How can Behavioral Economics drive consumer behavior?

Do you make your purchasing decisions based on rational information about a product, or are these decisions mostly driven by emotion or personal incentives? You may think you systematically weigh the pros and cons before making a purchase, but behavioral economics reveals psychological biases that powerfully influence your choices, most notably the halo effect that subconsciously draws you toward certain brands while pushing you away from others. In this article, we explore how behavioral economics works in business to attract more consumers.

Behavioral Economics

Behavioral economics is a modern economic science that combines psychology and economics in the decision-making process to understand how people make decisions. It examines the psychological, emotional, cognitive, and social factors of consumers. Standard economic theory assumes that consumers make rational and logical choices that maximize their utility. Although the roots of this discipline go back to the works of the economic philosopher Adam Smith, one of its most prominent pioneers is researcher Richard Thaler, who won the Nobel Prize in 2017 for his book "Behavioral Economics." Behavioral economics has been applied in many fields, including public policy, healthcare, education, and business.

Behavioral Economics in Business

This field studies consumer decisions and the psychological and economic motivations for purchasing a particular product or service. Behavioral economics provides a wealth of insights that enable entrepreneurs and brand owners to improve their services. The following are the most prominent applications of behavioral economics with consumers:

1. Marketing and Sales

Understanding Consumer Behavior: Consumer behavior is the study of how people make decisions when purchasing, using, and disposing of goods and services. It delves into the motivations, influences, and processes behind consumer choices.

Pricing Strategies: For example, the "power of nine" strategy, which involves ending prices at 0.99; the "framing" strategy, which emphasizes gains over losses; and the "anchoring" strategy, which emphasizes a more expensive option to make other options more affordable. These and other strategies help formulate effective marketing messages that motivate purchases.

Read also: Shein's Premium Pricing Strategies

Promotional Offers: Techniques such as scarcity, the urgency of quick sales, and social proof such as reviews and ratings contribute to a deeper understanding of the consumer and attract increased purchase rates.

Customer Loyalty: Smartly applying behavioral economics strategies contributes to short-term customer satisfaction, which in turn improves and develops the brand, creating strong customer bonds that maintain long-term loyalty.

2. Product Design and Development

User Experience (UX): Companies that offer their services or products through their own apps are keen to provide the best ways to develop the user experience. User experience analysis helps identify the possibilities that make the experience easy, enjoyable, and effective.

Choice Architecture: This refers to designing ways to present choices to consumers and their impact on the consumer decision-making process. A prominent example of this is "framing," meaning that when a company offers a health product, its success rate and impact on users' health are often highlighted to attract more consumers.

In short, understanding these psychological influences and cognitive biases helps companies design better products, improve prices, create compelling marketing campaigns, and more accurately predict consumer behavior.

Applying Behavioral Economics to Market Research

Behavioral economics provides a framework for understanding the systematic ways in which people make seemingly irrational decisions in the marketplace. Incorporating insights from behavioral economics into market research can help companies gain a more realistic view of how customers make choices and understand their motivations. Here are some key points of how it can be applied to market research:

• Anchoring and Adaptation

People rely heavily on the first piece of information they receive and fail to adequately adjust their judgments. For example, if a product's price is initially fixed at a high amount, subsequent lower prices may seem like a bargain in comparison. Researchers can measure anchoring effects by changing the order in which information is presented to survey participants.

• Loss Aversion

This refers to the psychological or emotional impact consumers feel when they lose something more than they gain it. For example, when a consumer loses 100 riyals on a product, they will feel a greater loss than they gain it. Companies can detect this by analyzing reviews and framing the product to help balance expectations in consumers' minds.

• Mental Accounting

People tend to categorize money and spending into separate mental accounts, such as "food budget" or "entertainment," and make different decisions based on the mental account they derive from it. Evidence of mental accounting can be found by asking people how they allocate their money and time across different budget categories. This understanding can help companies market to specific budgets.

In Conclusion

Behavioral economics is concerned with human decision-making, which is often irrational and driven by emotion. Several factors influence consumer choices, including the ninth power. By applying behavioral economics to market research, companies can gain insight into psychological biases to build better products, improve customer experiences, and deliver more compelling marketing tactics.