Behavioral Economics Deck

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October 27TH, 2010

SWITCHING BARRIERS RESEARCH

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UNDERSTANDING CONSUMER COMPLACENCY TO SWITCHING TO THE BEST OFFER According to behavioral economists, consumers don’t always behave rationally, like a market (in theory) does, and they don’t make decisions based solely on facts or logic such as price or quality. Other psychological factors have an impact on decisions. This explains why very often, consumers become complacent when faced with the best value proposition. FEAR OF OVERPAYMENT The opportunistic mindset is engrained in how people shop today. People have an expectation to get a deal and will not very easily purchase if they are convinced they could find better. The way value is framed is key reassuring people that they are getting a deal. FAMILIARITY AND FEAR OF CHANGE We are creatures of inertia. If we’re accustomed to buying a certain type or brand of product, we’ll continue to buy it even if there might be a better choice. The “known” is familiar and comfortable.

FACED WITH ‘OVERCHOICE’, THE RESULT IS NO CHOICE Increased choice makes us less able to choose. This is true in the cereal aisle, but it’s also true when shopping for cars, phone plans or for a mortgage. It’s easier to evaluate three products than it is to evaluate thirty.

THE NEGATIVE INERTIA OF BURIED TIME, EFFORT AND COST This is a strong mental barrier that causes us to apply a higher value to something once we have invested time, money or effort. And this dictates that we will work harder to avoid losing something than to pursue a gain, which leads to failing to see future value, because of what has already been invested in something.

Source: “Predictably Irrational: The hidden forces that shape our decisions”, Dan Ariely, 2010 “Market Perceptions”, Harvard Business School, 2001

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OVERCHOICE PARALYSIS
SOLUTION: CHOICE REMOVAL CREATE CHOICE FILTERS To prevent the risk of overwhelming customers with options and hence, delaying a purchase, the strategy is to leverage a type of filter and narrow the list of choices. REFRAME CONVERSATIONS TO REMOVE CHOICE For parity products, the strategy used seems to reframe the problem in such a way that makes consumers reevaluate their needs and realize that only one product can fulfill their need. This usually removes the other choices because they don’t deliver against that specific need anymore. Insurance companies introduced new packages to address new consumer needs and to remove other competitor choices.

IMPLICIT FILTERS
Netflix uses a filtering approach that leverages user ratings, movie genre frequency, and cross-sell likelihood.

COLLABORATIVE FILTERS
The online travel industry - a category rife with overchoice - is replicating the idea behind sites like Pandora to curate destinations based on tastes in other things and budget in order to simplify choices.

EXPLICIT FILTERS TO RESTRICT CHOICE

Credit card companies are using financial selfdiagnosis tools to provide users with a credit card offer that fits the profile and a simple tactic that forces choice.

Ultra-personalized financial services through self-segmentation

Source: NYTimes.com, Freakonomics Blog “ The Hidden Side of Behavioral Economics” Diamond Consulting Group Study on Behavioral Tactics

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FEAR OF OVERPAYMENT
SOLUTION: SHIFT THE FOCUS FROM HARD COST TO EMOTIONAL VALUE

TRANSPARENCY Ancillary costs like shipping costs, taxes, activation fees cause delayed purchase decisions. Being transparent about charges appeals to consumers on an emotional level eliciting trust. metroPCS advertises the absolute cost versus a perceived cost that will usually increase once taxes are added. Ally Bank display of the fees more clearly helps avoid surprises

EMOTIONAL GRATIFICATION Zappos uses emotional triggers, knowing that rushing a product into a shopper’s hands without delaying benefits is key to swaying consumers into buying and keeping a product. One of Zappos’ tactics is upgrading any purchase to...
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