Behavioral economics: How users make a choice?

Have you ever wondered how users are influenced to make decisions? Marketing, that’s how. Presenting the user with the right content at the right time is essential to making or breaking a sale. Let’s look at the thought process of a customer when making a purchasing decision to understand how a potential lead can convert to a valuable customer.

We simply hate losing

Let’s start by looking at a psychology phenomenon known as ‘loss aversion bias’. Don’t worry, it’s not as complex as it sounds. It is the simple idea that the pain of losing something is greater than the satisfaction of an equivalent gain.

Let’s look at an example to understand this better. Ananya is a friend of mine who purchased a product through a digital e-commerce platform for $10. After the product was shipped, she realized that she was charged 30$ in total. She emailed the support team and received a boilerplate response. Later, she got in touch with a person working in the ops team and figured out that she was charged for the wrong product. She had to compose a new email explaining her situation with all necessary details. After 2 weeks in total, she received the difference of 10$ as refund.
Now, let’s relook this as a business proposition for Ananya. The task will potentially consume 4 hours which will require her to contact and get in touch with a few customer support people which involve few email exchanges. I offered her 10$ in total (the exact same amount she received as refund) and she rejected the offer spontaneously.

In ‘Predictably Irrational’ a renowned book of behavioural economics,by noted economist Dan Ariely, he writes that while assessing the pros and cons of any transaction/exchange, we tend to focus more on what we might lose in the bargain rather than what we stand to gain which adversely influences our decisions and behaviors. Or putting it even shorter: we simply hate losing. And that creates loss aversion.

Is loss aversion bias dangerous?

Loss aversion bias brings in another bias called ‘sunk cost fallacy’. Let’s look at a simple example to understand this effect.

Imagine you go for a movie and realize you hate it after spending 10 minutes in the theatre. You will tend to stick around for the next 2 hours in misery even though you hate it. The ticket for the movie has already been paid, so you don’t want to waste money by not seeing it. If you are not enjoying the movie, it’s simply going to make the situation much worse. This is a classic example of sunk cost fallacy.

How does the above translate to marketing?

Loss aversion bias is an effective technique to persuade people to buy products. To leverage this phenomenon, express the outcome (in this case of buying a product) in a loss frame. Talk about what your customers will lose rather than what they would gain by buying it. Carefully observe what the above advertisement in the image reads. It reads ‘Save upto 70%’ rather than ‘Get 70%’ which makes a lot of difference. Focus on what your prospects will lose if they don’t take up the offer rather than what they will gain.

Help the user overcome their fear

For products or services, we can convince users to take certain actions by understanding what their inhibitions may be. If we can discover people’s concerns through user research, we can guide them to overcome their fears. For example, users might be unwilling to fill a form, because they are worried about the time consumption for the task. For such scenarios, the users can be given information such as average time taken to fill the form to help them overcome their fear.
A classic example is asking users to enter their income while filling a form. Make the user less insecure to reduce the drop off at every level of the consumer funnel.

Power of ownership

Have you ever realized that the price at which you sell second-hand goods is often higher than the price you would be prepared to pay if you bought the item? Ever wondered why? This phenomenon is known as the endowment/ ownership effect. The ownership of goods appears to increase the perceived value of an item, particularly for goods that are not frequently traded.
Once we have something, we don’t want to let go of it. If you let your customers own the product for a while, they will be more likely to buy it. Classic examples are products which offer a trial period which allows users to experience and use the product for free.

The Way Forward

Consumer psychology plays a crucial role in today’s world. Even though ‘loss aversion’ is a simple idea that we feel more pain at losing something than we feel pleased when we gain something of equal value, it can have a major impact on driving sales for your company. It is also a widely accepted theory which can be tested easily and increases the chance of the prospect taking a risk while making a purchasing decision. The key takeaway here is to continually experiment and optimize. As this article has shown, small tweaks can make a huge difference.

-Authored by Sailesh Dev, Software Engineer at Haptik.

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