Only Behavioral Economics Can Improve Your Business!

September 21, 2020 6 min read
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Fundamental Rules You Can’t Afford To Ignore About Behavioral Economics.

95% of the decision-making process happens in subconsciousness: we often don’t know exactly why we chose A and not B. 

Warnings on cigarette packages don’t scare smokers off. On the contrary, fMRI images show smokers crave for a puff when they see them. Before rationally reading and analyzing the text, the brain associates the warnings with the pleasure of smoking! 

Are you wondering if there’s any explanation to these weirdly illogical, yet authentic facts? 

Well, Behaviorism might have some interesting explanatory facts in store for us! 

So buck up for some not-so-obvious information, because here we have every crucial thing there is to know about Behaviorism, Behavioral Economics and Business Techniques! 

Behaviorism: Outlined and Applied

Behaviorism is a theory of learning which states all behaviors are learned through interaction with the environment through a process called conditioning. Thus, behavior is simply a response to environmental stimuli.

Behaviorism consists of two central components: Operant and Classical Conditioning.

Operant Conditioning 

Operant Conditioning, an integral part of modern behaviorism, is the shaping of future behavior based on past rewards or punishments.

Google Pay is one of the most popularly used apps for payments. 

How does it stand out from all the other payment apps? 

Of course, its simple and short payment procedure plays a pivotal role.

But if someone asks you what’s the best part about Google Pay, what will you say? 

google Behavioral Economics examples

Yes! That picture right there is your favourite part about using Google Pay, isn’t it? 

Scratch cards and other offers are rewards that condition us into inherently using Google Pay for every payment, in the hope of earning more and more rewards! 

Classical conditioning 

Classical Conditioning can be simply understood through the classic experiment performed by Ivan Pavlov.

In the infamous experiment that Pavlov conducted with his dogs, Pavlov found that objects or events could trigger a conditioned response. The experiments began with Pavlov demonstrating how the presence of a bowl of dog food would trigger salivation. 

Pavlov then designed an experiment using a bell as a neutral stimulus. As he gave food to the dogs, he rang the bell. Then, after repeating this procedure for a few days (first ringing the bell and then providing food), he rang the bell but did not provide food to the dogs. However, this time, even though the food was not provided, the ringing of the bell alone caused the dogs to salivate. This happened because the dogs were classically conditioned to expect or associate the ringing of the bell followed by food, hence causing them to salivate. 

The theory can also work with specific brands. A consumer may start associating a brand name or product with a certain perception after repeated marketing efforts and/or experience with the brand or product.

According to Nestle research, 60% of sensory sensations comes from the surroundings (the place where we drink our coffee), not the beverage itself.

At some point, we all might have observed ourselves associating Starbucks to aesthetic ambience, light music and the alluring aroma of coffee.

Oh, did we just forget to mention coffee itself amidst the other features of Starbucks? 

Behavioral Economics used by Startbucks

Our classical conditioning of Starbucks involves much more than just coffee. 

We think of it as a peaceful place with an aesthetically pleasing ambience, with light music and the aroma of coffee.

On any random day, we might observe some people in Starbucks studying, working on their laptops, or reading books  owing to the above mentioned captivating features of Starbucks. Those people are highly likely to buy a cup of coffee (which might even be overpriced) or a muffin, (thanks to classical conditioning!) although their initial motive to go there might not be to have some coffee.

That’s precisely what makes Starbucks and its outstanding Sales strategies stand out. Apart from customers who visit it to have coffee, it also turns readers and nerds into its customers! 

Knowing what Behaviorism is, and the way it’s applied in Sales and Marketing, we can now delve into the details of what is termed as Behavioral Economics. 

What is Behavioral Economics?

Behavioral Economics is a study that intersects the teachings of psychology and economics. 

Unlike the field of classical economics, in which decision-making is entirely based on cold-headed logic, behavioral economics acknowledges the role of irrational behavior in decision making and attempts to understand why this may be the case.

Principles of Behavioral Economics have major consequences for how we live our lives. By understanding the impact they have on our behavior, we can actively work to shape our realities.

Sales Strategies: Behaviorism in Disguise

The Power of “Free”

As humans, anything free is hugely motivating and attractive to us. Consumers love freebies. But the companies handing out complimentary donuts, comic books, ice cream, and pancakes love giveaways even more. On the surface, freebies look like obvious money losers. 

But when handled wisely, giveaways are guaranteed to boost sales. Simply giving the product into the hands of consumers is something of a success: After all, every person who tries it out has the potential of becoming a lifelong customer. Besides, the customers feel obligated to buy something, owing to the reciprocity principle, although they didn’t ask for the giveaway in the first place. Also, consumers talk more about freebies. Word of mouth is as powerful a tool for publicity as traditional advertising, according to research. 

For Halloween 2017, Burger King launched their scary Clown Night campaign. They offered a free Whopper burger to anyone who came to the branch dressed as a clown on Halloween.

Attracting over 110,000 clowns into their branches worldwide that night, there were plenty of free Whoppers snapped up. But with their bold move, Burger King’s global sales went up by 15% that evening. That really is the power of “free”.

Irrational Value Assessment

A simple application of Pavlovian theory is the response that some consumers have when they hear the word “sale.” It can generate an urge to shop, even if people have no specific need at the time. This is because people are classically conditioned to associate “Sale” with shopping and saving money at the same time. 

Combined with the classical conditioning of the word “Sale”, comes the irrational value assessment. You are likely to admire a $5 product, if the brand tells you that it costs $45? Research says you are. This is usually the strategy used by marketers and business leaders, as a part of any Sale. That’s what the cancelled prices are all about! 

Dominated Alternatives and Attribute Priming

Can just talking to customers about a certain attribute of the product, make them desire that attribute more? Research says YES! 

This technique is called Attribute Priming. 

Besides, attribute priming of the target product also eliminates the chances of losing any customer due to decision paralysis. It’s like killing two birds with the same stone! 

Dominated Alternatives and Attribute Priming can be used to boost sales of a product that the brand desires to sell. 

This can be done by making the product a ‘dominated alternative’, i.e; A third decoy option that you are more likely to choose and it’s exactly the one that the brand secretly wants you to choose.

Behavioral Economics:  Some Behavioral Ninja Techniques

The door-in-the-face (DITF) technique is a compliance method in which (in this context) the salesperson attempts to convince the consumer to buy an expensive product, that the person will most likely turn down, much like a metaphorical slamming of a door in the salesperson’s face. But the person is very likely to agree to make a smaller purchase, proposed by the salesperson after that. 

This technique works due to the guilt that a person feels on having refused the large request. That is why the person tends to agree when asked for a smaller favour. 

example of Behavioral Economics

The low-balling technique is a persuasion tactic in which an item is initially offered at a lower price than one expects in order to get the buyer to commit; then, the price is suddenly increased. The low-balling technique is commonly used among salesmen and advertisers.

Foot-in-the-door technique is a compliance tactic that aims at getting a person to agree to a large request by having them agree to a small request first. This technique works due to the creation of a connection or bond between the person asking for a request and the person that is being asked.

This is because people are more likely to help people they’ve already helped before.

It works on a principle opposite to that of the Door-in-the-face technique. 

Behavioral Economics example cats illustrations

This very old sales approach is based on getting the prospect to agree to something small, and then asking for something bigger. The classic example would be selling a small product at a very low price, and then later selling something more costly to the same prospect. 

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Neuromarketing is the process of researching the brain patterns of consumers. Learn all about neuromarketing, and it’s common myths.