BEHAVIORAL

ECONOMICS
and the customer journey

Colin Strong &

Kiriaki Koutmeridou

Behavioral Economics

If by looking at the picture [1] on the left you think that the vertical table is
longer than the horizontal one, then you are victim of a visual illusion.
A result of evolution, a large part of our brain is dedicated to vision and we
make use it most hours of the day. Yet our intuition fools us in a consistent,
persistent way. If we make these repeatable, predictable mistakes in vision,
whats the chance that we dont make even more mistakes in something
that we are not physically designed to do?
Lets take financial decision making, something we dont have a specialized
part of the brain for. What is worse? With visual illusion it is easy to
demonstrate the mistakes (take a ruler and measure the two table tops).
With cognitive illusions its much harder to demonstrate the mistakes. We
dont have an easy way to see them.

BEHAVIORAL ECONOMICS:
Visual illusions as a metaphor for rationality

A field that increasingly recognized in providing insights into understanding

this is Behavioral Economics. This field, popularized by a range of writers
including Malcolm Gladwell to Daniel Khanneman, has built a strong
following among a range of professionals concerned with consumer behavior
not simply from a commercial perspective, but right through to what this
means for shaping public policy.
Behavioral Economics is the idea that people dont always make strictly
rational decisions. This is not to say that we are always destined to make
the wrong decision; patently we dont. Within the limits of our brainpower
and our ability to process all relevant information to the problems we have
to solve, we are able to function effectively for the majority of our needs.
But because this is done by using simple rules of thumb (in other words,
making shortcuts and not always using optimal (strategies), we occasionally
get things wrong.
So how can the understanding of consumers that Behavioral Economics
gives us assist in the design and marketing of products and services?
The answer is in many different ways, but here we have picked out some
important principles that are relevant. This is by no means an exhaustive
list but provides a useful starting point for thinking about how to apply
Behavioral Economics to your business issues.

Behavioral Economics

Why is Behavioral Economics so useful?

For market researchers, Behavioral Economics offers an approach to
understanding human behavior which accepts that economic theories and
approaches will not deliver the whole story about the factors that influence
consumers economic behavior.
On its own, Economics is based on the premise that people make rational
decisions and that market forces will resolve everything in the most
efficient way.

BEHAVIORAL ECONOMICS:

Yet Behavioral Economics increases the explanatory power of Economics by

providing it with more realistic psychological foundations.

Implications of Behavioral Economics

for Market Research
Behavioral Economics is not meant to be a separate approach in the long
run. The hope is that behavioral models will gradually replace simplified
models based on stricter rationality, as the behavioral models prove to be
tractable and useful in explaining hidden drivers behind our behaviors and
making surprising predictions.
We are exploring ways in which we can make approaches more Behavioral
Economics friendly.
Behavioral Economics confirms what we already know about research design
and can provide the explanatory framework which is difficult to access by
surveys alone.

Behavioral Economics

We generally believe that we like choice; the more choice, the better, and we
assume that our desire for choice and our ability to manage it is unlimited.
Indeed, decisions for products as part of a large range, such as mobile
devices, can often be extensive as it is generally considered to be a positive
idea to cover as many consumer preferences as possible.
In fact, the reality is that consumers often struggle with the number of
options available to them, as illustrated by the classic jam sandwich study.
This research involved setting up an exotic jams tasting booth at a highend grocery store in California. On one occasion there were 6 jams at the
tasting booth, while on another occasion 24 jams were displayed. Consumer
reaction and subsequent purchase was tracked with compelling results;
despite the initial appeal of the wider choice of 24 jams, in this case only
3% of consumers actually purchased a jar. In contrast, of the consumers
browsing the tasting booth when only 6 jams were available, a staggering
30% went on to purchase a jar.
Consumer product company Proctor & Gamble has since made use of these
findings, reducing the number of versions of Head & Shoulders shampoo
from 26 to 15. Sales subsequently increased by 10%.

RULE 1:

Technology is a category that has many examples of this with ecommerce

sites offering a huge number of categories and sub-categories, with too
many options in each of these categories and overly complicated ways of
customizing products. Clearly, the content needs to be simple and organized
in a straightforward way for consumers to stay and use the products.

Dont overload consumers with too much choice

Case study:
The history of consumer electronics is littered with companies that have
boasted extensive ranges of devices, all absorbed with the commercial
desire to cover as much as the market as possible to generate revenue
across the board. Of course, this can result in choice overload. Consumer
electronics company Apple have gone to the other end of the spectrum
by having an extremely minimal product range, to the extent that the new
version of the iPad is referred to as exactly that, the new iPad, not even
giving it an upgrade number as has been common practice in the past.

Behavioral Economics

Prior to making a purchase choice, consumers generally review the market

and begin to identify their preferences. Behavioral Economics research
has shown that it is increasingly clear that preferences are actually very
malleable and influenced by all manner of context effects.
A good example of this is a classic experiment which offered people a
choice of two cameras. One was an upmarket camera boasting various
special features; the other was a much cheaper, basic model. Broadly equal
numbers of people were interested in each camera.
Another study was then undertaken with the same two cameras but this
time with the addition of an even better, more feature-packed camera. In
this scenario, the camera that was previously a photographers dream is
now the middle-range option. However, in this new context, the camera
improved its market share with more than 50% of respondents choosing
that item. The camera (which still has the same features as it had in the
previous context, as well as the same price) won over more customers as it
now looks like a good compromise - a deal hard to pass by.

RULE 2:
Consider the positioning of your most profitable options

So consumers preferences are clearly governed by the context of options

that they do not choose, a finding that has implications for how technology
brands seeks to position their products in the market both relative to
competition and indeed within their own portfolio

Case study:
An interesting example is the effect of a decoy option on preference for
The Economist subscription renewals. Participants for this were shown a
combination of 3 options:
(1) Online only for US$59
(2) Print only for US$125
(3) Print and online for US$125
The first group saw all 3 and unsurprisingly no body picked option 2 and
84% chose option 3. So what is the point of option 2? Well, when it was
removed for the next group the number of people choosing option 3
dropped to 32%. Option 2 effectively acted as a decoy making the print and
online subscription seem far more attractive than when it was absent.

Behavioral Economics

Consumers struggle to juggle a large number of variables at a time. One

study illustrated this well by looking at the way in which magistrates (a
court official in UK courts) make decisions concerning whether to allow
defendants to have bail (go free until their next court appearance) or
whether to retain them on remand (keep them in jail until their next court
appearance). Although magistrates are instructed to make their decision
based on a wide range of different variables, in the vast majority of cases
the researchers found that it was ultimately only one or two pieces of
information that influenced the decision (in this case the advice of the
prosecution).

RULE 3:
Help consumers make fast and frugal decisions

This fast and frugal means of decision making is a useful, adaptive skill we
adopt in an attempt to simplify the otherwise complex myriad of everyday
decisions we may have to make. This is pertinent for many companies which
often provide consumers with a large amount of information concerning the
variety of features that their proposition may offer. The fast and frugal
rule means that it is critical to understand which features consumers focus
on when making their purchase decisions.

Case study:
Work weve undertaken has explored how consumers make decisions about
the purchase of new televisions. As the TV market is evolving with the
introduction of some disruptive new features, consumers may be inclined to
balance these with other more well-known facets such as price
and brand. However, our initial study has indicated that the vast majority of
consumers only use one piece of information to generate a shortlist - price.
More work is underway to examine if a larger number of features are used
when comparing TVs within the same price range. Nevertheless, in the
meantime this is a sober finding for television manufacturers.

Behavioral Economics

Once consumers make a purchase and own an item they revalue it,
resulting in a reluctance to give it up or exchange it for any other item.
An example is a study where participants in three different groups were
offered a choice between the same two goods, a coffee mug and a bar of
Swiss chocolate. In the first group, upon completing a short questionnaire,
students were asked to choose between the two goods. The result was a
roughly equal split in preference.
Meanwhile, all students in the second class were given the coffee mug
at the beginning of a session as a reward for completing the same task.
On completion of the task, the students were shown the bar of Swiss
chocolate that they could immediately receive in exchange for the mug.
The students in the third class were offered the opportunity to make
the opposite, having been given the chocolate bar first. In each case, the
majority of students chose not to make the exchange.
This neatly illustrates how consumers, once in possession of an item, will
endow it with a greater value than they otherwise would have done.

RULE 4:
Encourage consumers to take ownership of your services

This effect is so strong that it extends to situations where people just

imagine owning an object, a pseudo-endowment effect. This has been
repeatedly shown to affect people bidding for objects on online auction
sites. If someone becomes the highest bidder they begin to start
concretely thinking about possessing their desired item, leading them
to pursue the item more aggressively if they get outbid. This has been
proven to occur on a range of products from cars to furniture.
The implications for companies is to give consumers a sense of ownership
of their purchase

Case study:
An area in which the endowment effect has been put to great use is in
the offering of free trials. People are disproportionately affected by loss
compared to what they might gain. This partial ownership changes our
perception, so instead of gaining a product at the point of purchase we are
effectively losing one, making it hard for us to give up what we just had.
A great example of this is online retailer Amazons free trial of its express
delivery service Amazon Prime. Their limited trial makes customers focus
on what they will lose if they cancel their subscription.

Behavioral Economics

Studies have shown there to be a difference between what consumers have

actually experienced and what they remember experiencing. This is a subtle
but critically important distinction that has significant implications for the
way in which brands manage customer experiences.
A significant, if rather wince-inducing, study from the early 90s looked at
the experience of patients undergoing a colonoscopy. At that time, this
was a treatment which was administered without the benefit of anesthetics
and was thus considered to be very painful. Patients were asked to report
their pain levels every 60 seconds, a demonstration of real commitment
to the cause of research! When the patients were asked to report their
retrospective evaluation of the treatment, researchers found that the
average or total amount of pain was much less important than the peak pain
experience or the level of pain that occurred at the end of the operation.

RULE 5:
Focus on providing memorable moments

This finding is crucial for brands which must ensure that the in-life
management of their customers has some key positive experience,
particularly towards the end of the life cycle.

Case study:
The clear lesson here is to create positive peaks and positive endings.
The former could be a surprise free gift. Meanwhile, a positive ending
might be extending a subscription for a short while. Many companies
aim to deliver on these. A good example is food-delivery company Abel
and Cole which regularly puts tasty surprises in its vegetable boxes.
We suspect that the often low value items, such as an avocado, have a
disproportionately high impact on consumers and are, therefore, a great
means of driving customer loyalty.

Behavioral Economics

Advertising is hugely dependent on memory to guide subsequent decision

making and behavior. Given the time delay between consumers exposure
to advertising and their opportunity to purchase the advertised product,
there is a need to improve consumers memory at the point of purchase. The
placement of advertising retrieval cues (verbal or visual information from the
ad) has been shown to trigger recall and increase advertising effectiveness.
Research has demonstrated that retrieval cues can lead to more favorable
brand evaluation and can effectively increase likelihood of purchase.
Are all cues the same?

RULE 6:
The power of memory cues

The use of retrieval cues is not a panacea. Cue effectiveness to prompt brand
recall is highly determined by the cues ability to bring to mind only that
specific brand. However, within product categories, there is a substantial
overlap of information leading to the use of the same advertising cues. Used
at the point of purchase, those shared cues will not be beneficial to a specific
brand as they will prompt memory for other, same category, brands as well.
What is the solution? To identify the most effective advertising cues for each
brand and avoid cues that are also related to competitors.

Case study:
We have undertaken work exploring the most effective retrieval cues. We
began by exposing consumers to TV advertising in a low involvement way.
Subsequently, after a time lag of week, the participants were presented
with a variety of advertising cues. Results indicated that not all cues were
successful in prompting brand recall. Only advertising cues that were
distinctive and unique to the brand were able to retain the memory for that
brand and the product characteristics. Advertising needs to increase the
use of information that is distinctive and unique to a specific brand and use
that information alone as a retrieval cue in the retail environment.

Behavioral Economics

Most pricing strategies are governed by market exchange norms and

establish a money-market relationship between the seller and consumer.
Participating pricing is a new pricing mechanism where the consumer has
complete control over the price they pay. This promotes a social-market
relationship governed by social exchange norms, like norms of distribution
or cooperation. Previous research has shown that this strategy increases
consumers intent to purchase. Consumers are strongly motivated by
concerns of fairness and reciprocity [2]. People help those who are kind to
them and punish those who are unkind [3].
Companies increasingly try to create shared value by developing profitable
business strategies that deliver tangible social benefits. This is creating
major new opportunities for profit and competitive advantage at the same
time as benefiting society by unleashing the power of business to help solve
fundamental global problems. However, Corporate Social Responsibility
activity can be treated with scepticism and suspicion by the customers.
Introducing a participating price model can promote the establishment of a
Shared Social Responsibility that could reinstate the trust to the seller and
encourage purchasing behavior.

RULE 7:
Encourage social norms

Case study:
A field study was conducted at an amusement park. Fairgoers riding a roller
coaster were photographed during the ride and then decided whether
to buy the photo or not. In one condition, the photo had a fixed price of
US$12.95. In the other condition, participants were free to pay what they
wanted. Participants in both situations were told that half of the revenues
would go to charity.
Total sales suggest that Shared Social Responsibility promoted by the pay
what you want model is substantially more profitable (US$6224) compared
to Corporate Social Responsibility (US$2331)
As stated at the outset, Behavioral Economics is in many ways an exercise
in making explicit many of the mechanisms that we have implicitly
understood but struggled to generalize. For example, we knew that if an
item was running out then people would see it as a sign of popularity,
being more likely to want to purchase it themselves. But what we have
failed to recognize is the contexts in which this operates, how powerful it
is, who it influences (or not) and so on. Behavioral Economics extends our
understanding of consumer behavior and allows brands to avoid common
pitfalls.
We strongly believe that Behavioral Economics has real benefits for brands
wishing to enhance their consumer insights. It can be particularly powerful
when integrated with existing survey work to fully embrace a rounded
understanding of the consumer context. If you wish to find out more, please
dont hesitate to get in touch.

GfKs Research Centre for Behavioral Economics

Contact

GfKs Research Centre for Behavioral Economics was established in 2012

as a joint initiative between GfK and academic institutions. Together,
we undertake primary research using leading-edge market research
techniques combined with the latest Behavioral Economics thinking to
generate fresh thinking on business challenges.

References
[1] Based on illustration found in - Shepard, R.N. (1981) Psychological
complementarity. In: Kubovy, M. & Pomerantz, J.R. (eds) Perceptual
organization, pp. 279342. Hillsdale, NJ: Lawrence Erlbaum Associates.
[2] Andreoni, J. and Miller, J. (2002) Giving according to Garp: an
experimental test of consistency of preferences for altruism,
Econometrica, vol. 70, no. 2, March, pp. 737-753.
[3] Rabin, M. (1993) Incorporating Fairness Into Game Theory and
Economics, The American Economic Review, vol. 83, pp. 1281-1302.

More information

To find out more about Behavioral Economics, please contact the author:

Colin Strong

GfK NOP | Ludgate House | 245 Blackfriars Road | London | SE1 9UL
United Kingdom
T +44 (0)20 7890 9186
colin.strong@gfk.com