Emotion, rather than logic is the major driving force of the decision-making process of customers. This is why the behavioral economics model is a much better approach than the conventional economics model.
The conventional economics model assumes that customers are always logical, have perfect knowledge, and make decisions based on cost and benefits. Contrarily, behavioral economics acknowledges that humans are not always logical and that a range of outside influences affects their choices.
In marketing, behavioral economics teaches us how to build stronger relationships with consumers. It increases the effectiveness of our advertisements and fosters enduring loyalty. In this article, I will discuss how you can use behavioral economics to increase sales.
What is behavioral economics?
Behavioral economics combines human psychology with economics and examines how our financial decisions are influenced by psychological, cognitive, emotional, cultural, and social aspects. In terms of psychology, people don’t always think logically. This is because our thoughts are influenced by our emotions, prejudices, and social interactions.
Every purchase choice involves both cognitive and psychological processes. No two persons think similarly from a cognitive standpoint. It’s crucial to keep this in mind since what resonates with one individual could not have any significance for another.
It will be simpler to adapt your sales presentation to the person in front of you if you have a deeper understanding of the problems that influence consumer behavior. This information enhances product design, marketing, and business decision-making.
Key principles of behavioral economics
Several principles under behavioral economics can be used to explain certain customer behaviours. You may use one or a number of these principles to encourage consumers to patronize your business. Be aware of these principles, and know when to use one or another for a given circumstance. You don’t have to employ all of these ideas at once, but they should all be tools in your arsenal.
The idea that if someone you know and trust is satisfied with a product or service, you will be as well is known as social proof and authority.
Testimonials, reviews, and endorsements are powerful tools for building credibility and trust with potential clients. Reliable endorsements might be provided by a client’s friends, relatives, or a medical practitioner.
Because they eliminate ambiguity and streamline decision-making, the social proof and authourity tactics work well.
2. Anchoring effect
Because of anchoring bias, we often believe the first information we are given. Our opinions and decisions may be significantly impacted by this initial “anchor” even if it is incorrect or unimportant.
Marketers may affect customer behavior by providing a reference point, or anchor, that frames subsequent information since people’s judgments are often impacted by the first piece of information they get.
Showing the buyer how big of a bargain they are receiving by placing the reduced price next to the standard price is a popular example of an anchoring approach. The lowered price subsequently becomes the new norm for the cost of a product.
3. Scarcity and urgency
Customers develop a perception of the item’s worth due to the difficulty of obtaining it, regardless of whether it is a great bargain or not.
Exclusive offers and limited-time promotions are instances of scarcity and urgency. For clients who dislike missing out on things, this is a successful tactic.
The aim is to encourage consumers to make decisions more quickly than they otherwise could have, so scarcity or urgency is an effective marketing tactic.
4. Loss aversion and risk reduction
Also known as the prospect theory. This suggests that when consumers are unsure about making a purchase, they are more likely to avoid a loss than to acquire a gain.
It may be more successful to frame marketing communications in terms of prospective losses rather than potential rewards since customers value preventing losses more than making gains.
5. The decoy effect
The decoy effect is employed when there are two options, one option is the desired option, that is, the option marketers want the customers to buy. A third option is added to the mix and is usually asymmetrically dominated; that is, it pales in comparison to the desired option, whereas it is only slightly inferior to the other option.
If the customer was considering the other option before, the addition of the third option will skew the customer’s preferences in favor of the desired option.
6. Framing effect
Influencing consumer perceptions via the presentation of advertisements and other marketing initiatives is known as a framing effects technique.
Stressing a product’s advantages and demonstrating how it shields the customer against loss or damage is a good use of this tactic.
7. The endowment effect
People tend to value the objects they own more than objects they don’t own, so would be willing to pay more to retain what is theirs than purchase something else. One way to take advantage of this principle is by offering free samples and trial periods.
When customers have a taste of your product and it works well for them, they will be more willing to stick to your product than purchase something else.
8. Choice architecture
Everybody has days when they are just too mentally spent to consider all the options. Choice architecture is tactics that streamline the customer’s options and facilitate decision-making.
The theory is that if a consumer purchases without exerting any effort, they are more likely to stick with it than to back out.
The goal of choice architecture is to reduce a customer’s mental burden while they are making a purchase.
9. Cognitive ease
Our brains’ ability to discover information is known as cognitive ease. We enjoy and utilize it more when it’s easier. Marketers make products seem appealing, accessible, and easy to use.
Benefits of behavioral economics in increasing sales
Behavioral economics increases sales faster than any other economic model out there, which is why it is so popular. There are several benefits, including;
- A behavioral economics sales strategy addresses all of the fundamental problems that influence consumer behavior.
- Meeting your clients’ psychological requirements will increase their perceived worth as you attend to their mental health.
- Customers will see you as more reliable and trustworthy as you meet their emotional demands. Additionally, they would be delighted to share their positive experience with their friends.
- You will become better at incorporating social factors, prejudices, and emotions into your sales presentations with time and practice. In the end, you’ll achieve your objective of raising conversion rates while maintaining client satisfaction.
How to use behavioral economics to increase sales
You now have a basic understanding of behavioral economics and how it can help you increase sales. Now, let’s learn how to incorporate it into your marketing strategy.
1. Determine who your target audience is
Knowing your customers is the first step to understanding the reasons behind their behavior. Understanding why your target audience is a good match for your brand is just as important as being able to describe the traits of your target audience, such as demographics, income, their values, and their common views.
When creating your Unique Value Proposition, you must have a thorough understanding of the issues facing your target market and how your product or service offering addresses those issues in a novel manner.
2. Select the appropriate principle of behavioral economics
As previously said, behavioral principles are tools in your arsenal; not every situation requires every tool. In addition to determining the principles you believe will influence your audience’s behavior, you also need to ensure that your approach to using the tool aligns with your brand.
The scarcity principle may not be the best option for you, for instance, if your brand opposes discounting (preserving the premium pricing). A brand like this could be better suited for Social Proof.
3. Perform tests and evaluate outcomes
You must test regardless of the principles you decide to use. Human behavior is complex, and research is currently ongoing to determine how the internet affects our minds and behavior.
Furthermore, you must think about the effects of using any of these concepts as well as any possible drawbacks. When your behavioral intervention results in an inadvertent unfavorable reaction, this is known as the “backfire effect.” Wait until your behavioral adjustments have been fully tested and shown to be successful before revealing them to your audience.
4. Always adjust your approach
An experiment that doesn’t work out as intended may always teach you something new and provide you with more chances to improve your approach.
Take note of what you discovered about what worked and what didn’t with each trial. Improve on what worked, and look for alternative approaches to what didn’t work. Both your approach and your experiments should develop and evolve.
5. Be ethical
When used properly, the principles of behavioral economics may have a favorable effect on a company’s performance. Because these techniques can affect the emotions of customers and influence their actions, it is easy to overuse or misuse them. Above all, it is morally required to apply these guidelines ethically and refrain from purposefully misleading clients.
Behavioral economics should not only benefit you and your business, but your clients also, so customer satisfaction and happiness should be at the forefront of your mind whenever you employ any of the principles.
Conclusion
We can learn a lot from behavioral economics to improve our marketing. It enables us to comprehend the motivations behind people’s decisions. In this manner, we may increase the audience’s interest in our advertisements.
But it’s crucial to use these ideas morally and sensibly, avoiding deceptive strategies that take advantage of cognitive biases and heuristics.
