rate in a meaningful way.
Human mind works in fascinating ways. Through better understanding of our decision-making processes and biases, digital marketers can design more effective campaigns and online experiences. Businesses generate more sales and consumers are less frustrated with the online shopping experience. It’s a win-win.