Behavioural economics can help brands: study

03 March 2010

NEW YORK: Behavioural economics can help marketers overcome a variety of obstacles related to both price and broader market competition, McKinsey, the consultancy, has argued.

The latest of issue of Admap showed how the COI, the UK government's communications arm, Sainsbury's, the supermarket, and Boots, the chemists, are making use of behavioural economics.

McKinsey argued that marketers have actually displayed an "inadvertent leadership" in this area in the past, in the form of offers like "three for the price of two" and "extended layaway plans".

What has been lacking, it suggested, is a systematic approach, largely as most firms simply used these tactics because they worked, rather than basing them on an in-depth understanding of shoppers.

Among its recommendations for companies looking to exploit the insights from this emerging discipline is to "make a product's cost less painful."

Consumers, it argued, can both pick between brands and decide against all the goods available, and often "value a dollar" differently depending on the specific item they are considering.

Retailers have long-since realised that allowing customers to put-off paying for acquisitions can increase their propensity to buy, as this tactic offers both financial and emotional benefits.

"Even small delays in payment can soften the immediate sting of parting with your money and remove an important barrier to purchase," McKinsey's report said.

Secondly, positioning a product or service as a "default" typically heightens the probability that it will ultimately be selected, particularly when individuals are presented with a wide variety of alternatives.

What is important is to ensure that a default constitutes a "good choice for most people", and eliminates the need to make difficult decisions.

This is crucial because the pleasure from being "given" something, which is how defaults are generally perceived, typically results in a stronger attachment than if someone has actively identified a brand.

In the absence of defaults, marketers must avoid creating a "choice overload", which make it harder for consumers to find a preferred option, and thus discourages them for reaching the end of the purchase funnel.

A "choice overload" can also generate a "negative halo" effect, as picking one brands inevitably incurs a penalty, in the form of foregoing favourable characteristics offered by in other, similar rivals.

"Reducing the number of options makes people likelier not only to reach a decision but also to feel more satisfied with their choice," McKinsey said.

Finally, it is crucial to understand that while everyone has a different budget, each person has a maximum price they would be willing to pay for certain goods.

Marketers can, however, exert an influence in this area by repositioning their brands, often in ways that can initially seem counter-intuitive.

For example, increasing the price of a product can change perspectives about its quality, while making a more expensive alternative available can lead to an alteration in perceptions of value.

Sony, for example, found that, with its 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."

McKinsey's own research has also revealed that when deciding on an ice cream, brand consideration typically takes primacy, followed by flavour, and then by price.

"Organising 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," its study concluded.

Data sourced from McKinsey; additional content by Warc staff