Behavioral Economics Helping Marketers Better Understand Consumers

The next time you’re standing in the coffee aisle at the grocery store and pick up one particular brand of joe over another, ask yourself why. The answer might be rooted in behavioral economics 101.

Marketers and their agencies have been trying to decode why consumers buy what they do since the 1920s, when N.W. Ayer suggested people would “walk a mile for a Camel.” But lately they’re turning to behavioral economics, a blend of psychology and economics that has until recently been a mostly academic discipline, and could be described most simply as the study of how consumers make economic decisions.

It deviates from traditional economics in that it doesn’t assume consumers behave rationally, like a market (in theory) does, making decisions based solely on facts or logic such as price or quality. Rather, emotions and social psychology affect or dictate decisions and create sometimes predictable “irrational” tendencies. Those tendencies form the tenets of behavioral economics. The health care, finance, and even government policy industries are turning to behavioral economics. The Credit Card Reform Act, for instance, is cited as one big behavioral economics document with ideas such as clearly labeled interest rates and terms and tables of actual spending on credit card bills to “help” consumers make decisions more easily on which card to get or use, how to spend within their means, etc.

President Barack Obama’s administration is rife with behavioral-economic proponents such as Cass Sunstein, head of the White House Office of Information and Regulatory Affairs, who co-wrote “Nudge” with revered behavioral economist Richard Thaler. And while many of the government’s uses for behavioral economics, such as upping nutrition labeling and financial reforms, have been positioned as counter balances to an advertising world that pushes unhealthy food and spending to feel good, marketers themselves are exploring and adopting behavioral economics to do more and smarter product pushing.

Irrational effects
Dan Ariely, author of “Predictably Irrational” and a behavioral economics professor at Duke University’s Fuqua School of Business, often works with agencies and marketers, has an ongoing relationship with neighbor ad agency McKinney in Durham, N.C., and has trained and consulted on specific clients. He warns that professional ad people often don’t see what nonprofessionals see — and the irrational effect people’s emotions have on their choices. His research with agencies and marketers is meant to help them understand consumer choices and the forces behind them.

For example, McKinney and Mr. Ariely are working together using behavioral economics in one example they provided, to figure out what makes people go to the gym. Traditional focus group research has found that people will say they would go to the gym if it were closer to their office, or less expensive, or even offered free babysitting. However, gyms have offered all those things without measurable increases in attendance.

Mr. Ariely found through his behavioral research that people are more likely to go to the gym when they have an appointment with a trainer — perhaps because they paid for the extra help in advance, felt ashamed for not showing (and now someone else knows they didn’t go) or felt guilty that they had just wasted another person’s time. Jeff Jones, partner and president of McKinney, said they’re also studying different payment structures that drive behavior, and gave the example that instead of paying via a monthly credit-card deduction for membership, what if consumers didn’t pay at all except if they didn’t go to the gym?

“Who knows what the economic impact would be?” he posited. “But what might it do for the churn rate?”

“Behavioral economics gives Ph.D. credibility and academic rigor to intuition,” Mr. Jones said. “It’s really hard today to make million-dollar decisions based on intuition. This helps clients realize there is data behind the decisions and there is research behind the decisions.”

And indeed financial pressures, ad-agency marginalization and greater availability of sophisticated consumer data are all reasons ad agencies and marketers are increasingly drawn to this formalized process of analyzing consumer spending choices.

DraftFCB, New York, has adopted behavioral economics as a key discipline within its recently launched Institute of Decision Making, which also looks at other emerging areas of study such as neuroscience. It recently pitched a utility company using behavioral economics.

“It’s easy to get people to agree that they should use less energy — 86% of them strongly agreed they should — but they don’t do it,” said Matthew Willcox, who heads the institute as executive director (and continues to serve as director of account planning at DraftFCB, San Francisco). So DraftFCB researched and included specific ideas in the pitch, such as the number of things the utility could ask and people would be willing to do to reduce energy, or the things they would be willing to tell others about saving energy.

One concept of behavioral economics that’s particularly practical for marketers is framing — the way in which an offer is framed or put in context for consumers, along with the bias and experience that each consumer brings to that purchase.

Another concept, called anchoring, refers to the fact that when people are given a number, they tend to use that number as a kind of permanent benchmark for future thinking.

Behavioral economist Daniel Kahneman, a psychologist who won a Nobel Prize in economics and is considered the “father” of behavioral economics, described anchoring in a McKinsey Quarterly video in May 2008. He said when people are thinking about quantities, the first number that gets mentioned has “enormous impact.” So if he asked people if the tallest tree in the world is more or less than 900 feet, most people would correctly guess that is way too tall and say it’s less. However, he points out, he’s now made you think of very tall trees. The opposite would have been true if he used 100 feet as an “anchor” number.

Behavioral economics is not about whether a person might be into a new brand of coffee or what they think of coffee brands in general, but what coffee a person picks off the shelf, said Joel Rubinson, chief research officer at the Advertising Research Foundation.

Also, as brands have become less powerful today, thanks to a plethora of choices and information, it’s become more important to figure out how and why consumers purchase. “Market research today is studying purchase intent, but not really studying how people make decisions,” said Mr. Rubinson. “When only half of people who say they plan to buy something actually go out and purchase it, and 50% of decisions are made at point of purchase, that’s leaving a lot on the table.”

He adds that marketing does a good job of studying brand equity, a less than perfect job at studying brand activation, and mostly very little in studying how consumers purchase. “Brand equity and purchase intent are fine, just incomplete,” Mr. Rubinson said.

However, even the early adopters and aficionados understand that behavioral economics is not a replacement or panacea, but rather an additive set of tools for marketers — and other industries, for that matter — to use. “It’s not about ‘We used to do it this way and now it’s a wholesale change and we’re doing it this way,'” Mr. Jones said. “These are just new ways of understanding how and why people make decisions. And it’s just smart marketing to understand them and use them.”

by Beth Snyder Bulik, July 26, 2010

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