Better Marketing with Behavioral Economics

If competitiveness is synonymous with understanding what makes consumers tick, then it’s also now synonymous with behavioral economics.

December 10, 2014

Better Marketing with Behavioral Economics

There is attractive simplicity to the notion that consumers choose what they want. It makes the work of marketers relatively straightforward: give the right people the right information and they’ll synthesize it, weigh their various interests, and make the most informed choice. By this account, the brain is both a logical processor and a perfectly calibrated scale. “But consumer decision-making is not, in fact, just about availability of information,” says Ravi Dhar, Director of the Center for Customer Insights. “We know from behavioral economics that it’s much more nuanced than that.”

Behavioral economics injects the standard marketing approach with insights from the past three decades of psychology, economics, and marketing research. It sharpens our focus on how and why people make the choices that they do—what feeds the decision-making process? What levers most effectively influence outcomes?

Though firms spend billions of dollars every year attempting to persuade current or potential consumers, the results are decidedly mixed, and rarely commensurate with this spending. Behavioral economics highlights methods for driving desired consumer behaviors that are consistently effective at a tiny fraction of the cost.

One Consumer, Two Minds

A behavioral economics lens on consumer choice helps explain why some marketing efforts are not effective and, more importantly, how to construct more effective marketing programs. Many of the important lessons of behavioral economics stem from a reconstrual of how consumers approach choice. “One of the broadest and most important insights into consumer choice is the fact that people often think about things very intuitively rather than deliberatively,” says Nathan Novemsky, a faculty fellow in the Center for Customer Insights. This intuitive approach is formally known as System 1 thinking. (More deliberative thought processes are known as System 2 thinking.) As it turns out, System 1 thinking is very susceptible to subtle or subconscious cues.

Take an average trip to the grocery store: most consumers spend no more than a few seconds considering each choice that they make. In so little time there is no opportunity for System 2 to crunch numbers and effectively analyze tradeoffs. Rather, the more capricious System 1 decides what to take from the shelves based on subtle cues from the environment and consumers’ momentary mindset. Interestingly, this holds true even when purchases become more consequential, like buying home electronics or a car, as System 1 feeds information to System 2. “If System 2 sees nothing wrong with what System 1 is doing,” says Novemsky, “then it will simply carry the information through.” The result is that System 1 is driving consumer decisions under most circumstances.

Habit and inertia also act forcefully on consumer choice. If consumers receive a credible message about the superiority of one product or service over another, that message alone does not necessarily translate into action, because system 1 responses are more easily dictated by habits than by beliefs which may not even be salient at the moment of a decision. Marketers must therefore understand not only how to influence consumer preferences, but also what kinds of approaches are required to dislodge long-held habits.

A New Consumer Psychology

“Marketers are very used to thinking about demographics: a particular consumer lives with this many people, this much income, even these needs,” says Novemsky. “But one thing they don’t think about that has come out of recent psychology is that people, at any given moment, also have a particular goal that’s active.” While standard marketing approaches think in terms of static needs, recent psychological research suggests a much more dynamic notion of goals. People may hold many goals simultaneously—be more athletic, a better worker, a better husband or parent—but only one goal tends to be active at any moment, while the others remain latent. Which goal is active influences what kind of information consumers pay attention to, and what kinds of choices they ultimately make. Say something to a consumer when the wrong goal is active and your message will just bounce off them. Offer that same message when the right goal is active and you will have that consumer’s attention! Marketing efforts that take account of active goals or that actually activate goals are going to have much greater impact on consumers.

Behavioral economics also reveals a range of factors that, though beyond marketers’ direct control, is nonetheless critical to understanding how to influence consumer decisions. For instance, people make decisions differently when they are under time pressure, or when they have just made a series of (even unrelated) decisions. This latter case, known as mental depletion or fatigue, occurs because people’s limited attention spans can be “used up” by repeated decision-making, leading to a greater willingness to succumb to temptation and indulgence.

Seeing Thru the Lens of Consumer Beliefs

Finally, all consumers interpret the world through a preset system of beliefs. “People bring certain lenses to the marketplace,” says Dhar. However good they taste, low-fat and low-sodium snacks will always rank below their conventional counterparts because of consumer preconceptions about low-fat taste. Even more importantly, these beliefs can influence how we actually experience a product or a service. If the low-fat product beats out its conventional competitor in blind taste-tests, once the tasting is no longer blind this advantage disappears. Beliefs about a product can be the driving influence not just of predictions about a product, but of actual experiences and memories of those experiences. The challenge for marketers is thus not simply product improvements through R&D, but managing and influencing consumer beliefs, including understanding and activating the relevant beliefs at the right moments! “There are many different ways in which people’s attention is driven to certain beliefs at key moments,” says Dhar. “These need to be understood if we want to predict a person’s choices in the marketplace.”

Shopper Insights

In the same vein, the presentation of alternatives, known as choice architecture, is essential to successful marketing. Retailers have for years known that products on middle shelves are more attractive and more likely to be purchased than products on top or bottom shelves. Why? Because System 1 imposes a satisficing rule: stop when you find something that is good enough and System 1 generally starts by considering what is right in front of us. Similarly, salad placed first in a cafeteria line encourages children to eat more salad. Why? Because System 1 answers the question how much should I take in part by considering how much room do I currently have on my tray or plate. All these examples implicitly involve a recognition that System 1 thinking involves much simpler processes than is typically assumed. In short, careful choice architecture can have more impact that offering a superior product.

Lessons for Marketers

While the work of behavioral economics continues to reveal that consumer decisions are more complicated than previously thought, it also uncovers new realms of opportunity for marketers.

  • System1/System2: Given that most consumer decisions are made using System 1 thought processes, marketers have many inexpensive opportunities to persuade potential customers. Simply framing messages properly—catering to the processes that dominate System 1—can produce outsized results. As one among many examples, System 1 reacts much more favorably to the promise of a $15 credit with a purchase of $35 than to the promise of 30 percent off purchases of $50.
  • Beliefs: An important challenge for marketers is not just designing the best product, but recalibrating belief systems. What tools are available to change the beliefs that people hold? Or, alternatively, how might existing belief systems be used beneficially? Take concrete flooring (versus tile), which leads consumers to perceive that prices were lower, since they associate such floors with discount outlets, like Costco.
  • Goals: Similarly, how can marketers figure out which goals are active at any one moment? “Hitting consumers when a particular goal is active is very important for getting them to notice and care about what you’re saying,” says Novemsky. The other piece of this puzzle is designing communication that influences which goals are active. For instance, pictures of a motherly figure are known to activate achievement-oriented goals.

These types of questions and lines of inquiry, once far from the minds of marketers, are of central importance today as behavioral economics fills out the modern consumer portrait. If competitiveness is synonymous with understanding what makes consumers tick, then it’s also now synonymous with behavioral economics.

If you want to learn more about how behavioral economics can grow your business, the Yale Center for Customer Insights (YCCI) can help. In partnership with McKinsey & Co., YCCI introduces a 1-day curriculum in behavioral economics to be held in New York. For an even broader understanding, attend our 3-day immersion session on campus at the Yale School of Management in New Haven, CT.

For more information email heather.fitzgerald@yale.edu