Consumer Psychology: New Experiments That Use Science To Grow Your Audience

Transcription

1 Consumer Psychology: New Experiments That Use Science To Grow Your Audience Tim Baker Director, Baker Richards & VP, The Pricing Institute Sara Billmann Director of Marketing & Communications, UMS Ron Evans Principal, Group of Minds Agenda Introducing Behavioural Economics and our hero: Daniel Kahneman Relating Behavioral Theory to Practice: marketing An experiment at UMS Psychophysics, anchoring, and so much more Relating Behavioral Theory to Practice: personal development 2 1

2 Challenging Classical Economics Classical economics is based on rational person homo economicus with perfect information If you look at economics textbooks, you will learn that homo economicus can think like Albert Einstein, store as much memory as IBM s Big Blue, and exercise the willpower of Mahatma Gandhi. Dan Ariely ( Predictably Irrational ) Human decision-making is based on the interplay of the conscious and un-conscious mind. A battle between two systems of thought: the reflective system and the automatic system. Thaler and Sunstein ( Nudge ) 3 Introducing Behavioural Economics Reflective System versus Automatic System controlled, effortful, deductive, slow, self-aware and rulefollowing uncontrolled, effortless, associative, fast and unconscious 4 2

3 Introducing Behavioural Economics Homo Economicus versus Automatic System controlled, effortful, deductive, slow, self-aware and rule-following uncontrolled, effortless, associative, fast and unconscious 5 Introducing Behavioural Economics Homo Economicus versus Homer Economicus controlled, effortful, deductive, slow, self-aware and rule-following uncontrolled, effortless, associative, fast, unconscious and skilled. 6 3

4 7 Thinking, fast and slow Thinking Slow SYSTEM TWO When an easier question is not available to answer, we switch to slow, effortful, System 2 thinking. Only System 2 can follow rules, compare multiple attributes and make deliberate choices. System 2 is also in charge of doubting and unbelieving. Thinking Fast SYSTEM ONE System 1 detects and uses simple relations (e.g. one is bigger or better than another) and is pre-disposed to trust and believe (it favours uncritical acceptance of suggestions) 8 4

5 System 1 versus System 2 System 1 uses simplifying shortcuts and intuitive thinking. This is an essential part of the machinery of cognition: it would be too effortful to use System 2 to rationally weigh up EVERY decision. It is not necessarily the case that the choice is irrational but that the choice may be affected by a range of other factors, including: Limits to the information that is available to System 1 (it focuses on the available information and ignores absent evidence) Loss aversion Showing diminishing sensitivity to quantity (psychophysics) * Kahneman, D. Thinking, Fast and Slow, Allen Lane, You can t switch System One off System 1 continually constructs a coherent interpretation of the world in an instant, giving System 1 decisions the appearance of informed choice 10 5

6 Relating Behavioral Theories to Practice 11 Biases of Intuition: Representativeness You see a person reading The New York Times on the New York subway. Which of the following is a better bet about the stranger: She has a PhD She does not have a college degree Consider with respect to performing arts we are extremely willing to predict the occurrence of unlikely events without considering the base rate Don t assume the numerator without considering the denominator. Think like a statistician 12 6

7 The Paradox of Choice Barry Schwartz: 2004, eliminating (reducing) consumer choices can reduce anxiety for shoppers and lead to higher sales: more choice and more information can be overwhelming When 24 jams offered, only 4% purchased When only 6 jams offered, more people stopped and 30% purchased* Stanford Business School Study** (September 2012): Arranged marriage vs. love marriage and happiness levels Another chocolate experiment: are you happier when your choices are presented sequentially, or simultaneously? *Dawnay, E. and Shah, H. Behavioural Economics: Seven Principles for Policy Makers, New Economics Foundation, 2005, p **Baba Shiv (Stanford University), Sheena Iyengar (Columbia University), Cassie Mogilner (Wharton), Applications of Prospect Theory 14 7

8 The Endowment Effect The fear of regret is a factor in many of the decisions people make * Risk of regret favours conventional and risk-averse choices. In a retail context: Consumers who are reminded that they may feel regret as a result of their choices show an increased preference for conventional options, favouring brand names over generics. Not only do the disadvantages of change loom larger than the advantages (so there is a bias towards the status quo), but people also try to keep something that they consider is theirs. There is no loss aversion in routine commercial exchanges but it does apply on items for use to be consumed or enjoyed.* * Kahneman, D. Thinking, Fast and Slow, Allen Lane, 2011, p Loss Aversion: The hypothesis Those who receive an offer with a voucher worth a certain amount of money will be more apt to redeem the offer than those who receive a discount. Think Macy s Cash, GymBucks at Gymboree, other retail offers that encourage you to come back a few weeks later to redeem your cash on a future purchase. People will go out of their way to avoid losses, while at the same they would not bother to go out of their way to gain something - we focus on minimising threats/losses before realising opportunities. 16 8

9 Loss Aversion: The UMS Experiment Lapsed ticketbuyers from the 10/11 season Experiment Design: each receives same letter but three different offers: Control Group: Just the letter, no offer Discount Group (COMEBACK): $20 discount per ticket for any event in 2012 Voucher Group (FREEGIFT): Receive UMS Cash worth $20 per ticket for any event in 2012 Some restrictions (minimum spend of $30 per ticket before offer, limited time offer) 17 Loss Aversion: Response Rate Control Group 1.14% Discount performed 63% better than the control. Discount 1.87% UMS Cash Voucher performed 70% better than discount and 178% better than control. UMS Cash 3.18% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 18 9

10 Loss Aversion: The Results Control Group $1,905 Discount $2,798 $1,199 UMS Cash $4,053 $1,346 $- $1,000 $2,000 $3,000 $4,000 $5,000 $6, Loss Aversion: Average Revenue per Piece Mailed Control Group $0.81 Discount $1.70 UMS Cash $2.32 $- $0.50 $1.00 $1.50 $2.00 $

11 Average # of Tickets Purchased per Household Control Group 1.93 Discount 3.25 UMS Cash Loss Aversion: Average Ticket Price Control Group $36.63 Discount $27.95 UMS Cash $26.60 $- $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $

12 23 Psychophysics Psychophysics is a field of psychology that relates a varying physical quantity on one side (the brightness of a light or the amount of money) with the subjective experience of brightness or value on the other.* A power curve applies to our perception of price increases. Basically, we lose perspective: the higher the overall amount the less we notice differences (we experience diminishing sensitivity) As the numbers get bigger, the thresholds move further apart the difference between $110 and $120 is perceived as less than the difference between $10 and $20. * Kahneman, D. Thinking, Fast and Slow, Allen Lane, 2011, p

13 Everything is relative 25 Price range and relationship Price Price +% break /Difference I % II % III % IV % V % VI

14 Context is King 27 Anchor Pricing Decoy Pricing 28 14

15 Anchoring Solitaire Diamond Rings Left to Right $80. $175. $690. Tiffany ad from Anchoring New Yorker: Downsizing Supersize (August 13/20, 2012): In a classic experiment by Itamar Simonson and Amos Tversky, people asked to choose between a cheap camera and a pricier one with more features were divided more or less equally between the two options. But when a third option a fancy, very expensive camera was added to the mix, most people went for the mid-range camera. The very expensive camera made the middle one seem less extravagant

16 Anchor Pricing and the Primacy Error People are more heavily influenced by the first information they receive, because later evidence is interpreted in light of the beliefs already formed by first impressions. Implications: The first prices customers encounter (the location or order of prices in printed materials, or how prices are presented online or over the phone) set the anchor and context for the value being offered. ALWAYS present prices top-down rather than bottom-up * Sutherland, S. Irrationality, Pinter & Martin, 2009, p Using anchoring to maximise donations 32 16

17 Trade-off contrast 33 Joint Evaluation

18 The Reference Price Effect Buyers are more price sensitive the higher the product s price relative to the prices of the buyers perceived alternatives. * Perceptions of the substitutes and their prices differ widely among customers and purchase situations Reference prices are formed by: Your own prices The customer s experience and memory of prices Comparator and competitor prices, which depends on your market positioning * Nagle, T. & Holden, R The Strategy & Tactics of Pricing, Prentice Hall, 2002, p Positioning: set your own reference price Market positioning is a key component of your pricing strategy Targeting: the motivations (needs) you seek to meet will affect your customers competitive set 36 18

19 37 Applying these concepts to you We've talked about the marketing applications, but there are important personal ways to use these concepts to make you more happy and more effective in what you do. Let's talk about three areas: Being more effective in your own performance Being more aware of the way you make decisions and interact with co-workers The concept of "experienced well-being" The "fast" brain is impulsive. Reactive. Primal. Protective. Usually not a good thing for stressed & tired workers. The "slow" brain can help you focus on the bigger picture 19

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23 Easy to get caught up in small stuff Let's have an example of this -- in the following video, be totally silent. Count the number of passes made by the players wearing white, ignore players wearing black. 45 Easy to get caught up in small stuff Thousands of people have watched this video, and 50% of them don't notice anything unusual. Like a big gorilla in the middle

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25 Decision making and interactions Kahneman states that "rewards for improved performances are more effective than punishments for mistakes." Personal goals are more able to be accomplished when we set a reward for ourselves This also works for employees -- there should be a recognizable reward for measurable performance. Praise is a reward -- I started scheduling praise with a couple of my contractors, and they exploded in productivity Small changes make a big difference

26 Illusion of validity It's very hard to change what s been happening for awhile, even if it isn t working. Change is very hard for some people The "known" is easier to deal with than the unknown (remember that the Type 1 thinking will go for the easier option is given the choice) Your "intuition" can lead you to experiment, but it should be backed up by actual data -- measure, measure, measure It is useful to have benchmarks to measure against -- this takes out the emotional component and allows you to compare your findings to the findings of others

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28 55 Happiness We measure marketing effectiveness, we can also measure our own effectiveness, our happiness, and our sense of well being, and we should Many apps, journals, diaries, and other methods to do this Remember that you must have a benchmark before you try to move the needle, in personal development too You can improve happiness and effectiveness over time, and learn how much work is too much for you

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