Essential Behavioral Economics Principles for Retailers

Emma Miller
Emma Miller
Guest Contributor

If you want to boost sales and generate profits, don’t invest all your time and energy into what to offer; rather, consider focusing on how to offer.

It’s long been a popular opinion among retailers that there’s little to no logic behind the way shoppers make purchasing decisions; they believed that a customer’s choice to buy a certain product is often, simply, irrational.

However, over time, retailers have found ways to affect shoppers’ decision processes and use it to their own advantage, all while unaware of the fact they are applying the principles of behavioral economics.

Behavioral economics helps understand how small changes in the way the product is offered can alter consumer behavior. Once you understand what drives people to jump at a certain offer, you can use that knowledge to maximize your sales and profits.

To ensure higher revenue, consider applying the following principles of behavioral economics.

Free is the luckiest number

One of the most powerful words that gets us instantly excited is “FREE.” Just stop for a second and think about it – it’s all around us, isn’t it?

It can be seen everywhere – from online businesses and services, to brick-and-mortar stores. And if you can see it, shoppers can, too. You may even think that, being so extensively showcased, shoppers have stopped reacting to it and are no longer so easily swayed into buying a certain product just because they get something else for free.

Trust me, this is far from the truth.

In fact, when used judiciously, its influence is so significant that it can help completely reverse consumers’ preferences and can affect their ultimate decision.

Why is that so?

The behavioral principle behind this is largely influenced by dopamine which affects, among other things, our emotional responses. Namely, our brain releases high levels of dopamine when we see or hear the word “free,” which automatically makes us feel happy and enthusiastic. And when shoppers are influenced by such strong emotions, they tend to make irrational decisions. As a consequence, the offer in question becomes very enticing and hard to resist. As Djuradj Caranovic, a retail innovation consultant and keynote speaker on business growth and development said, “Understanding the underlying principles of the human decision-making process is essential for retailers who are aiming to yield maximum profits.”

A decoy is what you need

As a retailer, you work hard on devising new sales strategies and tactics every month, putting certain products or services in sharper focus. It happens more often than not that you want to increase the sale of one particular product by placing two items side by side with an aim to direct your customers towards purchasing the one you deem preferable. In situations like these, presenting the shoppers with a third, alternative product could motivate them to choose the option you want them to. This principle is called the “decoy effect,” and was demonstrated for the very first time in 1982.

To understand how the introduction of a decoy offer really works, let’s have a look at how the Economist used it as leverage.

Buyers were given two subscription options – an online subscription for $59, and an offer featuring both online and print subscription for $125. Although the publishers’ hidden agenda was to sway their subscribers into choosing the latter option, the majority of them opted for the online one. In order to turn the tables, the publishers came up with a third option where subscribers were offered “print only” subscription for $125. Of course, they knew nobody would even consider choosing it; the sole purpose of such an offer was to serve as a decoy. And it worked! All of a sudden, the second option (an online and print subscription) became the most popular one chosen.

More is not always merrier

A popular belief nowadays is that consumers crave more choice. But is that really the case? As it turns out, when shoppers are faced with a large number of available options, their mind becomes overwhelmed and unable to process and evaluate each separate product. The outcome of this “choice overload” is the shopper’s decision not to buy anything at all.

If a potential customer has to work really hard to discover and purchase an item she considers the best fit, it creates a certain barrier in her mind that prevents her from realizing the purchase. Djuradj Caranovic further emphasizes that having too many varieties of a single product might cause customers to develop negative feelings toward all available options. The reason for this lies in the fact that by making a definite choice, buyers are (in a way) forced to forgo other products that also have some desirable qualities.

An experiment involving grocery shoppers was used to test this theory, and the results are pretty straightforward – fewer options available can, in fact, increase profits. The experiment involved two groups of researchers; one had six different types of jam on display, whilst the other presented 24 types. Although a larger number of people stopped and browsed the more varied display, the six-jar display ended up having five times higher sales.

The power of personalization

Customers are the heart of every successful business. That being said, businesses have to recognize the changing needs of their customers and find a way to cater to their demands while remaining profitable at the same time. By properly applying the principles of behavioral economics, retailers can design personalized incentives which can cause sales to skyrocket.

One of the greatest advantages of digital and technical advancements is the ability to collect and store customer data more easily. Such input allows retailers to track and predict customer behavior, as well as their preferences, which then enables them to create personalized offers designed to target a specific customer type.

For instance, phrasing your offer differently for each customer type will leave them with an impression that the offer is designed just for them; or embracing a dynamic pricing strategy so that each group of customers will get an offer that is in alignment with their purchasing habits.

Just remember this – if you want to boost sales and generate profits, don’t invest all your time and energy into what to offer. Instead, start focusing on how to offer it.

About the writer: Emma Miller is a digital marketer and blogger from Sydney. After getting a marketing degree she started working with Australian startups on business and marketing development. Emma writes for many relevant, industry related online publications and does a job of an Executive Editor at Bizzmark blog and a guest lecturer at Melbourne University. Interested in marketing, startups and latest business trends.

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