Wednesday, January 26, 2011

BE and Marketers' Tool Kit

The art of selling, as a body of knowledge, is quite like folk art form. Much of it is not formally documented and passed down through societal intuition. This knowledge or intuition often works very well for the marketers. Behavioural economics in the last few decades has thrown some light in practices oft used but less understood.  Behavioural research on decision making in psychology, marketing, economics and related fields is substantially advancing our understanding of how and why many established marketing principles work. To the extent that these advances deepen our understanding of consumer behaviour, that’s a win for everyone.
In this article we will talk about some interesting and obvious tools that every marketer should have up his sleeves. These are used but randomly by companies. A systematic focus and strategy would help marketers win their customer over time over and over again.

1.       Make a Product’s Cost Less Painful
In almost every purchasing decision, consumers have the option to do nothing: they can always save their money for another day. That’s why the marketer’s task is not just to beat competitors but also to persuade shoppers to part with their money in the first place. According to economic principle, the pain of payment should be identical for every buck we spend. However, the reality is quite different.

Marketers know that delayed payment option can increase customers’ willingness to buy. One logical explanation is: the time value of money makes future payments less costly than immediate ones. But there is a second, less rational basis for this phenomenon. Payments, like all losses, are viscerally unpleasant. But emotions experienced in the present—now—are especially important. (For the same reason many of us avoid meeting our bosses when things are not moving at work and try pushing the encounter for later)  Even small delays in payment can soften the immediate sting of parting with your money and thereby remove an important barrier to purchase.

Another way to minimize the pain of payment is to understand the ways “mental accounting” affects decision making. Consumers use different mental accounts for money they obtain from different sources rather than treating every rupee they own equally, as economists believe they do, or should. Commonly observed mental accounts include windfall gains, pocket money, income, and savings. Windfall gains and pocket money are usually the easiest for consumers to spend because they are least valued. Income is less easy to relinquish, and savings the most difficult of all. Marketers can be effective by understanding the sources of money with their customers. For example banks can develop algorithm to identify regular income and windfall gains and pitch financial products to customers.

2.       Power of Default Option

Evidence abound that presenting one option as a default increases the chance it will be chosen. Defaults—what you get if you don’t actively make a choice—work partly by instilling a perception of ownership before any purchase takes place. Sometimes when we’re “given” something by default, it becomes a part of us—and we are more loath to part with it. A McKinsey study reveals the following- an Italian telecom company increased the acceptance rate of an offer made to customers when they called to cancel their service. Originally, a script informed them that they would receive 100 free calls if they kept their plan. The script was reworded to say, “We have already credited your account with 100 calls—how could you use those?” Many customers did not want to give up free talk time they felt they already owned. The spin of default option turned the decision on its head!!

Defaults work best when decision makers are too indifferent, confused, or conflicted to consider their options. That principle is particularly relevant in a world that’s increasingly awash with choices—a default eliminates the need to make a decision. The default, however, must also be a good choice for most people. Attempting to mislead customers will ultimately backfire by breeding distrust.

3.       Paradox of Choice

More choice does not always lead to higher utility as many economists believe. In absence of a default option, marketers must be wary of generating “choice overload,” which makes consumers less likely to purchase. In a classic field experiment, some grocery store shoppers were offered the chance to taste a selection of 24 jams, while others were offered only 6. The greater variety drew more shoppers to sample the jams, but few made a purchase. By contrast, although fewer consumers stopped to taste the 6 jams on offer, sales from this group were more than five times higher.

There are two problems when marketers present great number of choices to customers. First, these choices make consumers work harder to find their preferred option, a potential barrier to purchase. Second, large assortments lead to a heightened awareness that every option requires you to forgo desirable features available in some other product. And this will reduce the experienced utility of the chosen option. Reducing the number of options makes people likelier not only to reach a decision easily but also to feel more satisfied with their choice.

4.       Positioning Your Preferred Option Carefully

How marketers position a product, can influence the buyers immensely. Consider the experience of the jewellery store owner whose consignment of turquoise jewellery wasn’t selling. Displaying it more prominently didn’t achieve anything, nor did increased efforts by her sales staff. Exasperated, she gave her sales manager instructions to mark the lot down “x½” and departed on a buying trip. On her return, she found that the manager misread the note and had mistakenly doubled the price of the items—and sold the lot. In this case; shoppers almost certainly didn’t base their purchases on an absolute maximum price. Instead, they made inferences from the price about the jewellery’s quality, which generated a context  specific willingness to pay.

The power of this kind of relative positioning explains why marketers sometimes benefit from offering a few clearly inferior options. Even if they don’t sell, they may increase sales of slightly better products the store really wants to move. Similarly, many restaurants find that the second-most-expensive bottle of wine is very popular—and so is the second cheapest. Customers who buy the former feel they are getting something special but not going over the top. Those who buy the latter feel they are getting a bargain but not being cheap. Sony found the same thing with headphones: consumers buy them at a given price if there is a more expensive option—but not if they are the most expensive option on offer.

Another way to position choices relates not to the products a company offers but to the way it displays them. Our research suggests, for instance, that ice cream shoppers in grocery stores look at the brand first, flavor second, and price last. Organizing supermarket aisles according to way consumers prefer to buy specific products makes customers both happier and less likely to base their purchase decisions on price—allowing retailers to sell higherpriced, higher-margin products. (This explains why aisles are rarely organized by price.) For thermostats, by contrast, people generally start with price, then function, and finally brand. The merchandise layout should therefore be quite different.

Marketers have long been aware that irrationality helps shape consumer behavior. Behavioral economics can make that irrationality more predictable. Understanding exactly how small changes to the details of an offer can influence the way people react to it is crucial to unlocking significant value—often at very low cost.

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