Behavioural economics is about modelling choice architectures so that we can develop products and marketing messages that appeal to our customers. Some of the key principles of behavioural economics may seem counter-intuitive, but offer some real insights into how we should design, sell, price and market products.
Behavioural economics outlines five cognitive biases worth thinking about in marketing:
1. Loss aversion
Given the choice, most people would rather avoid making a loss to acquiring a gain. Why? Because they attach more value to something they already have as opposed to something they don’t.
It may work better, for example, to talk about a surcharge for late payment of an account than a discount for early payment.
2. Paradox of choice
The more choices people are given, the less likely they are to choose between the options. In practice, people may buy more if there is a choice of three jams on a supermarket shelf than if there are fifty options.
People’s purchasing decisions are influenced by previously introduced reference points and data, even if these are irrelevant and irrational. On a restaurant’s menu, the second most expensive dish will look like a bargain compared to the most expensive item if there is a price differential.
4. Short term bias
People will usually opt for instant gratification rather than a long term reward. They’re more likely to act to lock in a short term gain or avoid an immediate penalty, even if it means sacrificing a larger reward further down the line.
People are deeply influenced by the behaviour of other people. For example, anEskom campaign that shows that 95% of consumers are switching off their geysers at night might be effective in persuading people to do the same to conserve electricity.