Behavioral econ and marketing

Copying An interesting blog from www.simoleonsense.com. I need to get back and re-read this later on Probably useful for cambodia project

11 april 2012

Interesting piece by Ned Welch

Synopsis (Via Mc. Kinsey Quarterly)-

Marketers have been applying behavioral economics—often unknowingly—for years. A more systematicapproach can unlock significant value.

Click Here To Read: Mc.Kinsey Quarterly: A Marketers Guide To Behavioral Economics

Introduction (via Mc. Kinsey Quarterly)
Long before behavioral economics had a name, marketers were using it. “Three for the price of two” offers and extended-payment layaway plans became widespread because they worked—not because marketers had run scientific studies showing that people prefer a supposedly free incentive to an equivalent price discount or that people often behave irrationally when thinking about future consequences. Yet despite marketing’s inadvertent leadership in using principles of behavioral economics, few companies use them in a systematic way. In this article, we highlight four practical techniques that should be part of every marketer’s tool kit.

Keys To Behavioral Marketing: (via Mc.Kinsey Quarterly)

1. Make a product’s cost less painful-

In almost every purchasing decision, consumers have the option to do nothing: they can always save their money for another day. That’s why the marketer’s task is not just to beat competitors but also to persuade shoppers to part with their money in the first place.

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Another way to minimize the pain of payment is to understand the ways “mental accounting” affects decision making. Consumers use different mental accounts for money they obtain from different sources rather than treating every dollar they own equally, as economists believe they do, or should.
2. Harness the power of a default option

The evidence is overwhelming that presenting one option as a default increases the chance it will be chosen. Defaults—what you get if you don’t actively make a choice—work partly by instilling a perception of ownership before any purchase takes place, because the pleasure we derive from gains is less intense than the pain from equivalent losses. When we’re “given” something by default, it becomes more valued than it would have been otherwise—and we are more loath to part with it.
3. Don’t overwhelm consumers with choice

When a default option isn’t possible, marketers must be wary of generating “choice overload,” which makes consumers less likely to purchase. In a classic field experiment, some grocery store shoppers were offered the chance to taste a selection of 24 jams, while others were offered only 6. The greater variety drew more shoppers to sample the jams, but few made a purchase. By contrast, although fewer consumers stopped to taste the 6 jams on offer, sales from this group were more than five times higher

4. Position your preferred option carefully
Economists assume that everything has a price: your willingness to pay may be higher than mine, but each of us has a maximum price we’d be willing to pay. How marketers position a product, though, can change the equation. Consider the experience of the jewelry store owner whose consignment of turquoise jewelry wasn’t selling. Displaying it more prominently didn’t achieve anything, nor did increased efforts by her sales staff. Exasperated, she gave her sales manager instructions to mark the lot down “x½” and departed on a buying trip. On her return, she found that the manager misread the note and had mistakenly doubled the price of the items—and sold the lot. In this case, shoppers almost certainly didn’t base their purchases on an absolute maximum price. Instead, they made inferences from the price about the jewelry’s quality, which generated a context-specific willingness to pay.

Click Here To Read: Mc.Kinsey Quarterly: A Marketers Guide To Behavioral Economics