Last week we spoke at Bajaj Finance on applying behavioural science to improve sales conversions, new product adoption, product portfolio, choice architecture, pricing strategies, employee behaviour change, productivity, performance management systems, learning and team collaboration.
One of the questions asked during the Q&A was what’s the difference between data science and behavioural science and what’s the role of both in business. We answered the question with the example of Uber. To make sure you can hire an Uber within couple of minutes of booking one and to make sure the cab arrives at the exact location around the time promised, Uber must be applying incredible amount of data science – matching user’s data with driver’s data and of course so much more we don’t understand as behavioural scientists. When Uber would use surge-pricing too, they would apply data science to incentivise drivers to reduce customer’s waiting time. But it didn’t go down well with anyone. So Uber changed its tactic from surge-pricing (1.8x) to upfront-pricing (Rs. 167). With upfront-pricing customers no longer feel its unfair because they are informed about the exact fare at the time of booking prior to the trip, which is a certain fixed amount and that puts customers at ease, even though in peak times Uber indicates that fares are higher due to higher demand. On the other hand, surge-pricing (1.8x) pinched people a lot more. But now with upfront-pricing, Uber is still able to charge a surcharge, but without pinching people as much, thereby improving customer experience. Uber’s upfront-pricing is an example of Behavioural Design.
When you give something free, people don’t value it. Even if your brand is being given free as a gift with the purchase of another brand, whether highly priced or not, it could backfire.
Behavioural scientist Priya Raghubir had participants view a duty-free catalog that featured liquor as the target product and a pearl bracelet as the bonus gift. One group was asked to evaluate the desirability and value of the pearl bracelet in the context of it being the gift, and another group was asked to evaluate the pearl bracelet by itself. She found that people were willing to pay around 35% less for the pearl bracelet when they saw it bundled with the target product as a gift, than when they saw it as a standalone product.
This happens because consumers might infer that the product’s manufacturer wouldn’t give away a valuable product for free. People may wonder what might be wrong with the gift or may assume that the gift is obsolete or out of style or isn’t selling or it may be plain junk.
One way of preventing such damage would be to inform consumers about the true value of the gift. So instead of a ‘Free backpack with the suitcase’, it should read ‘Free backpack worth Rs. 1990 with the suitcase’.
This has application for anyone looking to influence others. Says Robert Cialdini, Professor of Psychology and Marketing at Arizona State University, “by pointing out to a colleague that you were happy to work for two extra hours to help finish this important project, because you know how much it means to his/her prospects, you are valuing your time in your colleague’s eyes. Or you could use it to convince people that, in order to avoid having their opinion devalued, they should stop giving you free advice.”
Source: Free gift with purchase: Promoting free gifts with purchase: Promoting or discounting the brand? – Priya Raghubir – Journal of Consumer Psychology, 14(1&2), 181–185 (2004)
The tendency to be more sensitive to possible losses than to possible gains is one of the best-supported findings in behavioural science. Nobel laureate Daniel Kahneman and his colleague Amos Tversky were the first to test and document the notion of ‘loss aversion’ – the idea that we are more motivated to avoid losses than we are to acquire gains.
Loss aversion affects a lot of our decisions, in finance, negotiation, persuasion, etc. One consequence of loss aversion is that it makes inexperienced investors to prematurely sell stocks that have gained in value because they simply don’t want to lose what they’ve already gained. (We had also written about it in ‘Why we sell the wrong stocks’) Similarly, the desire to avoid any potential for a loss also makes investors to hold on to stocks that have lost value since the date of purchase. Because selling the stock would mean taking a loss on the investment, which most investors are reluctant to do, a decision that often precedes further stock price decline.
Another popular example of loss aversion is the debacle of New Coke. From 1981 to 1984, Coca-Cola company tested its new and old formulas in taste tests amongst two hundred thousand people across twenty-five cities. 55% of people preferred New Coke versus 45% who preferred the Old Coke. Though most of the tests were blind, in some of the tests people were told which was the New and Old Coke. Under those conditions, preference for New Coke increased by an additional 6%. Why did New Coke fail inspite of such extensive research?
Says Robert Cialdini, Professor of Psychology and Marketing at Arizona State University and advisor to Obama “During taste tests, it was New Coke that was unavailable to people for purchase, when they knew which sample was which. So they showed an especially strong preference for what they couldn’t purchase otherwise. People at the Coca-Cola company might have said, “Oh this means that when people know that they’re getting something new, their desire for it will shoot up.” But, in fact, what the 6% really meant was that when people know what it is they can’t buy, their desire for it will shoot up. Later when the company replaced Old Coke for New Coke, it was Old Coke that people couldn’t have, and it became the favorite.”
For people losing Old Coke was more valuable than gaining New Coke. What this means is that to make messages more persuasive they should be framed to avoid losses more than acquire gains. So a message like ‘Shop till you drop at 30% discount’ could be more persuasive if framed as, ‘Don’t miss the chance to shop at 30% discount’. The latter implies that the deal is scarce in some way (e.g. limited time) and that people could be losing the opportunity to get a good deal.
Sources: Daniel Kahneman and Nathan Novemsky – The Boundaries of Loss Aversion – Journal of Marketing Research 42:119-128 (2005)
Ziv Carmon and Dan Ariely – Focusing on the Forgone: How value can appear so different to buyers and sellers – Journal of Consumer Research (2000)
G.R. Shell – Bargaining for advantage (1999)
Often when companies introduce a premium variant of the product, sales of their existing best seller get a boost. Of course the premium variant could eventually go on to becoming the best seller, but by then, usually there is a luxury variant introduced on top of that premium one. Eg. Cadbury Silk has been a successful variant as well as given a boost to sales of regular Cadbury Dairy Milk. When Blue Label was added to Johnnie Walker’s range, Black Label benefited the most. Why does this happen?
According to decision researcher Itamar Simonson, when consumers consider a particular set of choices for a product, they tend to favor alternatives that are ‘compromise choices’ – choices that fall between what they need at a minimum, and what they could possibly spend at a maximum. When consumers make a decision between two variants, most compromise by opting for the less-expensive version. However, if a third variant (Blue Label) were to be offered that was more expensive than the other two choices, the ‘compromise choice’ would shift from the economy-priced variant (Red Label) to the moderately priced variant (Black Label), which is no longer the highest-priced variant. Thus upgrading consumers.
So while laying out the product portfolio it is important to recognize that the brand’s lowest-priced and highest-priced variants provide two important potential benefits for the business. One is that the top-of-the-line products (Blue Label) meet high-end needs of a niche group of current and future consumers. This is well recognized. But what’s not so recognized is that the next-highest-priced variant (Black Label) will more likely be considered attractively priced – the compromise choice.
An important part of the application of the ‘compromise choice’, says Robert Cialdini, Professor of Psychology and Marketing at Arizona State University, “It could happen that the brand faces an unexpected slump in the sales of the highest-priced variant, which might tempt you to stop offering that variant. However, removing that item from the set of consumer choices without replacing it with another top-of-the-line variant could produce a negative domino effect that would start with your next-highest variant of your product and work its way down. Such a shift in your consumer’s compromise choice would land you in a compromising position of your own.”
Even though you know on a conscious level that there is no important difference between those two numbers, our perception of them is radically different because our brain is not very good at equating those digits with a real world quantity. One study suggests it’s because our brain is reading the price like it reads everything else: left to right. It puts a higher value on the first thing we see so no matter what comes after that, we still wind up relating it to the first digit. No matter how much you tell yourself otherwise, Rs.499 still registers as “in the Rs.400 range” rather than “essentially Rs.500.” Or $4.99 still registers in the 4 range than 5.
In one of the most telling experiments, Rutgers University professor Dr. Robert Schindler and his colleagues did a real-life test with a women’s clothing catalog few years ago. The clothing line normally advertised items ending in 99 cents. For the experiment, the researchers divided the 90,000 customers into three groups. One group got catalogs with the traditional prices, one got prices ending in .00 and one got prices ending in .99. The 99-cent catalog significantly outperformed the .00 one, Dr. Schindler said, recording 8 percent higher sales even though the average price decrease was only three-hundredths of a percent.
A 99-cent ending “makes the price ‘feel’ less,” Dr. Schindler said, “and it goes deeper than just appearances. If you give people two ads for a blouse, one priced at $22 and one at $21.99, people are more likely to judge the $21.99 item as being on sale. “And there’s an emotional kick to getting a discount that makes a difference to consumers.”
Retailers also look at 99-cent pricing from the opposite direction, said Britt Beemer, chairman of America’s Research Group, which interviews up to 15,000 people a week to gauge consumer behavior and marketing techniques. “Let’s say your item is $49.99 vs. $49,” Mr. Beemer said.
“There is no perceived difference for most consumers between the two. The consumer looks at the dollar number and forgets the right-hand digits.” From the seller’s standpoint, then, the $49.99 price can yield them almost one extra dollar for each item, with no perceived difference in the price on the part of the buyer. Pretty handy for the US economy, I must say.
Having said that I think that premium retailers and brands, that don’t wish to be associated as a discount label, should have their prices end in round numbers because that will perhaps speak of ‘quality’ more than ‘discount’. What do you think?
We find this situation pretty much every time we go to the vegetable market (anywhere in India). But in reality its not just rich people who behave irrationally, it’s everyone. Two stalwarts of behavioural economics – Daniel Kahneman and Amos Tversky – explain such behaviour with the help of the following example in their paper “The framing of decisions and the psychology of choice” published in Science in 1981.
Suppose you have two errands to run today – to buy a new pen and a suit for work. At a stationary store, you find a nice pen for Rs. 250 (in the original paper the amounts are different and in $). You are set to buy it when you are told that the same pen is for sale for Rs. 150 at another store 10 minutes away. What would you do? Would you take the trip to save Rs. 100? Most people faced with this dilemma say they would take the trip to save Rs.100.
Now you are shopping for your suit. You find a luxurious gray pinstripe suit for say Rs. 5000. You are about to buy it when another customer tells you that the exact same suit is for sale for Rs. 4900 at another store 10 minutes away. Would you make the 10-minute trip? Most people say they would not.
What’s going on here? Is 10 minutes of your time worth Rs. 100 or not? Whether the amount from which this Rs. 100 will be saved should be irrelevant. But in comes the problem of relativity.
We make comparisons which are easy and available locally. We compare a cheap pen with an expensive one and this contrast makes it obvious to us that we should spend that extra time to save Rs. 100. At the same time, the relative advantage of the cheaper suit is very small, so we spend the extra Rs. 100.
Says Dan Ariely, “This is why it is so easy for a person to add $200 to a $5000 catering bill for a soup entrée, when the same person will clip coupons to save 25 cents on a one dollar can of soup. Or a person will find it easy to spend $3000 to upgrade to leather seats when he/she buys a new $25000 car, but finds it difficult to spend it on a leather sofa.”
Now if we can think broadly about which transactions could help us save a lot, and how else we could use that saved money we’ll be using our money and time better. As far as vegetable vendors are concerned, that money you saved by bargaining is relatively a lot for them.
I struggled all my studying years with MATH (Mental Abuse to Humans). I was so bad at math that I had even developed a method of memorizing patterns to solve problems, so that I could apply them in case a similar question came up in the exam paper. If you were and are good at math, I have very high regards for you, because most of the human race is simply bad at it.
Consider these two promotions. One is a flat ‘33% off’ on the MRP. The other is 33% more quantity of the product free. In short – ‘33% extra free’. Are both similar? Which one seems more attractive to you?
If both are similar in terms of a proposition to you, but you still prefer ‘33% extra free’, you’re in the majority. In a study, Akshay Rao, the General Mills Chair in Marketing at the University of Minnesota’s Carlson School of Management, asked undergraduate students to evaluate two deals on loose coffee beans — one with 33% more beans for free, the other at 33% off the price. All the participants chose ‘33% extra free’, inspite of ‘33% off’ being a quantitatively bigger and better offer favouring the customer. (33% off = 50% extra free)
The reason why we opt for ‘33% extra free’ is not just that we suck at math, but we are also infatuated with the idea of getting something for free. It seems as if the power of ‘free’ makes us worse at math.
Now, how you take advantage of this will depend on whether you are a consumer or a marketer.
Illustration by Mayur Tekchandaney