How Understanding Behavioral Economics Can Improve Your Business

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Have you ever wondered why you put a lot of effort into certain purchase decisions, but cave in to an impulse buys for others? According to the field of behavioral economics, it's simply in human nature to repeatedly make "irrational" decisions that don't really make sense for our finances, health, well-being, etc.

We're driven by emotions and easily give in to cravings and desires. We like instant satisfaction and have a difficult time keeping our eye on long-term goals when so many distractions exist. Just think about how hard it is to stick to a diet! Although we're certainly capable of rationalization, our decision-making processes tend to happen on the spur-of-the-moment rather than not.

For example, you might spend hours fretting about your bank account and planning out a budget to rein in unnecessary spending. You vow to do better. But how long does it take before you buy an overpriced coffee or cheeseburger out of convenience? Many psychological forces fuel our decision-making processes, and the study of behavioral economics aims to uncover them and market products accordingly.

What Economics Gets Wrong

Economics traditionally takes a very rational approach when analyzing the market. Economists' findings then get passed down to business owners and marketers, who apply them in the same rational way. But this tactic assumes that consumers behave like economists, looking at supply and demand, pros and cons and market trends before buying anything.

Behavioral economics uncovers the truth of the matter: Human psychology somehow prevents us from being so analytical when we make our everyday purchase decisions.

On a personal level, this may sound disheartening. But the business owner in you should sit up and pay attention. Behavioral economics can inform the way you place products in the store, how you frame your advertising campaigns and much more. Once you understand the basics of behavioral economics, you just need a little creativity to put the principles into action.

Behavioral Economics Principles

Dozens of behavioral economics principles exist, but we'll talk about some popular ones to help you start to think about your business and marketing from a new perspective. When you understand the role of behavioral economics, you can strategize accordingly. Even just a few tweaks to your web copy can make a difference.

Anchoring Perspective Into an Initial Idea

The behavioral economics principle of anchoring plays a huge role in web design, marketing copy and even product placement. It refers to the idea that the first concept, price or reference point someone sees influences how they judge everything else that comes after.

Supermarkets understand this principle by showcasing delicious foods as soon as you walk in the doors. In fact, you often walk into the fresh produce section first or else walk past decadent bakery items. This is not random, but well-thought-out. It anchors you into thinking that everything else in the store is beautiful, healthy and delicious.

When you design your website, what's the first thing people see? When you write ad copy, what's the first word or phrase people will read? For example, if you want everyone to read the first page of your website while thinking about how much money they could save, mention the savings right away to anchor them onto that idea.

Consumers Love the Word 'Free'

Discounts work well, but if you can work the word "free" into your packaging or promotional material, behavioral economics says consumers will take notice and opt for the free choice.

TV infomercials use this tactic often, telling viewers that they can get a second product "absolutely free" if they call right away. But you can also pair different products together, offering one as "free" and included with the price of the other. For example, if you sell dog collars, adding a "free" dog leash to collar orders could boost sales in a limited-time sale.

Whether you run a buy one, get one free sale or include a small freebie item with each package, consumers place a high value on anything "free" and, given the choice, undoubtedly choose the free option time and time again.

Default Options and Decision Paralysis

The next two behavioral economics examples tend to work hand-in-hand. As consumers, we tend to trust that the default options presented to us come recommended by the manufacturer. In addition, if too many options lay before us, our decision-making ability essentially freezes in what's known as decision paralysis. Even when the choice we make is completely subjective — in other words, no option is "better" than another — we can still experience decision paralysis when too many options exist.

Therefore, if you sell a product that can come with many different features, you need to be aware of the pitfalls of allowing too much customization. Consumers are more likely to buy your default option than to choose to change it. This can work to your advantage if your default option includes features that consumers can actually subtract for a lower price, because our preference for and trust in default options holds strong even if we stand to save money through customization.

Trusting Price to Reflect Value or Quality

Do you know how much it actually costs to make the clothes you wear or the food you buy? The prices assigned to products and services are largely arbitrary, but we often trust those prices to be a true testament of the value or quality of a product.

A famous wine tasting study explored this concept. The tasters were more likely to rate expensive wines as higher quality when they knew the prices, even though the prices had been randomly assigned.

You can use this to your advantage when pricing your own products by pricing them higher than the price you actually truly want or need. Then, offer a discount that puts the product at your desired price point. Consumers will think they're getting a fantastic deal, when in fact they're paying the price you wanted all along.

Social Proof or Herding

We're social creatures and we like to follow the herd. We trust the opinions of other people — even if they're complete strangers. That's why products with great reviews tend to outsell competitive products with little to no customer feedback.

If you can work the concept of "other people are doing it, so should you!" into your ad copy or marketing, you can end up reeling in more customers. For example, don't just have a button that says "Subscribe" — make it say "Join 5,000 Other Happy Subscribers" for increased conversions.

Loss Aversion Versus Gain Attraction

According to behavioral economics, we are driven to action by the fear of losing something more than by the attraction of gaining something. Fortunately, almost any product or service pitch can be spun toward loss or gain with a little brainstorming. Just think about the clichéd wedding adage, "It's not losing a daughter, but gaining a son."

In other words, it all depends on how you look at things. And if you want people to buy, behavioral economics principles say you need consumers to look at things from a loss aversion perspective. Try some A/B testing with email newsletters, web copy or online advertisements to see for yourself whether loss aversion or gain attraction works better with your audience.

We Feel Better When Paying for Effort

It might be the easiest thing in the world for you to change a tire, but to someone who has never done it before, they'll gladly pay for the effort. In fact, according to behavioral economics, consumers are more willing to part with their money when they can see that the service takes significant effort.

This is bad news for anyone who works behind the scenes. In order to sell your service for the price you know you deserve, you may need to clue in your clients to the work that goes into the finished product.

Logo designers represent an example of people who may need to work this angle into their marketing materials. A professional logo can cost upwards of thousands of dollars, but clients might assume it should be "easy to just draw something quick." Consider a blog post or video that shows some of your day-to-day work and why your logos are worth it.

Procrastination, Scarcity and FOMO

How many times have you heard the phrase "Hurry! Limited time offer!" on a TV commercial? This is a tried-and-true marketing tactic that plays into the fact that people love to procrastinate. We'll wait until the last minute to do pretty much anything.

That's why you need to make it seem like people need to act right now in order to benefit from your sale. Don't run sales for two weeks — try running them for two days and putting the "fear of missing out (FOMO)" into the hearts of consumers.

And if it makes sense to do so, rotate your stock. For example, ice cream shops have plenty of flavors to offer, but rotating some of the flavors and promoting them as "limited time only" can spur people to stop in for a bite. After all, who knows when they'll get to taste that delicious flavor again. We're motivated by scarcity.

Reward Substitution and Immediate Satisfaction

We don't like to wait for happiness. We prefer to feel good as soon as possible, and if a product or service promises that we'll feel amazing once we get it, it takes a lot of willpower to hold ourselves back. And the behavioral economics principle of reward substitution says we're more likely to do things that are good for us in the long-run if we also get an immediate reward.

A face cleanser promises to give us softer skin over time, but we also feel good about taking care of ourselves after using it. We give money to a charity because it feels good to help others. If you can provide an immediate reward, all the better.

Get creative with this. Offer an instant and "free" ebook download with every purchase to keep customers entertained and excited while they wait for their product to arrive. For example, if you sell fitness products, offer an ebook that explains different diet strategies that people can start right away while their new exercise equipment ships. Or, give access to an exclusive exercise video that requires no equipment whatsoever.

Behavioral Economics Topics Are Extensive

Regardless of the industry, your business can benefit from the study of human behavior. If you really want to narrow in on the strategies that will get people to buy, start exploring behavioral economics in-depth. Economic trends don't mean anything to business owners until the underlying human behavior is revealed. The above list serves as a primer, but behavioral economics topics are extensive, so dive in to really put them to work.