ArticleNudge Your Consumers in the Right Direction
I want to make a slight pivot from the usual digital advertising content to talk about something more fundamental: consumer behavior.
Most marketing is predicated on the notion that consumers are rational agents with clear preferences and well-defined budgetary parameters. We assume that consumers will make decisions that are in their own best interests and maximize their individual utility – after all, how else can you explain the never-ending barrage of logical, feature-heavy, value-centric marketing that’s everywhere on the internet?
Put simply, we (generally) market to people as if they have a clear understanding of the issue they’re looking to solve, what they want in a solution and how much they’re willing to pay for it. There might not be a more apt articulation of this than the traditional marketing funnel:
Of course, that flies headlong into the on-the-ground reality that we observe: consumers aren’t logical or rational. They don’t make decisions that maximize their utility within the confines of their budget. And they certainly don’t always make the “best” choice given their situation, budget and stated goals.
While human irrationality can be a frustration, it’s also an opportunity for the marketers/operators/owners who can systematically capitalize on the eccentricities in human behavior to turn the odds in your favor. Here are five practical examples of how marketers can leverage behavioral economics to improve ad efficacy, conversion rates + lifetime value:
Social Proof
People are wired to rely on information from others in making decisions – both from a practical standpoint (the world is a big place that one person can’t hope to observe directly) and a social standpoint (making decisions based on socially-accepted norms tends to increase acceptance).
How to leverage it: add reviews + ratings to your ad creative, service pages, and product display pages (PDPs). According to Trustmary (and which jive with our internal data), reviews increase conversion rates by 43% – 67%. If you’ve already done that, test creative featuring UGC or consumer reviews – not only do consumers find this more authentic + trustworthy, but we’ve seen contribution margin per impression increase by nearly 3x for ads that feature social proof.
Anchoring
Consumers tend to over-rely on the first piece of information they receive. This anchors their evaluation of subsequent information. While this has traditionally been used for price-setting (Steve Jobs’ famous use of the expected $999 price point in his 2010 announcement, for instance), anchoring can be used for so much more, from making a single feature a key part of the decision-making process, to creating a sense of FOMO, to positioning your product as the SPECIFIC solution your audience needs.
How to leverage it: successful anchoring strategies begin with understanding what your target audience’s pain points, objections + blockers. Map those onto your product’s features to create meaningful anchors:
- Paint Points & Benefits – The #1 blocker for news consumption is time. Reading a newspaper feels like a long, arduous chore. Morning Brew expertly capitalizes on this with their headline: “Become Smarter in 5 Minutes”. Now, any future alternative will be evaluated against Morning Brew’s 5-minute claim – and feel more demanding/intense.
- Fear of Missing Out – No one wants to be on the outside looking in, or feel as if they are missing the nuggets of insight their peers are collecting. Nik Sharma is the master of this in newsletters, with his wall of Twitter shout-outs from marketers + DTC operators raving about how his newsletter has helped them scale/drive sales/become more profitable.
- Niche Applications – Everyone wants a solution to their specific problem. Anchoring your solution as the ONLY one that addresses their needs completely is a great way to make other, more generic competitors, look inferior. Take this page from Recart (who you should absolutely check out for SMS, too): this speaks directly to the Shopify store owner who is looking to scale his/her business profitably with SMS – and immediately backs it up with statistics, FOMO (see all those other brands that are using Recart?) AND social proof.
In every case, the anchoring strategy is successful because it puts the single point of differentiation at the forefront. The first thing the consumer sees is what they anchor to, and that anchor then serves as the reference point against which all alternatives and competitors are compared.
Scarcity
Our perceived value of a thing is inversely proportional to its availability: if something is widely available, it is perceived as less valuable than something that is scarce – regardless of whether or not (a) the product is actually scarce and (b) whether or not scarce item actually has utility. You can see examples of scarcity in marketing all over the place:
- Limited Stock – does anyone really think that Adidas is going to run out of shoes? No. But that doesn’t stop them from including “Only X left in stock” on their PDPs. Likewise, many service businesses will highlight limited availability for client spots or appointments (they can always take on more), and many hotels or theme parks will reference (“only X passes/rooms left”) – despite the fact that they have many more slots/rooms available.
- Drops & Limited Releases – Brands have been capitalizing on scarcity via Product Drops for 3 decades (going back to GOODENOUGH in the early-90s) – though the trends has recently taken hold, with luxury brands like Louis Vuitton and global artists like Taylor Swift getting in on the game (The Eras Tour ticketing was/is a masterclass in scarcity).
- Invite-Only – Many of the world’s most successful brands – from Facebook to Spotify to Gmail – were built as “invite-only” (the “Little Bighorn Strategy”) – it’s as simple as it is effective: simply create an “invite-only” event / thing, limit the number of people who can get it, and watch consumers do whatever it takes to claim a coveted spot.
- Editions – This is the oldest example of scarcity around. And it still works (see the Threads launch this past week, where each IG user was given their “number” for signing up for Threads). Create product “editions” – either by numbering products (Sagamore Spirit does this phenomenally well), or by releasing products in tranches like Bored Ape Yacht Club (BAYC). The original 10,000 NFTs have skyrocketed in value, from an original price of $200 to well over $2M in some cases. Why? Because those are the originals – the “first editions”.
Loss Aversion
Losses loom larger than gains. Consumers are more willing to do more to preserve what they have than to gain something new. From a marketer’s standpoint, this can provide a remarkable opportunity to nudge your audience into making a decision by framing a choice in terms of losing vs. gaining.
How to leverage it: Integrating loss aversion into your marketing strategy is relatively simple: frame your offer/messaging in terms of a loss in terms of a potential gain. This might be as simple as changing your headline from “Save 5 hours a week” to “Stop losing 5 hours each week” – the subtle shift in framing (from “saving” to “losing”) prompts a stronger response.
Likewise, framing a home improvement project – like window replacements – in terms of losses can be powerful: “You’re losing $250 each month through your windows!” is a much more effective headline than “You could save $250 in energy costs each month with our replacement windows!”
This pain of loss doesn’t just apply to offers – it also applies to payments. Paying for something is acutely painful (which is one reason merchants are going away from cash) – and delaying payment can dramatically increase a consumer’s willingness to buy. As a marketer/business owner, you can capitalize on this by offering delayed payments (i.e. pay in installments or no payments for X months). Combining these two forms of loss aversion in marketing can make an otherwise unappealing offer extremely attractive:
Option 1: Pay $10,000 today to save $250 in monthly utility payments for the next 15 years with our replacement windows
Option 2: Stop losing $250 each month to faulty windows for $0 down and just $100 per month for 15 years.
You’ll probably notice that Option 2 actually results in $8,000 more paid over the term ($18,000 vs. $10,000) – but Option 2 has a significantly higher take rate. Why? Because the loss (“losing $250” + $10,000 immediate payment) looms larger than the gain (“save $250” + $100 per month)
Choice Architecture & The Decoy Effect
Put simply, the decoy effect is the phenomenon by which our decision between two options is influenced by the addition of a third, asymmetrically dominated option. As a marketer, decoys should be among your very best friends, because of their ability to nudge your consumers to buy more than they need.
How to leverage it: leveraging the decoy effect requires a bit more understanding as to how asymmetric dominance occurs. This starts with three core concepts:
- Target: this is the product/offer/service you (the marketer) want your target audience to take.
- Competitor: the alternative option that is competing with your target offer.
- Decoy: the third option, which is added to nudge your consumer toward the Target.
For the decoy effect to be successful, the decoy must be asymmetrically dominated by the target and the competitor, with respect to at least 2 properties (for instance, cost + features). Put simply:
| DECOY Vs. | TARGET | COMPETITOR |
| PROPERTY A (SIZE) | TARGET | COMPETITOR |
| PROPERTY B (PRICE) | TARGET | DECOY |
In the above, you can see that the TARGET dominates the DECOY on both Property A and Property B, while the COMPETITOR dominates the DECOY in Property A, but NOT on Property B.
To use a simple example from Starbucks:
In this case, the TARGET product is the Venti. The relevant properties are size + price. The DECOY is the Grande, and the COMPETITOR is the Tall. From the Starbucks App:
Tall: 12 oz / $4.45
Grande: 16 oz / $4.85
Venti: 20 oz / $5.45
You can see that the TARGET is both larger and more expensive than the decoy (Grande), while the Competitor is smaller but roughly equivalently priced to the decoy. This nudges the consumer toward the Venti – and in doing so, drives the AOV higher for Starbucks.
If you want to check out other examples of the Decoy Effect in action, check out this TED Talk from Dan Ariely.
IKEA Effect
Starbucks’ user experience + marketing is a masterclass in behavioral economics. In addition to leveraging the Decoy Effect (above), they also make substantial use of the IKEA effect (the phenomenon by which we assign higher value + more emotional attachment to things we partially create vs. things which are created for us).
Starbucks leverages this through the “Customize” functionality in your app (in fact, they push this so hard that they auto-trigger the customize pane in their app, even if you *want* to add a ready-made drink to your cart).
How To Leverage It: While we can’t all be Starbucks, every business can take advantage of the IKEA effect. Some options we’ve used to great effect include:
- Quizzes – users who complete a quiz or assessment in order to get “personalized” recommendations are more likely to purchase the items “picked for them” than a default product or bundle – even if the items “picked for them” are not ones they need or would ordinarily choose.
- Product/Service Customization – A variant of the quiz structure above is providing a customer/client with the ability to “tailor” a package of services to their specific needs – this is something that HVAC companies (for instance) do phenomenally well by allowing homeowners to “select” which coverage/service they want. Likewise, Peloton + Echelon (two at home, connected fitness companies) have tapped into the IKEA effect by allowing their members to “select” their own workouts/classes. Doing so has resulted in increased customer loyalty + higher overall LTV for members who have created their own regiment vs. those who simply opted into a default.
- Online Communities – If your product isn’t one that can be easily customized, consider creating a space where users can engage in their own creation/discovery – a great example is LEGO. You’ll find multiple communities where consumers are using Lego products to create products that aren’t available to the general public.
System 1 & System 2
One of my personal favorite applications of behavioral economics comes from the research of Daniel Kahneman on System 1 & System 2.
System 1: According to Kahneman, about ~95% of the ~3,000 daily decisions consumers make are done by System 1 – our emotional/intuitive/”gut” decision-making system. These are fast, unconscious., associative decisions that all of us rely on to get through the day.
System 2: The remaining 5% of our decisions are made by System 2: the logical, rational, computative, resource-intensive system. In contrast to System 1, System 2 is slow, resource-intensive, and somewhat accurate.
While this is all well & good, the big question is how to apply it to marketing. One example is mapping your conversion rates by hour of day:
(image credit: Bart Schultz)
What you’ll probably notice near-immediately: conversion rates are LOWER in the middle of the day + earlier in the week. Why? Because System 2 is playing a larger role in the decision-making process and constraining the audience’s impulses.
But as the day and week progress, System 2 (the resource-intensive one) fatigues and System 1 (the more impulsive, more emotional one) kicks in – and consumers start making more impulse purchases.
From a marketer’s standpoint, this presents a GOLDEN opportunity: If your conversion rates by hour + day look like the above, consider varying your messaging/offer by time of day and/or day of week – in times when System 2 (the red/yellow) is working, focus on rational/logical appeal; in times when System 1 (emotional + gut), focus on more emotive messages.
The simple reality is that irrationality is a core function of consumer behavior. As marketers + business owners, the opportunity is in systematically taking advantage of this irrationality to nudge our target audiences to take our desired actions. This can be in employing some of the strategies above, or (as in the case of Starbucks), in stacking multiple tactics together to create a wildly compelling, revenue-driving machine.
