As consumers, we think we know why we buy.
The reality is more complicated.
Did you know that 95% of our decisions are driven by subconscious urges?
We are not rational agents making informed decisions. We are creatures of habit and instinct, making decisions more on gut feeling and psychological biases than rational consideration.
Let’s have a look at how human nature and economic principles are used in marketing, exactly …
What is behavioural economics?
Behavioural economics is an academic discipline which studies the effect that psychological factors have on our economic decision-making.
The purpose of behavioural economics is to better understand decision-making and predict human behaviour in certain situations.
When it comes to our behaviour, our decisions can be swayed by things as large as the political system in our country, or as small as the number of products we have to choose between.
In short, behavioural economics predicts illogical human behaviour.
How is behavioural economics used in marketing?
Behavioural economics studies how a customer’s purchasing choices are influenced by factors that are seemingly unrelated to the product itself. These factors can be psychological, cognitive, emotional, cultural or social.
The core principle of marketing is to ensure that the consumer chooses your business over a competitor.
Behavioural economics aids marketing strategies by understanding how consumer decisions can be influenced.
As a result, making small changes to the product, the branding or the choices you offer can massively influence consumer behaviour.
Let’s look at the 9 brilliant examples of behavioural economics in marketing…
Behavioural economics principle #1: The power of FREE
One of the most powerful words you can use in marketing is “Free”.
That’s why you’ll see supermarkets advertising “Buy one, get one free”, not “Buy two products, get 50% off”.
While both of these deals are fundamentally the same, consumers will get a lovely hit of dopamine when they see the word “Free”, and that will be reinforced when they take advantage of that offer.
Typical example in marketing: Subway
While a lot of brands are moving away from such deals – as customers start to see through the gimmick – brands like Subway still roll out “Buy one, get one free” deals for events like World Sandwich Day to get customers through the doors.
Behavioural economics principle #2: Social proof
Social proof is one of the most powerful tools in behavioural economics, particularly in online marketing. It is the tendency to be swayed by other people’s choices, especially in ambiguous circumstances.
People are more likely to buy products or services that are popular to gain social standing amongst their peers, which is why so many consumers read online reviews in order to gauge how trustworthy a company is – in fact, 81% of consumers trust a company with lots of positive reviews.
Typical example in marketing: UK government
The private sector is not the only sector that uses behavioural economics principles in persuading people to take a desired action.
Below is an example of the UK government using the principle of social proof to encourage more people to become organ donors.
Guess which landing page performed better – A or B?
Social proof leads consumers to feel a greater sense of trust in the company, even if this is the first time they have visited the brand.
Behavioural economics principle #3: Scarcity
If you’re familiar with limited edition products, then you’re already familiar with the power of scarcity in behavioural economics.
Put simply, people tend to put more value on a product if they think there’s only a limited amount available, or if there’s only a limited window where they can buy it before it becomes unavailable.
Typical example in marketing: Starbucks
Starbucks is the master of scarcity marketing. We’re all familiar with the hype around Pumpkin Spice Lattes – and one of the main reasons for this is that they’re only available for a few months every year.
The coffee giant frequently releases special holiday food and drinks that are only available for short amounts of time, with the marketing of these products revolving around the phrase “Enjoy it while it lasts”.
Behavioural economics principle #4: Loss aversion
Humans are more afraid to lose what they have than to gain something they don’t have.
This basically means that the regret that comes from losing £10 weighs much more heavily in our minds than the enjoyment that comes from winning £10.
The loss aversion principle tells us that to demonstrate a product’s advantages to the consumer, we need to highlight what they are set to lose if they don’t make a purchasing decision.
Typical example in marketing: Amazon Lightning Deals
The best example of loss aversion is Amazon’s daily Lightning Deals. These are the discounted offers that only last for a limited amount of time – 24 hours or less – and can only be redeemed by a certain number of consumers.
This limitation is the reason why this deals page is so prominent on the website, as it encourages consumers to make a purchasing decision quickly to avoid “missing out”.
Behavioural economics principle #5: Partial ownership
Almost every successful online membership company offers free trials.
By offering a free trial to consumers, you’re giving customers the feeling of ownership over that product or service, which develops an emotional attachment.
When the trial period ends, consumers have to choose between losing the product or paying for continuing the service.
Typical example in marketing: Netflix
Customers new to Netflix can take out a 30-day free trial to see if the service works for them, which you’d think is a big loss-maker for the company – but it’s quite the opposite.
Behavioural economics principle #6: Framing
Simply put, framing is highlighting aspects of your product in such a way that makes it more appealing to consumer emotions.
Typical example in marketing: Tesla
In this brilliant example from Tesla, the adverts are framed to highlight the aspects of the car that make it a unique product.
Tesla knows the customer is already aware of their brand and product, so these ads frame specific aspects (like how the car’s motor is silent) to emphasise how unique the product is.
It’s a simple message, but it’s one that helps to form an idea in the consumer’s mind that this product is something that will set them apart from other car owners.
Behavioural economics principle #7: Dominated alternative/ Third Decoy
The Dominated Alternative (also known as Third Decoy) principle shows us that when a third, less desirable option is introduced, it can influence which choice consumers make.
Typical example in marketing: Shutterstock
Shutterstock has 4 subscription options at a variety of price points. The pre-selected one is £99/month for 350 images/month, making each image 28p.
The cheaper options in this example appear to be decoys in order to make the more expensive subscriptions seem like better value.
As the cheapest option is £19/month for 10 images/month, making each image £1.90, it makes sense to the customer to buy a more expensive subscription as they feel like they’re getting a better deal.
Behavioural economics principle #8: The choice paradox
Analysis paralysis is real, and more choice doesn’t always result in more sales.
When consumers are given more choices, they often feel overwhelmed and leave without making a purchase, or procrastinate in fear of making a bad decision.
Typical example in marketing: SiteGround
Like many other software-as-a-service providers, SiteGround offers customers 3 options to choose from when they first set up their hosting service. But once a customer is set up, they are introduced to add-on purchases and additional services including managed transfers, SSL certificates, and more.
This strategy reduces decision fatigue and increases sales.
Behavioural economics principle #9: Anchoring
Once you know about the anchoring principle, you’ll start seeing it everywhere.
Anchoring is the practice of giving customers the most expensive option first in order to make all subsequent options seem cheaper.
Typical example in marketing: Crazy Egg
A great example of this are the subscription options for Crazy Egg’s heatmap tracking software.
The ‘Pro’ plan is listed on the left where consumers are likely to see it as the first option. Priced at $99, this becomes the anchor against which all other plans are compared.
You’ll also notice that this example has multiple other behavioural economic principles at play – it also uses framing (highlighting the ‘Plus plan in a different colour to catch the eye) and the decoy effect (providing cheaper, but less desirable, options).
Summary: Importance of behavioural economics in marketing
Understanding how behavioural economics principles are used in marketing is super important if you are looking for shortcuts to business success.
Behavioural economics allows marketers to better understand the human mind and use scientific evidence about human decision-making.