Behavioral Economics Deck
October 27TH, 2010
SWITCHING BARRIERS RESEARCH
1
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
2
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
SWITCHING BARRIERS RESEARCH
1
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
2
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