8 Marketing Lessons From Theresa May’s Campaign

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When Theresa May called the general election in April the polls were showing a lead for the Conservative Party of up to 20 points. It looked certain that May would get a much improved majority in parliament.

However, during the course of the campaign the Conservative’s lead almost evaporated as Theresa May’s popularity declined. This resulted in the Conservative’s losing 12 seats and their slim majority rather than gaining the large mandate May had expected.

Why did this happen and what does the result tell us about the nature of marketing campaigns and strategy?

1. Actions speak louder than words:

Before announcing the election Theresa May had repeatedly said she would not call a snap election. May indicated that she had the mandate for Brexit, the economy was strong and even the Labour party supported the triggering of Article 50 in the commons. However, by calling an early election May created uncertainty about her motivations and whether the future was so positive.

The psychologist Professor Alastair Smith from New York University has studied the outcomes of UK general elections since 1945. He suggests that calling an early election is like playing poker with the electorate.

Image of poker chips and cards on the table

Smith suggests that people understand that prime ministers have access to information about future prospects that the rest of us don’t have. Calling an election early may be a sign that they are trying to conceal information (e.g. Brexit might be a disaster) and expect to see their popularity decline as a result.

He argues that more competent governments are in less of a hurry to call an election and so it is less confident prime ministers who call snap elections. We should not have been surprised then that Theresa May’s popularity and her party’s lead in the opinion polls declined. Indeed, Smith’s analysis indicated that the larger the governing party’s lead in the polls at the time of calling an election. The greater the likelihood that their popularity would fall during the campaign.

Implications for marketing:

People understand that major sponsorship or advertising campaigns cost a lot of money and take a long time to recoup the investment. This is known as costly signalling. It demonstrates a brand’s intentions to be around for the long term.

Just as calling an election early shows a lack of confidence in future prospects. Brands that fail to support their product launches or marketing campaigns with a reasonable level of advertising or sponsorship spend are indicating a lack of confidence in their ongoing success.

2. Messages need to be meaningful:

From day one May used a few core sound bites to communicate the essence of her proposition. ‘Strong and stable leadership’ and ‘coalition of chaos’ were May’s main messages that were almost immediately turned into memes by opposition supporters.

Psychologically people hate uncertainty. Voters might seek strong and stable leaders to manage instability and uncertainty. However, the strong and stable message was purely an emotional appeal to calm and orderliness. While the ‘coalition of chaos’ aimed to create fear of a Labour government.

“If I lose just six seats I will lose this election. Jeremy Corbyn will be sitting down to negotiate with Europe.” – Theresa May, 20th May 2017

The Conservative’s slogans therefore lacked a rational element. They were further undermined by May’s behaviour including her U-turn on their social care policy and her refusal to take part in live TV debates with other leaders. In addition, May communicated her messages in an almost robotic way and so struggled to demonstrate emotional intelligence. This resulted in May being referred to as the “Maybot” in the media.

By contrast Jeremy Corbyn ran a more enthusiastic and engaging campaign around changing the status quo and looking after the majority rather than the wealthy minority. His slogan ‘for the many, not the few’ was an anti-establishment message that may have benefited from recent political movements.

Although his message was criticised by some commentators as potentially turning off the more affluent voters. It resonated with natural Labour supporters and clearly reflected Corbyn’s own political principles. No one could accuse Corbyn of not living according his slogan as it is something he has campaigned on since he first became a Labour MP.

Implications for marketing:

Emotional arguments resonate strongly with our fast intuitive mind (see System 1) and can be very persuasive. However, this does not mean that rational argument should be forgotten. It is important to align implicit motivations with rational benefits (explicit goals) to avoid conflicts between our different decision making systems.

When brands create slogans and messages to support the value proposition it is important to provide evidence to support such communications. However, it also necessary to create policies and behaviours within the organisation that demonstrates a commitment to these same values. Otherwise customers are likely to see such messages as soundbites that don’t reflect the real values of a brand.

3. Linking your brand to an individual is a risky strategy:

Theresa May decided to make the Conservative campaign primarily about her leadership. This presidential style campaign meant that at rallies and in ads the headline was ‘Theresa May’s Team’ and the Conservative Party was relegated to a small footnote at the bottom of the banner. This was a big departure from the norm in the UK and highlighted how she wanted to focus on her leadership compared to Jeremy Corbyn.

Image of Theresa May's Team at campaign rally
Source: campaign rally

However, as the campaign developed and U-Turns and wobbles were observed this back-fired on the party. Positioning it as a presidential campaign highlighted that May was not as nimble or empathetic as she needed to be to play this as a strength.

Marketing Implications:

Brands that strongly associate themselves with an individual person, whether they are a celebrity or a business leader, run the risk of being damaged if that person’s popularity or reputation declines. Celebrity endorsements can be a powerful marketing tool, but few brands successfully build themselves around a single individual. Richard Branson has achieved this with Virgin, but he clearly demonstrated that he had the necessary charisma and personality to develop such a brand.

4. Position your brand around what is important to your customers:

Theresa May positioned her campaign on the basis that it was about Brexit. However, what she failed to understand was that Brexit was largely a protest vote.

In contrast Labour focused on policies that directly influence people’s lives such as the NHS, education, police numbers and rail nationalisation. These issues resonated much more strongly with people and took the focus away from Brexit. As a result Labour were able to project a much more positive and meaningful campaign.

Marketing Implications:

Listen to customers and conduct qualitative research to better understand what motivates them. Don’t assume you know what is important to customers as often this is off the mark because of our own perceptions of the world. We get too close to our brands and products and can fall foul of the echo chambers we construct around ourselves. If you need to understand more implicit motivations or responses to your messages explore using implicit research techniques rather than conventional methods of research.

5. Diversity is your friend:

When Theresa May created a manifesto only a small inner circle of was involved in the discussions. Small groups that lack diversity and insulate themselves from dissenters are very prone to groupthink.

When all think alike, then no one is thinking - Walter Lippman - The danger of groupthink

This is a psychological phenomena whereby groups make poor decisions because there is pressure to conform and ignore information that contradicts their decision. This creates an illusion of invulnerability and over-optimism which means they are willing to take unnecessary and extreme risks.

Marketing implications:

Ensure diversity in group decision making by recruiting people with a wide range of experience, cultural and gender backgrounds and cognitive ability. Re-frame disagreement as a necessary and helpful characteristic of teams and encourage all team members to contribute their thoughts, ideas and opinions.

Don’t be too prescriptive when briefing a problem and avoid quickly criticising other ideas and attacking other team members for ideas that contradict the consensus. Use market research and data analytics to provide scrutiny for ideas and generate fresh insights.

6. People are loss averse:

Prospect theory tells us that people prefer a small, but certain loss to a small risk of a much larger loss. Thus, people prefer an 80% chance of a certain small loss against a 5% chance of losing everything.

Because of this bias, the dementia tax as it become known was political suicide as it attacked the property owning class, many of whom are natural Conservative voters. It created a concern in voter’s minds that if they were unlucky enough to get a long term illness and needed care they might have to give up all but £100,000 of the value of their house after their death.

It was almost irrelevant that if they didn’t need long term care their assets would be safe. After he resigned, Nick Timothy, Theresa May’s special adviser admitted that it had been a mistake not to include a cap when they launched the policy. This would have limited the potential loss and may have made the policy more acceptable to voters.

Marketing Implication:

Remember loss aversion is a powerful motivator. Focus more on avoiding losses rather than making gains. Guarantees and money back offers help to eliminate the concern that a choice may lead to an unacceptably large loss. In spread betting for instance automatic stop losses eliminate the potential for unlimited losses that would probably prevent most people considering this kind of betting.

7. Provide a positive reason to choose your brand:

Theresa May failed to communicate a positive reason to choose her campaign. The campaign was characterised by warning voters about the consequences of not giving May the majority and Jeremy Corbyn getting into power. There was little to promote in terms of positive benefits for voting Conservative.

Remain voters in particular who weren’t in a constituency with Liberal Democrat candidate capable of winning were faced with all options being bad (see prospect theory). When people are in a situation where all outcomes involve a loss people become risk seeking. The status quo is usually perceived as the safer choice and so Corbyn would have been more appealing as he represented the riskier option.

Marketing Implication:

People buy benefits rather than features. Position your brand positively with a compelling proposition rather than trying to undermine your competitors. Identify important implicit (psychological) goals to differentiate your brand and get an emotional response. But don’t forget a strong rational benefit is also important.

8. Consistency is a valued personality characteristic:

Before the EU referendum Theresa May had been on the remain side, though some had criticised her for a lack of enthusiasm. After the referendum result and especially once she became prime minister May become an ardent advocate of Brexit. Further, May had repeatedly said that she had a mandate for Brexit and there was no need for a general election before the end of the fixed-term parliament. Of course she then called a general election.

This lack of consistency created anxiety among some voters that May could not be trusted to keep promises. Consistency and the appearance of consistency is a high personality trait. People who are not consistent are often untrustworthy. This was compounded May’s U-turn on her social care policy when she introduced a cap after it was heavily criticised and then claimed “nothing has changed”.

Marketing implications:

Commitment and consistency can be used by marketers to persuade visitors to undertake a desired behaviour.

Lifehack.org is a lifestyle and well-being site that publishes ideas for self-improvement. When a new visitor lands on the site they are served a pop-up asking the user if they would like to “try something different today. Don’t stay stuck. Do better.” If a user clicks on the “I agree” CTA they are immediately served an email capture form with the heading “We think so, too!” Because these visitors have agreed to the first question they feel almost compelled to provide their email address to show consistency of behaviour.

Consistency is also important in branding and design. Using consistent branding and design principles can help communicate a professional and user-friendly customer experience. Being consistent with established web conventions also allows users to navigate according to experience and reduces cognitive load.

Conclusion:

The result of the 2017 UK general election should be a lesson to us all that we should not take our customers for granted. Customers respond to how people in organisation behave according to social norms and expectations that are influenced by many complex factors.

We should avoid behaviours that are inconsistent with promises we make. This creates anxiety and damages trust in our brands. Trust is critical for any relationship or transaction and so we should protect it at all costs.

It’s easy to make assumptions about what we think people want and how they will react to decisions we make. To prevent costly mistakes we should invest in research and insights to improve our understanding of customers.

Take action to avoid groupthink when making decisions. Encourage news ideas and look for information that contradicts your decision rather than just that which confirms it.

People are more concerned about losses than gains. Framing an offer as a potential loss may make it more appealing than promoting it as a gain. Avoid situations where all choices are bad because this can turn customers into risk seekers.

In digital marketing we have the advantage of being able to run experiments through A/B and multivariate testing. By developing a culture of experimentation we can learn how customers respond to changes in the customer experience before investing resources and money into a change. This helps to ensure resources are directed to where the biggest impact can be made.

Why Should Marketers Target the Subconscious Mind?

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How many times have you completed a task or arrived somewhere without thinking about how you achieved it? That’s your subconscious mind in action, making fast and automatic decisions with little or no conscious awareness of the decisions we make.

Why Does This Occur?

Research by evolutionary psychologists suggests that many of our subconscious and automatic responses relate to our instincts for survival. We do not act randomly or irrationally as some writers suggest. Indeed, research by Alex Pouget, Associate Professor of brain and cognitive science at the University of Rochester, discovered that people can make optimal decisions. But only if the choice is made by their subconscious mind.

Our subconscious mind has a rational purpose, to protect us from danger and respond quickly without depleting mental energy. People don’t consciously decide to ignore advertising banners or stop to read the copy. These are decisions we automatically make to ease the process of navigating a site. They allow us to focus on what our brain decides is the more important task at that moment in time. This is not irrational, it’s what has made our species so successful.

Unlike Kahneman, Pouget decided to avoid asking direct questions of people to determine how accurately they responded to problems. Instead, he studied the decisions that are made by our non-conscious brain. He also showed that in the vast majority of cases, we make the best decision we can dependent upon the limited information available to us.

Many decisions though are not solely reliant on our subconscious brain. Our conscious and subconscious brains co-exist together. Furthermore, our conscious mind (see System 2) is often triggered by visual and audio clutter, contextual issues and problems that require mental attention. This means that people have short attention spans and are very impatient. This has a significant impact on the digital user experience.

Implication for CRO:

  • Avoid clutter and competing calls to action to enable our sub-conscious brain to focus on achieving active goals. There are often too many calls to actions and a poor visual hierarchy on many websites.
  • Use visual cues to assist users find content or calls to action. Avoid flat design as this lacks the cues that users have become accustomed to seeing.
  • Follow established web conventions as these allow users to navigate from expectations set by their experience of other websites.

This product page from Comms-express.com is probably one of the most cluttered pages I’ve come across. It has so much content that not all of it fits on the page. This will ring alarms with a visitor’s brain and cause System 2 to take control.

What directs our attention to brands?

A mass of psychological and cognitive research since the 1970s has shown the goals that direct much of our behaviour can be activated without a person’s conscious attention or choice. Indeed, experiments have shown that much of our cognitive processing is triggered without the conscious deliberation and control once thought to be necessary. Furthermore, these studies also demonstrate that behaviour driven by goal achievement can also operate without conscious thought.

This suggests our subconscious brain automatically searches for opportunities to satisfy psychological needs and make decisions that are in our best interest. It is at the very heart of our decision making. When our brain identifies a good opportunity it generates a positive emotion. The brain automatically seeks a decision to enable need fulfilment.

Implication for CRO:

  • Avoid over reliance on rational benefits as these may not get the attention of user’s subconscious mind.
  • Always include implicit or psychological needs in your online communications as these grab attention more than purely rational benefits. Individual psychological goals are outlined later on in this post.

This example of a product page from AO.com is much cleaner and includes strong social proof messages using customer ratings and reviews.

How important are emotions?

So how important are emotions when people are making decisions? The neuroscientist Antonio Damasio observed patients with damage to the ventromedial frontal cortices of the brain which controls our ability to feel emotions.

The brain damage did not influence patients’ basic intelligence, memory or their capacity for logical thought. However, through a series of experiments Damasio found that the loss of their capability to feel, destroyed a person’s ability to make decisions that were in their best interests.

Damasio suggests that our thoughts mainly comprise images which include ideas, words, smells and real or imagined visual perceptions. Through our experiences these images become “marked” with positive and negative feelings.

These feelings are associated (directly or indirectly) with bodily states. If a negative marker is associated with an image of an expected outcome it sounds an alarm and our brain will steer decisions to avoid that potential outcome. Damasio suggests that these emotional markers improve the accuracy and efficiency of our decision making process.

‘‘In short, somatic markers are… feelings generated from secondary emotions. These emotions and feelings have been connected, by learning, to predicted future outcomes of certain scenarios’’ (Damasio, 1994, p. 174).

Implications for CRO:

  • Use copy and images that convey strong emotions to encourage engagement and create momentum in decision making. People are less likely to make a decision about a purchase if they don’t feel strongly about your proposition.
  • To encourage a positive feeling towards your brand, consider using humorous images or copy to put users in a good frame of mind. Kahneman found that even getting people to smile improved their mood and how they responded to stimulus.
  • Use images of positive outcomes on your website to reduce the risk of your content generating negative associations.

How important is the subconscious mind?

The evidence suggests that up to 95% of our purchase decisions are directed by sub-conscious mental processes. So, if the non-conscious and emotional part of our brain is so important to decision making. Why do we rely so much on engaging the conscious mind questions about our products and services?

Does it matter if our customers say they like our website or our product if the non-conscious brain is driving behaviour? How do we target the sub-conscious mental processes that direct our attention and ultimately decide what we buy?

Do we buy what we like or like what we buy?

There is substantial evidence that the activation of the brain’s reward centre predicts purchases. Provided the pain induced by price is below a certain level. As an example, neuroscience research by Gregory Berns and Sara Moore from Emory University compared activation of the reward centre of teenagers who were listening to songs from relatively unknown artists with subjective likeability.

By analysing sales of these songs over a three year period they were able to show that activation of the reward centre was much more predictive of future sales than subjective likeability. What this confirms is that it is the unconscious brain that directs much of our attention and not our conscious liking of a site or brand. Unless our communication engages with the non-conscious brain it probably won’t be noticed by the conscious mind.

Implication for CRO:

A purely rational argument may be completely ignored by the subconscious brain as it may fail to activate the brain’s reward centre. Emotionally engaging messages help us process information more quickly and improve the efficiency of our decision making.

How do we target subconscious motives?

Psychological motivations drive attention and much our behaviour.

This motivation model is the intellectual property of BEYOND REASON.

Marketing consultancy, Beyond Reason, have combined the latest psychological and neuroscience research to develop a comprehensive model of implicit (psychological) motivations. As the evolution of the brain occurs over thousands rather than hundreds of years. These psychological goals relate to basic human needs and social interaction.

The Beyond Reason model has eight overriding implicit motivations which cover the areas of certainty, belonging, recognition, Individuality, power, self-development, sexuality and physiology. The model is summarised in this graphic and as you can see each motivation divides up into four individual categories.

Beyond Reason use a form of the Implicit Association Test (IAT) to measure the relative strength of different psychological goals. As people are not fully aware of their psychological motives we cannot use traditional forms of market research that rely on self-reporting. Focus groups in particular can be highly misleading as people try to rationalise what brands or communications mean to them. In reality our mental processing is done by our subconscious.

Implications for CRO:

Identify what your visitors’ most important implicit motivations are to align your value proposition and communications with customers’ underlying needs.

Airbnb for example, have created lifestyle experiences to emphasise how their proposition appeals to the desire to be a non-conformist. This may partly explain why the average Airbnb customer’s stay is significantly longer than your average hotel stay.

Indeed, Airbnb’s own research suggests that many of their clients wouldn’t have gone on their trip if they hadn’t been able to use Airbnb. So Airbnb have actually grown the hospitality and travel market as well as disrupting some elements of the sector.

AO.com uses its sponsorship of the Britain’s Got Talent TV show to provide evidence of stability and certainty. People understand that sponsorship of a major TV show like BGT costs a lot of money and that it will take a long time for the company to get a return on their investment. This is known as costly signalling and demonstrates to people that AO.com are investing for the long term and plan to be a major player in their sector in the future.

Conclusions:

Attention, preferences and loyalty are most strongly driven by our unconscious mind. Visual and audio clutter on a screen can disrupt this process and lead to mental depletion.

Emotions help people process information and make decisions faster. Communications that target subconscious goals are more likely to be effective than purely rational benefits as they tap into human emotions.

Given the sub-conscious mind is responsible for most of our purchase decisions it is pointless asking people to rationalise brand preferences. Because of this focus groups are a misleading and inappropriate method of research.

It is still necessary to have strong logical reasons to purchase your brand, but they need to be aligned to implicit goals. Because people are social animals the behaviour of others, including traditions and norms, can also heavily influence the perceived value and rewards from a brand.

Finally, optimisers should aim to simplify the user experience to retain attention and build satisfaction and loyalty. Too many choices and complex decisions disrupt our subconscious decision making (System 1 thinking) and can result in mental depletion.

Why Do Most Attempts At Behavioural Change Fail?

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Behavioural change is not easy. Have you ever tried to change a long-standing habit or create a new habit? Perhaps you tried to give up smoking, eat fewer sugary foods, start taking regular exercise, or just spend less time on social media. It’s often difficult isn’t it and the same is the case when we try to change the behaviour of website visitors. Indeed, studies suggest that most attempts at behavioural change fail.

Why do most attempts at behavioural change fail?

BJ Fogg’s Stanford Persuasion Lab conducts research on behavioural change using technology. The BJ Fogg Behaviour Model explains how three elements must converge simultaneously for a behaviour to occur. The model highlights that for people to complete a task they need the necessary motivation, the ability and a trigger to prompt the behaviour. When an action does not occur, at least one of these three elements must be missing.

How can we use the model?

The Fogg Behaviour Model has been created to help designers understand what stops people from completing a behaviour. For example, if users are not completing a target behaviour, such as a quotation request form on a price comparison site. Then we can evaluate the user journey using the BJ Fogg model as follows:

Fogg Behaviour model

Image Source: BJ Fogg

Motivators – Psychological drivers:

Fogg highlights three key motivators; Sensation, Anticipation and Belonging. Each motivator has two sides; pleasure/pain, hope/fear and acceptance/rejection. Although this is a simplistic model of motivation, these core motivations can be applied to all uses. They get us to consider psychological drivers of behaviour.

Ability – Making things simpler:

If you want someone to do something they must have the ability to do so. It might seem obvious, but we sometimes wrongly assume everyone knows what we know and that they have the same skills as we do. We have two options here. We can either train people to improve their skills or we can reduce friction by making the target behaviour easier to complete.

Training or on-boarding is the more difficult route as people are generally impatient and lazy. As a result users will often avoid having to learn new skills. Designing an intuitive interface is normally a much better option as this fits much more closely with human nature.

Simplifying an action to make it easier to complete should be your preferred option in most cases. Ease of completion is a function of our scarcest resource. This is often either our time or money. Users are very impatient and so a behaviour that requires more than a few seconds may fail because the user is not prepared to sacrifice the time needed to complete it. This is why it is sometimes a good idea to inform users how long an action will take to manage expectations and encourage them to allow the necessary time for the task.

Money is another scarce resource. If a behaviour needs £25 to complete and you don’t have £25 to spend, then it’s not easy is it. This is why a free trial can be an effective way of reducing friction to undertaking a behaviour.

Prompts for behavioural change:

Congruence bias can result in us testing just the things we decide are a problem rather than looking at other things

Prompts or triggers remind us to begin a task. Without a prompt the target behaviour will not occur. There are lots of different names for prompts; reminders, call-to-actions, requests and cue to name but a few.

Prompts can be an external reminder, such as a mobile phone push notification or a pop-up message on a website. On other occasions our daily routine or habits may prompt a behaviour. For many people in large cities going to work prompts them to buying a coffee or checking Facebook may remind us to upload our latest photos. Some of the most powerful prompts though are major life events such as starting work, marriage, moving home, birth of a child and children leaving home.

Prompting an action for behavioural change:

I sometimes play poker on Facebook with Zynga the online gaming company. I haven’t played for a week or two and so Zynga sent me an email offering me the chance to win some free chips. The prompt is a simple call to action of Open Now. The motivation involves scarcity as the offer expires within 24 hours of receiving the email.

Although the target behaviour is to get me to sign in and claim my prize, Zynga’s larger objective is to get me playing a game of poker. The use of loss aversion is an effective way to motivate me to click on the call to action and as Facebook remembers my login details the behaviour is very easy to complete.

How to apply the Fogg model to digital marketing:

The Fogg model is a powerful resource for evaluating how to encourage behavioural change in digital marketing as it has been specifically constructed for use with technology.

What is motivating visitors?

People buy benefits rather than features and so it is important understand your customer’s needs and what they want from your product or service. Marketers need to communicate a compelling value proposition that includes implicit (psychological) goals and more rational (explicit) goals to motivate users. This needs to be sufficiently appealing to justify changing their behaviour and perhaps switching to a new supplier.

So before designing a page or website first consider what need your product or service is solving and how important is it to your prospects. Make sure you identify the most important needs so that you don’t make the mistake of promoting something that is not salient to your customers. Use the implicit association test to identify psychological motivations as people don’t have full access to our deeper, emotional drivers.

Evidence of social proof can further enhance the perceived value to prospects because of our natural herd instincts. However, perhaps most crucially is that your value proposition is communicated with engaging imagery and compelling copy to persuade visitors that it will deliver on your brand promise.

Rewards can be used to provide a further motivation to complete a task. However, make sure the reward is something people want and be careful to adjust the frequency of the reward to optimise its effectiveness. Read my post on the psychology of rewards for more details.

Evaluating ability:

If your target behavioural change that is not easy and simple for visitors to undertake it will create friction which can prevent even the most motivated user from completing a task. Apart from being lazy, people have limited attention spans and are often interrupted when browsing. This is what it’s important that the user experience is intuitive and there is a clear visual hierarchy.

To get an assessment of how much your site suffers from friction try undertaking usability testing. Observing visitors trying to navigate and complete tasks on your site is much more insightful than asking them direct questions. Your analytics can tell you where there may be a bottleneck, but usability testing tells you why there is a problem.

Browser replay tools, such as Hotjar can also help identify where problems may occur. Session replay recordings are like undirected usability tests as you don’t know for sure what visitors are trying to achieve. However, by encouraging people in your organisation to spend time watching session recordings it is surprising how frequently usability problems are identified.

I find a heuristic evaluation with the help of WiderFunnel’s Lift Model is also very useful at highlighting potential shortcomings with a screen or user journey. This begins with the value proposition and how compelling it is to your prospects. Use the model as a check list of what to look out for and you will soon come up with a long list of items to consider.

Frequent sources of friction:

There are some elements of web design that consistently cause friction and result in a poor user experience. Friction can reduce both our ability to complete a task, but the anxiety it creates can also harm motivation. So, if you have any of the following friction generators on your site I would recommend that you remove them if it all possible.

Using registration as a landing page:

Let me say this once. A registration page is not a landing page! Sending off-site visitors directly to your registration form is lazy marketing. Use a dedicated landing page that is designed to inform and persuade. If you have a very short sign-up process you may be able to include it on your landing page, but don’t use a standard sign-up form as a landing page.

Registration pages should not have to be designed to inform visitors about your value proposition. They should be focused on getting visitors through the sign-up process and not to persuade them that your offer is right for them. It’s also a poor user experience as it doesn’t conform to visitor’s expectations.

Sign up forms with a pop-up before the first page:

When a user clicks on a call-to-action button to launch a form to input information for a quotation or open an account the expectation is very clear. The visitor anticipates being taken directly to the form. Given this strong expectation it is not advisable to interrupt the user journey with a pop-up or interstitial to offer users another choice.

Theidol.com launch a pop-up to promote their comparison service immediately after the user clicks on “Get a Quote” CTA. This is a poor user experience as it is confusing for the visitor. The risk with interrupting the user journey in this way is that it’s not meeting customer expectations and can be perceived as too aggressive. It would have been better to offer the price comparison service as the primary CTA on the home page and made the existing option of getting a single quote a secondary CTA.

Dont’s use CAPTCHA:

Forms are a common source of friction and so it is important to take care when designing them. Use use recognised best practice for web form design. However, CAPTCHA fields are notorious for annoying and frustrating users. They are often implemented by IT security teams to protect a site against bots, but there many other better ways of achieving the same aim without causing friction.

Allow users to decide when they are ready:

When a user lands on your site many will not be ready to convert. If they have never been to your site before they need to establish your credibility and may want to browse to find out more about what you offer. However, many sites wrongly assume that visitors are ready to convert on their first visit and offer no secondary call to action.

To build visitor motivation it is necessary to design user journeys that allow for establishing credentials (e.g. customer testimonials and awards), information gathering (e.g. white papers or blogs) and lead capture (e.g. newsletter sign up form).

Always include a secondary CTA as people like to have a choice and you need to allow for those users who are not yet ready to commit. The above homepage from theidol.com prominently displays a primary and secondary CTA to give users the choice. This helps behavioural change because relevant triggers are clearly visible for most visitors.

Homepage Sliders/Carousels:

So many websites have auto-sliders or carousels on homepages. You would be forgiven for assuming that they must be an effective means of communicating multiple products or value propositions. Management love them because they can allow them to avoid making difficult decisions about what should be on their homepage.

Here is the carousel on Very.co.uk which changes every few seconds as the user is reading the text. This can also be annoying to visitors if they are not fast readers.

However, the vast majority of A/B tests and usability studies have shown that few users interact with sliders and they often harm conversion rates. Because carousels often look like adverts they are frequently ignored and have few clicks on calls to actions. In addition, even fewer visitors click on second, third and other panels that are included in a carousel. This means that prime real estate on your homepage is not performing effectively and so should be removed.

Welcome screen:

When a visitor successfully completes your registration process, don’t dump them into a blank page and expect them to work out where to go next. Make sure you provide a suitable welcome message and provide on-boarding information or cues. It’s an important stage in the user journey, and so make sure you take advantage of it with suitable content.

Deezer, the music streaming app, has a simple and easy on-boarding process. When a user completes a short sign-up form they are first asked to select music genres they like. Users are then asked to indicate their preference for a series of artists. Once this is complete the user is presented with a unique play list called “Flow” which reflects their music tastes.

By demonstrating how easy it is to create a play list Deezer also hope to encourage behavioural change by making the process very easy. Data has shown that customers who create their own play lists are much more loyal and less likely to cancel their subscription.

Conclusion:

BJ Fogg’s behavioural change model is a powerful framework for considering how we can nudge visitors towards their goals. Most attempts at behavioural change fail, not because people can’t change, but rather because at least one element is missing. People need a prompt, but also the ability and motivation to change. Use this framework to identify which elements are missing in your user journey and address these deficiencies to improve your chance of success.

How To Use Behavioural Science To Boost Conversions

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Do you want to use Behavioural Science to boost conversions?

In the book, The Growth Strategy That’s Being Ignored, Paul Rouke and other contributors argue that for conversion rate optimisation (CRO) to be a significant driver of growth. A customer centric approach needs to be embedded into the company’s culture. This need to come from the C-suite down and requires aligning the customer experience with visitor needs and motivations.

Dr David Darmanin, Founder & CEO of Hotjar – (from The Growth Strategy That’s Being Ignored)

“We need to re-align optimisation to the user experience. Understanding our users, listening to their feedback and empathising with their needs is the only way to truly understand what needs to be optimised.”.

However, whilst this sounds all well and good. CRO can only be a driver of genuine business growth if it first persuades more visitors to achieve their goals. The business’s goals should of course be aligned to customer goals. Think about it, improving awareness, engagement, intent or the overall customer experience doesn’t matter. Unless you persuade more users to convert in a profitable and sustainable way.

Bryan Eisenberg, Founder & CMO at IdealSpot – (from The Growth Strategy That’s Being Ignored)

“Conversion rates area a measure of your ability to persuade visitors to take the action you want them to take. They’re a reflection of your effectiveness at satisfying customers. For you to achieve your goals, visitors must first achieve theirs”.

To persuade users we need to understand the nature of human decision making. Behavioural science and behavioural economics in particular can help us identify how the mind operates and what mechanisms are involved in human decision making. Behavioural economics can also guide us on the forces that shape behaviour and the extent to which emotions, context, past experience and social influence drive decision making.

Why behavioural Economics?

Marketers can use behavioural economics to design strategies for behavioural change. Neuroscience is making great advances in understanding how our brains respond to different types of stimulus. Most of these factors are largely ignored by the field of economics. Yet much of marketing theory has been influenced by economic thinking. Behavioural economics though seeks to address these shortcomings and help us better model human behaviour.

Are people really rational, independent thinkers?

In the book Herd, Mark Earls points out that humans are “super social apes” and we constantly monitor and copy the behaviour of others. We align with groups we wish to associate with (herd theory) or copy others to learn new ideas and behaviour (social learning). This means we are automatically drawn towards brands that people in our social networks buy. In this respect we are almost the exact opposite of the agents that economists assume we are.

Behavioural economics allows us to gain a deeper understanding of the decision making process and the factors that influence user behaviour. So what are the practical implications and how can we use them to improve the persuasiveness of our digital marketing activity? Below are six key insights and implications from behavioural economics for CRO.

1. What About The Subconscious Brain?

Marketing is often ineffective because it fails to target both the conscious (rational) and non-conscious parts of the brain to get an emotional response. A purely rational argument may not communicate to the part of the mind that makes most of our decisions.

Behavioural economics cannot save a poorly designed product or weak value proposition, but it can hep us understand how our brains process marketing messages. Indeed, sometimes a good rational message can also result in strong emotional response. For example, Ronseal’s quick drying woodstain’s strapline; “Does exactly what is say on the tin.” This is a rational message that gives the buyer reassurance that they won’t regret their decision. Avoiding regret is a powerful motivator as people hate to feel such an emotion.

System 1 and System 2

The psychologists Daniel Kahneman and Amos Tversky have shown that the mind works at two levels. System 1 is our fast, intuitive, emotional and largely automatic brain which is continuously running in the background. It also largely steers our other level of thinking, System 2. This is a slow, analytical, and deliberative brain.

We use System 2 for self-control and cognitive effort, resolving complex problems and mental maths. However, because System 2 quickly depletes a shared pool of cognitive energy we use it sparingly. We rely on System 1 for most simple decisions.

Image of difference between System 1 and System 2

This concept of the mind has been further supported by Professor Gerald Zaltman whose research suggests that up to 95% of our purchase decisions are made by our non-conscious brain. Roger Dooley also makes the point in the book The Growth Strategy That’s Being Ignored.

Roger Dooley, Founder at Dooley Direct LLC – (from The Growth Strategy That’s Being Ignored)

“Today, there are many poorly optimised websites that even elementary CRO approaches can help. Once the basics are fixed, more sophisticated approaches will be needed to keep improving conversion rates. A key part of these better tactics will be to focus on the customer’s non-conscious decision-making using brain and behavioural science”.

Implications for CRO:

  • The explosion of literature about the non-conscious part of the brain has led some marketers to focus purely on emotional messages. This is misguided as a strong explicit goal forms the foundation of relevance and motivation to purchase. Behavioural economics indicates that we need to establish a strong connection between explicit (rational) and implicit (psychological) goals to avoid conflict between the System 1 and 2.
  • Targeting the non-conscious brain requires thinking about our underlying motivations that we often don’t express but are important drivers of behaviour. This means considering how people want to feel about their actions and the brands they buy. Even if people are not consciously aware of a message that targets an implicit goal. Research (Ruud Custers & Henk Aarts, 2010) indicates that it can still become more accessible in a person’s memory and so the brand has more chance of being top of mind.

Phil Barden, Decoded

“Implicitly activated goals not only make products or brands more accessible, they also result in a more positive attitude”.

  • Lean Cuisine for example used underlying motivations to create an ad “#WeighThis” which went viral. The ad creators realised that eating healthy, low fat food is often not about your weight. People make an effort to take care of what they eat for a purpose.
  • Psychologically they want to feel good about themselves. As a consequence the ad focused on getting people to talk about what really matters in their lives. Rather than using scales to measure their weight they were asked to weigh what they are most proud about their life. 

  • Behavioural economics suggests asking people direct questions about why they purchased a product or made a decision is fundamentally flawed. Customers don’t have full access to their underlying motivations and post-rationalise when asked to explain why they made a certain decision.

Focus Groups – A Failure

  • Focus groups are the biggest failure here as you also have group dynamics involved which makes feedback impossible to interpret. They are often the default method of research and appear to be popular because people enjoy watching a group of strangers rationalise about their product or creative.
  • But in reality we don’t sit in a bubble with a bunch of strangers trying to say clever things about something we don’t really care that much about. Neither is it normal to talk about digital content when we know the person who thought up the idea may be watching us behind a one-way mirror. This is as about as far from reality as anything we could think up in our wildest dreams.
  • Behavioural economics indicates that observing users (e.g. usability research), listening (e.g. qualitative research) and using implicit research methods (e.g. Implicit Association Test) are more reliable methods of research as they don’t rely on self-reporting. Direct questioning at the time of a user visit can be useful to obtain feedback on the user experience. Be aware of the limitations of such research.
  • For understanding how people react to new content or new products the most reliable method is a controlled experiment. The scientific method used for A/B testing allows us to measure real changes in behaviour. Rather than rely on biased and flawed research techniques.

2. Psychological Rewards Drive Attention:

Brands are objects in our minds and relatively few brands connect at an emotional level. We respond emotionally to brands because they help us meet psychological goals not because we are particularly loyal to them. Brands, however, can use these psychological territories to differentiate themselves from competitors and to improve their appeal to customers.

Neuroscience research (Berns & Moore, 2012) indicates that products and services activate the reward system of our brain. Indeed, this is more predictive of future sales than subjective likeability and the intensity of the brain’s response is related to the value we expect the product to deliver.

A neuroscientific study (Carolyn Yoon, 2006) indicated that brands are simply objects to the brain and brands are not perceived to be people with personality traits. People buy products to achieve explicit (rational) goals which relate to the product category.

Brands

Brands on the other hand help us meet implicit or psychological goals. People respond emotionally to a brand when it helps them achieve a goal and not necessarily because we feel deeply attached to it. However, the more important a goal is the stronger we relate to brands that are relevant to that goal.

Marketing consultancy Beyond Reason combined findings from behavioural economics, psychology and neuroscience to create a comprehensive model of implicit motivations. Research shows that implicit goals focus our attention. Even subconsciously we notice brands that may help us achieve an active psychological goal. Brands that we think are most likely to help us achieve a goal get the largest share of our attention. This may explain the attraction of guarantees and a compelling value proposition that promises a desired outcome.

Image of Beyond Reason's implicit motivation model

This motivation model is the intellectual property of BEYOND REASON

Behavioural science shows that our brains respond to the reward (i.e. achieving goals) and the pain (i.e. the price) we feel when considering a purchase. When the difference is sufficiently large we will be open to purchasing a product. The net value can change by increasing the reward (i.e. improve the benefits or performance of the product) or reducing the pain (i.e. lower the price). Another way to improve the value of a product is to use social proof to demonstrate how popular the brand is.

Implications for CRO:

  • Use the Beyond Reason implicit goal map to review your value proposition and messages on key pages. Beyond Reason’s implicit research methodology identifies and provides a weight to each implicit purchase motivation. You can align your value proposition and communications to your customers’ psychological goals. You can then use A/B testing to evaluate how communicating these goals influence conversions on your site or app.
  • People like what they buy, not buy what they like. Providing reasons, both rational and emotional can help to persuade visitors that what you offer is what they are looking for. However, the serial position effect suggests that you should position your most important points at the beginning and end of a list. Don’t list your benefits in descending order of importance because people have a tendency to remember the first and last items in a list.
  • Focus on habit formation or disrupting existing habits. Research by the late Andrew Ehrenberg suggested that most brand loyalty is driven by habits and availability, not by a strong emotional attachment to the product. Behavioural economics indicates that marketing strategy should be designed around people’s habits. It is easier to piggy back onto an existing habit rather than create a new one and so look to see how your product or service relates to everyday behaviour.

 3. The sales funnel is a myth!

Decision making is not a linear process as suggested by many models of consumer behaviour. Behavioural economics shows how decision making is much more complicated and decisions are not conducted in isolation from what else is happening around us. This means that people are easily distracted because they have multiple goals battling for attention at any one time.

  • The traditional sales funnel suggests we act rationally and go through a mythical sequence of steps before purchasing. In reality our brains are constantly bombarded by stimuli and as a coping mechanism our brain creates a cognitive illusion that makes us feel in control and rational. However, this process filters out information that our brains deem to be unimportant and distorts other inputs to protect and enhance our self-esteem.
  • In these circumstances a more appropriate analogy would be a leaking bucket that is standing on a ship’s deck. The water in the bucket is anything but tranquil. It is constantly being churned up by emotions, incomplete and inaccurate memories, social interactions and many other factors that can instantly cause us to change course. In figure 1 below I have summarised all the key elements that behavioural economics identifies as influencing behaviour.

Figure 1

Implications for CRO:

  • Cognitive biases such as confirmation bias, the backfire effect and bias blind spot shape our view of the world and make it very difficult for brands to change strongly held beliefs. What this suggests is that brands may be wasting their time and money by targeting existing customers of large competitors. They are unlikely to alter their opinions and habits unless something seriously goes wrong. Don’t use rational arguments to change people’s beliefs because often this will just result in those ideas becoming even more entrenched.

  • Brands can grow faster if they focus on increasing overall penetration by targeting visitors who are not strongly affiliated to any particular brand and use CRM activity to engage existing customers. This is supported by research published in the Journal of Advertising Research. It points out that your next customer is likely to be your most profitable visitor because average basket values increases as a brand franchise grows in size.
  • The insight here is to be less concerned about what your competitors are doing and put more effort into communicating a compelling proposition to new users and visitors to your site.

Journal of Advertising Research, 2002

“Brands need to target inclusively and stand for a vivid, clear but broadly appealing benefit. A narrow, exclusive focus on the ‘most profitable’ households is a recipe for stagnation and decline, not for brand health.”

  • Repeat key messages at key stages of the user journey to improve the likelihood that visitors will notice them. Repetition also plays to the availability heuristic. This means we are more likely to believe something that is familiar to us.

Barry Schwartz, The Paradox of Choice: Why More Is Less, Revised Edition

“When you hear the same story everywhere you look and listen, you assume it must be true.”

4. Brands are framed by people not brands:

Because people are extremely social beings we have complex social networks which influence our behaviour. We are constantly thinking about or observing the behaviour of others. Analysis of how behaviour and ideas disperse through populations suggest that a majority of consumer purchases are probably shaped by interactions with other people.

Whether it is the brands our parents purchased when we were young, what our colleagues talk about at work or the latest game that our Facebook friends are playing. These interactions are key to many of the choices we make and often we are not even consciously aware of how others influence us.

Mark Earls

To influence mass behaviour Mark Earls argues that we need to stop thinking about customers in the “I” perspective and begin considering them part of social networks and tribes of “Us”. He uses the analogy of trying to predict how a fire spreads through a forest. We wouldn’t concern ourselves with the characteristics of an individual tree and focus on a tree in isolation. Instead we consider how trees are connected to each other and how the landscape might influence the spread of the fire.

Implications for CRO:

  • People often conform to trends or fads, and may even ignore their own beliefs because they don’t want to miss out (i.e. loss aversion) on what everyone else is doing (see bandwagon effect). Use social proof (e.g. Facebook followers, customer numbers and testimonials) to communicate how popular your brand is to benefit from this phenomena.
  • Ratings and reviews are especially important when people are faced with a large number of similar options as they often don’t have the time or expertise to evaluate each item.

  • When you are faced with a number of similar options, such as pricing plans. People find it difficult to decide between them. One way behavioural economics suggests you can make it easier for users is to indicate which plan is your customers’ most popular choice. Many visitors will select the most popular plan because it is seen as a ‘safe option’.

Spotify

Spotify extensively utilises the bandwagon effect by displaying how many people are following a song, album, artist or playlist. This encourages users to explore new music and build their own playlists. Such behaviour improves user engagement and increases the potential value of customers.

Example of social proof from Spotify.com

Source: Spotify.com

  • People also consciously copy the behaviour of others when they want to be with like-minded people and participate in similar experiences. Use customer research to understand what beliefs and attitudes are most important to your visitors and align your behaviour and business ethics accordingly.

Innocent Drinks

Innocent drinks sell a range of premium smoothies to a health conscious audience. However, to communicate its high ethical standards it has a brand promise to be socially responsible in how it sources its ingredients. They guarantee to give 10% of profits to charities which fund projects that alleviate hunger around the world. This socially responsible stance fits well with many of its customers and probably helps it to maintain a premium price.

Apple

  • Be careful about social norms and traditions when entering a new market or launching a new product. When Apple launched the original iPhone in Japan in 2008 it struggled to sell because it didn’t conform to market norms. By 2008 Japanese consumers were already taking videos and watching TV shows on their smartphones. The iPhone did not even have a video camera or the ability to include chips for debit card transactions or train passes. In Japan many people use trains to get about.

Pepsi

  • Pepsi broke a social norm with the Kendall Jenner ad as they tried to use political protest for commercial gain. By attempting to co-opt a movement of political resistance and mimic anti-Trump and Black Lives Matter protests. Pepsi over stepped what was perceived to be acceptable by many people.

5. People do not seek a perfect solution:

Most of the time people are satisfiers rather than looking to maximise economic utility. We don’t have the time or resources to look for “ideal” solutions. Behavioural economics tells us that most people are not seeking perfection when making decisions. Because of loss aversion we are more concerned about not feeling regret. As a result most of the time we are probably content with something that is in the third quartile.

Implications for CRO:

Avoid using words to describe your offer as “ideal” or “perfect” as this is not aligned with real user behaviour. People want to know who can be trusted rather than if your product will change their lives.

Everything is relative. People automatically want to compare offers because they don’t necessarily know what above average looks like. Including comparative information on your site which includes some benefits where you are inferior to your competitors can help build confidence in your brand. People understand it is rare to find something that is better in every aspect and value honesty in the people they deal with. An independent source for comparative information can carry further weight.

Offer money back guarantees or free returns to demonstrates confidence in your product. This also reduces the risk of the customer making a mistake and feeling regret.

6. Ease the pain of payment:

Neuroscience research has indicated that an excessive price activates a part of the brain called the insula. This is normally a part of the brain associated with experiencing pain. It suggests that people can suffer from a form of mental pain when considering the cost of an item.

Implications for CRO:

Free trial offers and buy one, get one free offers are good strategies. This plays to our human tendency to be loss averse. People fear loss greater than a gain and are also attracted to free or discounted offers because they hate the feeling of regret when they miss out on something appealing.

Delaying payment can also significantly improve a user’s likelihood to convert because a payment in the future is worth less than a cost immediately incurred. (see hyperbolic discounting). Ecommerce stores routinely benefit from this phenomena by using buy now, pay later promotions and by allowing customers to pay in monthly instalments. Littlewoods.com is very effective at using the buy now pay later proposition to reduce the pain of a purchase and this allows the e-commerce retailer to charge a significant premium for products on its site.

Behavioural Economics

Behavioural economics tells us that brands can reduce the pain from a payment by using the concept of mental accounting. Brands can achieve this by associating a purchase with an existing household budget. People have a tendency to allocate money into separate subjective pots, such as house, weekly shop, holiday, savings, windfall gains and housekeeping money. They tend to be more willing to dip into some accounts, such as housekeeping and windfalls, than others, such as savings or house (i.e. rent or mortgage).

To benefit from mental accounting brands can seek to position their product or service as naturally coming from an appropriate and easily accessible mental account (e.g. air freshener from weekly shopping). In addition brands could allow customers hold a surplus balance or to allocate items to different accounts (e.g. banking apps that allow budget setting). This can help people manage expenditure according to their mental accounts.

All About Amazon

Amazon uses mental accounting with Amazon Prime Reload, a rewards program which encourages people to sign up to Prime and hold a surplus balance on their account. Prime members get 2% back on purchases when they first pre-fund their Amazon Balance using a debit card.

This may encourage people to load large amounts into their Amazon Balance to avoid ever having to pay directly for an item through their debit or credit card. By creating an ‘Amazon account’ this may encourage more frequent and impulse purchasing if the customer maintains a surplus balance. It makes it much easier for people to justify a purchase when the money has already been allocated to an existing account.

MYJAR

MYJAR.com uses its brand name to associate itself with the mental accounting concept because in the UK it is still common practice to keep spare change or money for a specific purpose in jars. Traditionally it was common to use jam jars to store cash for different needs (e.g. beer money and milk money).

Conclusion:

Behavioural economics provides us with a framework and language to create strategies for behavioural change. Behavioural economics provides many opportunities for us to be more persuasive online. Roger Dooley is correct in suggesting that we need to be better at targeting the non-conscious brain because this makes most decisions. However, neither should we forget to link the emotional with rational reasons why we buy as without System 2 thinking we may lack substance.

Beyond Reason’s implicit motivations model provides valuable insight into how we should discuss brand positioning. Many brands have similar features and benefits, but we can use implicit motivators to have informed discussions about how to best differentiate our brand using deep psychological and emotional goals.

Brands are nothing without human interaction, whether between customers or with staff via digital channels or offline conversations. People use the popularity of your site as a short-cut to deciding whether they can trust you. Social influence should, therefore, be one of your strongest strategies for influencing visitors to engage and convert.

As well as seeking to increase the value of your brand (e.g. through product enhancements) behavioural economics suggests we also look at the pain of price. It is important not to look at these factors in isolation because it is the net difference between the perceived value and the cost of an item that determines likelihood to purchase.

Can Behavioural Economics Save Marketing?

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Marketing is a Discipline!

In a recent podcastRory Sutherland, of Ogilvy and Mather UK, said that the second client marketing departments are “reduced to ‘MarComs’ marketing is almost lost”. So why do organisations think marketing is solely about communications and not behavioural change?

Marketing communications is of course a fundamental element of the marketing mix, but marketing is a discipline and a way of thinking. Communications should be an integral element of the four P’s, not a separate silo. Turning marketing into MarComs inevitably changes the relationship between areas that were once part of the marketing department.

They establish their own priorities and see communications as a service rather than part of the same discipline. This risks turning marketing into a process rather than a creative discipline. Once this happens MarComs is in danger of becoming a factory that churns out content that follows the set templates and adheres to the brand guidelines. It is unlikely to take risks or inspire customers.

Creativity is at the heart of the marketing discipline and it should be applied across all areas of the function to have maximum impact. A fragmented marketing function also encourages a tactical approach to marketing as MarComs have to respond to what product, pricing and the sales channels decide to do, often with little planning or discussion beforehand.

Marketing and Behavioural Change?

Image of mri-head scan

Source: Freeimages.com

Rory also mentioned how behavioural economics (BE) has the potential to allow creative people, like marketers and market researchers, to get involved in other areas of organisational management. It won’t solve the organisational problems of marketing, but BE can provide a valuable framework and language to create strategies for behavioural change. This would involve coming up with ideas for better choice architecture or nudges to influence the decisions people make. Marketers could be well suited to this role because behavioural change requires a creative and analytical approach to problem solving.

Neither is this about persuading people to do things they don’t want to do or selling them unsuitable products. Behavioural change has failed if this happens as people soon get wise to such unethical behaviour. It would not be sustainable either as companies would not want to risk damaging their brand’s reputation. Behavioural change is about understanding how and why people make the choices they do, but not just limiting ourselves to the marketing products and services.

Humans do not seek a perfect solution:

One of the most fundamental insights that BE gives us is that people seek to satisfy rather than maximise as we live in world of imperfect information and trust. Our goal with most decisions is to avoid a disaster rather than seeking a perfect solution. If this is the case then it should not be a surprise that messages often used in promotional material that refers to an “ideal” or “perfect” solution to “fully” meet your needs misses the mark?

Image of friends in a huddle

Source: Freeimages.com

Habit Formation:

Evolution has slowly created and shaped human decision making processes and so our cognitive machinery is little changed from when we first formed early civilised societies thousands of years ago. As a result we still rely on many of the same strategies for determining who we should buy from and what to do in new and uncertain situations. Behavioural change can use this insight to employ strategies that tap into our herd instinct.

People follow the crowd because it reduces the chance of a decision being a disaster. If the seller is aware they could lose social capital if they sell something unsuitable they are likely to avoid doing so. If, however, it leads to a satisfactory outcomes we may create a habit as we have learned to trust the person or brand concerned. Much of what traditional marketing refers to as brand loyalty is in fact habits. The insight here is that behavioural change is most likely to be effective when it focuses on habit formation or piggy-backs off an existing habit. Disrupting a habit is more important than the message.

image of people sitting outside Starbucks

Source: Freeimages.com

Brands:

Brands are also framed by how people interact with them and the stories they tell each other about their experiences. Trust is strongest when we learn through experience and the actions of the brand that they can deliver on their promises. The key relationships with a brand are the interactions between customers and employees. These define the brand relationship much more strongly than any advertising or social media campaign ever can. Thus, behavioural change is likely to be most effective if it focuses on these interactions.

Brands are created from our experiences.

Dave Trott, One Plus One Equals Three: A Masterclass in Creative Thinking

“The product creates the experience.

The experience creates the reputation.

The reputation creates the brand.”

Emotions:

The context of our decisions and our underling emotions are also crucial to behavioural change. We are much more willing to spend money and pay a premium price when we are searching for a last minute Christmas present that we promised to buy for our partner or children. We hate the feeling of regret and will seek to avoid it if we can. This is partly why scarcity is such a powerful motivator as people don’t like to feel they missed out on a bargain (i.e. loss aversion) because they were too slow to get to make a decision.

Image of man looking at a laptop

Source: Freeimages.com

As a result communications that triggers an emotional response are often more effective at getting attention and influencing behaviour than a purely rational message.

Aarron Walter, Teamtreehouse.com

“Showing personality in your app, website, or brand can be a very powerful way for your audience to identify and empathize with you. People want to connect with real people and too often we forget that businesses are just collections of people”.

Other useful insights from behavioural economics include:

  • We feel most comfortable when our behaviour conforms to recognised social norms relating to concepts such as fairness and social responsibility.
  • Humans are not the selfish, independent thinking agents that economics would have us believe. We will often hold back from behaviour that we believes treats others unfairly or lacks respect for others.
Image of behavioural economics decision bucket

Behavioural Economics Decision Bucket – Factors that influence decision-making.

  • Although people usually have clear explicit goals when making a purchase (e.g. I want a new car), they do not have full access to their psychological (implicit) goals (e.g. belonging and certainty) that help drive brand choice. For this reason there is no point using direct questioning to try to uncover these implicit goals. Our preferences also change over time and so consumer demand is continuously shifting in response to many influences.

Beyond Reason

  • The Beyond Reason model below shows eight overall implicit motivations and each of these is then broken down into a further four specific psychological goals. Marketers can use this model as a framework for discussing important psychological goals of their target audience. Rather than focusing on ’emotional responses’ marketers need to target relevant psychological goals to influence behavioural change.
Behavioural science provides us with a framework for behavioural change

Source: This motivation model is the intellectual property of BEYOND REASON

  • Intrinsic motivations, such as mastery and autonomy, can be more powerful at driving our behaviour than carrots and sticks, especially when the activity is not routine. Indeed, research has shown that extrinsic motivators, such as bonuses, often reduce motivation and performance when applied to creative tasks.

As you can imagine these insights can be employed in any environment where behavioural change is needed. This could be to tackle health and safety issues, reduce waste, improve compliance with good working practices, address employee motivation, or improve the effectiveness of communication.

What Next?

Well, Ogilvy and Mather, the global advertising and marketing agency, have already created a new business unit, Ogilvy Change, dedicated to the application of behavioural economics to deliver measurable changes in behaviour across a diverse range of environments. I recently attended the monthly London Behavioural Economics Network meeting where the team from Ogilvy Change discussed work they had conducted on behavioural change in a factory in South America for improving hygiene and the psychological optimising of a call centre in the UK. From small beginnings the team at Ogilvy Change are now working with a number of global businesses to press forward the application of behavioural science in the real world and maybe it is time we did the same.

Featured image by Alex Knight on Pexels

Is It Time To Kill-Off The Conversion Funnel?

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Does The Conversion Funnel Exist?

The conversion or sales funnel is based upon linear models of decision making such as A.I.D.A (Attention, Interest, Desire, Action). This ignores the reality that people don’t mindlessly go though each step in a mythical conversion funnel until they complete a purchase.

People are highly connected and use their social networks extensively to identify different ways they can meet goals and who they can trust. Behavioural economics supports the idea of a non-linear decision making process. It provides clear evidence of how important our interactions with other people are in the choices we make.

We use our network to reduce the chances of our decisions being a disaster. If someone is known to our network they risk damaging their own reputational capital if they sell us something not fit for purpose. Behavioural economics also shows how underlying emotions, social norms, traditions, and many contextual factors influence decisions. If any of these ring alarm bells we may reconsider our goals or abandon the purchasing process.

Image of paper people holding hands

Source: Freeimages.com

This often produces an erratic, on-off and on-again decision making process. Plus as we employ our unconscious brain when we can to conserve cognitive energy. We may not even be consciously aware of many of the factors that drive our decisions. This undermines much of the market research that organisations use to design their marketing campaigns.

Multiple Purchasing Processes:

In addition, when people are online they often simultaneously look at alternative solutions. They could be in more than one purchasing process at the same time. This means the funnel metaphor is misleading when it comes to understanding real-human decisions as it over-simplifies the process.

A Leaking Bucket:

The conversion funnel needs to be replaced by the behavioural economics decision bucket as visitors are continuous leaking from the process

A better metaphor for a conversion funnel may be a leaking bucket that is constantly being filled by a stream of water. People frequently swing from one decision to another. The importance of factors in our decision making can quickly shift as our emotions, social interactions and environment alter our motivations.

Our brain filters out a lot of the information that we are targeted with and cognitive biases further distort our perception of the information we receive. Having a simple and compelling message is essential if we wish to cut through the noise surrounding us.

Imperfect Memory:

Image of computer memory chips

Source: Freeimages.com

We don’t have a memory like a computer as each time we recall a memory it has to be recreated and elements inevitably get changed or lost. This means our memories are heavily dependent upon what happened at the peak and at the end of an experience. Get these wrong and chances are customers will not recall an experience in a positive light. It also explains why we need to regularly repeat our brand messages through advertising and other media as our memory degrades over time.

There is also evidence that high advertising and promotional spend act as a costly signalling. This demonstrates the organisation has long-term time horizons and is in good financial health. This behaviour may increase trust in the organisation or product as people interpret this as an indication of confidence about the future of the brand.

Goals Motivate People:

When we create an unmet need this forms an explicit goal (e.g. I want to have a reliable car to get to work). But for our brand (or website) to be chosen we need to communicate that we can deliver on key psychological or implicit goals. If we can convince customers that we meet these implicit goals we may generate an emotional response which can help close the sale.

Behavioural science provides us with a framework for behavioural change

This motivation model is the intellectual property of BEYOND REASON.

Provided the brand is available and the experience meets our expectations this may help form a habit which creates brand loyalty. This can be broken by lack of availability or the creation of a new habit. Indeed, if the product does not deliver what it promised we are unlikely to create a new habit and users may buy another brand.

Don’t Ask Why:

If asked why we purchased a product we will come up with what we think are rational reasons for our choice. But as we don’t have full access to our subconscious processes this is a pointless exercise. However, there are implicit forms of research that try to tap into these underlying motivations.

Conclusion:

The conversion funnel is dead, or at least it should be on life-support. They are a misleading way of describing the decision-making process. A conversion funnels may also result in too much focus on customer acquisition and short-term thinking because they imply there is only one goal (e.g. the conversion rate). Instead we should be looking to ensure our product meets the needs and expectations of customers and try to create sustainable habits to encourage brand loyalty.

Dave Trott sums it up nicely in his book One Plus One Equals Three: A Masterclass in Creative Thinking:

“The product creates the experience.

The experience creates the reputation.

The reputation creates the brand.”

Recommended reading:

Decoded by Phil Barden

Decoded

Herd by Mark Earls

Herd - How to change mass behaviour by harnessing our true nature

Thinking, Fast and Slow – Favourite Quotes

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Thinking, Fast and Slow by Daniel Kahneman:

Every time I revisit Daniel Kahneman’s Thinking, Fast and Slow I discover new insights and learn more about human behaviour. I gleaned more from the introduction to this book than the entirety of many other books I’ve read. If you are in business or just interested in human behaviour this book is a must read. It will change your life and how you think about decision making.

Kahneman outlines how two systems are at work in our brains to allow us to function without depleting our limited energy and mental capacity. Understanding the difference between System 1 and System 2 is at the heart of appreciating how humans make decisions. However, the book is much more than system 1 and 2 as it shines a light on the impact of mental short-cuts and cognitive biases. How our brain relies on these short-cuts to cope with the constant flow of decisions in our daily lives.

Thinking, Fast and Slow outlines the nature of system 1 and System 2

The section on over-confidence challenges the trust we place in ‘experts’ to advise us in business and in our personal lives. How our brains naturally focus on what know and ignore what we don’t know. Choices explains why people often miscalculate risk and why we are prone to making bad decisions in certain circumstances.

Here are a few quotes from Daniel Kahneman. It gives you a taster for what is in store for you when you read this brilliant book. You won’t be disappointed:

Cognitive Bias:

We documented systematic errors in the thinking of normal people and we traced these errors to the design of the machinery of cognition rather than the corruption of thought by emotion.”

“We focused on biases, both because we found them interesting in their own right and because they provided evidence for the heuristic judgement.”

Image of cognitive bias codex graphic

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Availability Heuristic:

“People tend to assess the relative importance of issues by the ease with which they are retrieved from memory – and this is largely determined by the extent of coverage in the media.”

Over-Confidence:

“However, optimism is highly rated, socially and in the market; people and firms reward the providers of dangerously misleading information more than they reward truth tellers.”

“Judgement heuristics are quite useful but sometimes lead to severe and systematic errors”

Role of Luck:

“Luck plays a large role in every story of success; it is almost always easy to identify a small change in the story that would have turned a remarkable achievement into a mediocre outcome.”

Intuition:

“Accurate intuitions of experts are better explained by the effects of prolonged practice than by heuristics. Skill and heuristics are alternative sources of intuitive judgement and choices.”

“Our everyday intuitive abilities are no less marvellous than the striking insights of an experienced fire-fighter or physician – only more common.”

“Intuition is nothing more and nothing less than recognition.”

Once you read this book, like me, you will want to return to it regularly to learn more about human nature and decision-making. Hope you enjoy reading it.

Thinking Fast and Slow

Thinking, Fast and Slow

Does Social Influence Drive Most Consumer Behaviour?

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Can most of the things we buy really be the result of the behaviour and opinions of other people, whether openly or through covert imitation? This challenges conventional thinking about how people make decisions and common assumptions that most market research is based upon. However, many of these are false assumptions so isn’t it about time we looked at the data and came up with a model of human decision making that doesn’t neglect social influence?

The Power of the Herd:

In the book I’ll Have What She’s Having by Mark Earls, Alex Bentley and Michael O’Brien the authors assert that social learning (imitating other people) is the engine for the spread of culture, behaviour and new ideas. The basic premise is nothing new. ‘Herd behaviour’ was first popularised a hundred years ago by Wilfred Trotter in his book Instincts of the Herd in peace and war (1914).

Social influence and our herd instinct determines consumer behaviour more than we realise

However, more recently the economists Thaler and Sunstein suggested that social influence is important. Most people learn from others and it is one of the most effective ways to nudge behaviour.

They noted that in Jonestown an entire population committed suicide due the power of social influence. That teenage girls are more likely to become pregnant if they see other teenagers having children. But also obesity, academic effort of students, broadcasting fads and the behaviour of US federal judges have all been found to be heavily influenced by their peers.

Is it a co-incidence that we buy so many of the same brands as our parents and have adopted some of their behaviours’ and phrases? Some of these preferences change as a result of friends, partners, colleagues, and others in our social networks. But by who? Our personal belief system is also the result of interactions with other people. We largely rely on people we respect and trust (see authority) rather than actively seeking experiences to form our beliefs.

Super Social Humans:

Source: FreeImages.comEarls and his co-authors suggest that our tendency to copy results from humans being the most social of all primates. Living in groups we possess superior cognitive abilities that allow us to copy behaviour and ideas. These characteristics have enabled humans to adapt and survive in changing social landscapes. We only have to look at how people now use smart phones to see how quickly humans find new ways to interact and exploit opportunities that didn’t exist just 20 years ago.

That is not to say that people automatically follow each others like lemmings. Humans do of course innovate. Earls and co assert that ideas spread through a small amount of individual learning (innovation), and then social learning by the vast majority of people. Sales and motivation consultant Cavett Robert confirmed the same observation:

“Since 95 percent of the people are imitators and only 5 percent initiators. People are persuaded more by the actions of others than by any proof we can offer.” Cavett Robert

Interactions and Conformity:

Further, Earls and his co-authors point out that even if an idea or behaviour is intrinsically appealing, unless the knowledge of, motivation for, or acceptance spread through our interactions with others it will not get very far. Indeed, social norms emerge and change in our cultures as a result of behaviour spreading through conformity.

No one sets out what these norms should be. But people from a particular culture will generally agree on social norms without having to confer with each other. We learn what the norms are through our interactions with other people. Further, as Robert Cialdini and other social scientists have found social proof and norms can be a powerful way to persuade people to behave in a certain way.

  • Too much choice!
Image of brands on a supermarket shelf

The psychologist Barry Schwartz points out that as the number of choices we have continues to rise. People have no alternative but to rely on second-hand information rather than personal experience. His concern was about global telecommunications and how these networks copy and distribute the same stories. Even if a story is false the danger is that the more people hear it, the more they assume it is true.

“When you hear the same story everywhere you look and listen, you assume it must be true.” Barry Schwartz, The Paradox of Choice: Why More Is Less, Revised Edition

In our modern societies copying is likely to be the most effective strategy for most decisions. We neither have the time or capacity to process so many choices. Schwartz visited a US consumer electronics store as part of the research for his book The Paradox of Choice. He estimated that the individual components in the store would enable one to create 6,512,000 different stereo systems. Perhaps it’s not surprising the iPod became so popular!

Market Patterns:

Earls and is his co-authors point out that patterns in market data are the best guide as to whether decisions are heavily subject to social influence. If people largely make decisions independently of each other, and use some kind of rational cost-benefit selection process, we would expect to see a normal distribution (short-tail) of brands. This is most likely to occur where there are relatively few similar products to choose from.

Furthermore, brand loyalty would not to be correlated with brand size and advertising would be as effective at attracting new customers as it is with existing buyers. Markets would be more stable as people wouldn’t follow trends. Sudden and massive cascades (e.g. the switch to digital cameras) wouldn’t occur as peoples’ preferences would not change until they had decided for themselves that a new product would better meet their needs. This indicates social influence is active all around us.

More Market Patterns:

In reality many markets are characterized by long-tail distribution that marketers recognize by the 80:20 rule. Andrew Ehrenberg’s work in social and market research identified that short-tail distribution can exist in static and non-segmented markets. This means there is no turnover of products. But in many of today’s highly segmented markets we can see countless products come and go during a year.

Ehrenberg’s work confirmed the double jeopardy law that small brand’s suffer from both fewer buyers and also less loyal customers compared to large brands. He also found that price elasticity declines in magnitude as a brand’s share rises. Why should this be if we are not subject to social influence from others? His work indicated that most promotions only have a short-term impact on sales and almost all buyers during promotions are repeat purchases rather than new customers. He concluded that most advertising simply raises awareness of a brand but rarely seems to persuade. Indeed, one of his key conclusions is that most FMCG markets lack any real brand loyalty. Purchasing patterns are from habit and availability than any emotional attachment to a brand.

Directed Copying:

Image of photocopying machine
Source: FreeImages.com

Earls and his co-authors make an important distinction between two kinds of social influence that humans use to learn from. These are crucial for marketers as they influence the dynamics of the social landscape and how markets change over time.

When we have a choice between many apparently equivalent options we often find copying the behaviour or decisions of a particular person preferable to trying to evaluate all the different options ourselves. Directed copying occurs where people copy in an advantageous direction. This may involve copying successful people, members of our family, people who are similar, or celebrities. When we copy people or groups that we wish to identify with this may lead to social diffusion within the confines of the group.

Undirected Copying:

Image of a large crowd of people
Source: FreeImages.com

Undirected copying occurs where we copy people, probably subconsciously, with little if any knowledge of the person we are imitating. This often happens where there are not just a huge number of similar options to choose from. But there are also too many people or groups of people to copy from. Further, people appear as equally uninformed as you and are probably copying other people themselves.

Undirected copying is particularly useful for all those thousands of little choices that we hardly given any thought to and so it is largely an unconscious process. However, it is a model that can be used at the population level. This is because even if individually we have specific reasons for copying someone else, there are likely to be so many and varied reasons for copying that we can consider it undirected.

Undirected copying is probably the norm in many situations and may help predict rates of change. It acts like the interactions of cascade models and is characterized by continual flux, unpredictability and long tail distributions. The latter reflects the fact that only a small percentage of new ideas ever becoming popular as most fail. This is why we see a turnover of ideas, as the most popular ones are more likely to be used again.

Some Implications of Social Influence:

  • Directed copying can explain variations in the normal ebb and flow that results from undirected copying. This could be from a cultural or media event (e.g. the Olympics or a motion picture release) as well the adoption by a celebrity. Celebrity endorsements don’t have the same impact, as it is not genuine behaviour.
  • When an idea is better than the rest, copying kicks in. It increases its popularity until something else comes along. Copying is from the quality of ideas. The more people in the population, the better the ideas.
  • The nature of copying among populations can be influenced by their interconnections. Large, interconnected networks of people where there are relatively few similar products tend to favour directed copying. In such networks the behaviour of individuals is greatly influenced by those upstream. If we hope that people will select on the basis of quality (i.e. the follow the copy if better rule) then this kind of network is more likely to benefit a superior idea. This is similar to the early adopters marketing model where innovators generate new ideas that are picked up by early adopters and then copied by others.

More Implications of Social Influence:

  • Undirected copying produces unpredictable landscapes where probabilities are the best guide to picking winners. In financial markets for instance a balanced portfolio has more chance of selecting a winner than trying to pick individual stocks.
  • The success or failure of an idea is often unpredictable and largely random. What determines success at any one moment is how popular it is.
  • Conventional marketing and market research thinking significantly underestimates the power of social influence in determining many of the things people buy and the behaviours we adopt. Further, emotional brand loyalty may be a lot less prevalent than many marketers believe it is. Behaviour mainly drives attitudes to brands, but what influences behaviour? I suggest that it may be time to believe the math, not the myth.
Further reading:
I'll Have What She's Having: Mapping Social Behavior (Simplicity: Design, Technology, Business, Life)

I’ll Have What She’s Having: Mapping Social Behavior (Simplicity: Design, Technology, Business, Life)

The Contribution of Andrew Ehrenberg to Social and Marketing Research by John A Bound.

Featured image from Adrienn on Pexels

4 Common Myths About Consumer Behaviour

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What Drives Consumer Behaviour?

Consumer behaviour is a complex process which behavioural economics is now helping us to better understand. Most marketing theories on consumer behaviour is based on models that do not fit the purpose. As a result, a number of myths have grown up about consumer behaviour and decision making.

1. Prices are determined by supply & demand!

  • Prices are often not the result of an equilibrium between supply and demand. When a new product comes out the initial price can be fairly arbitrary. It may simply reflect what the seller believes customers will want to pay.
  • However, experiments in behavioural economics show that the first price that we see when considering a purchase becomes imprinted in our mind and acts as an anchor. This influences not only current prices but also our future expectation of the price. This is contrary to traditional economic theory and is heavily influential on consumer behaviour.
  • This phenomenon is called arbitrary coherence and explains why the first decision to purchase an item is so important to future consumer behaviour. It also suggests that consumers can be manipulated with how much they want to pay. You can find prices by answering random questions.
  • In one experiment Ariely got students to write down the last two digits of their social security number before asking them to bid for a number of items in an auction. Ariely found that students with the highest-ending social security numbers bid the highest. Those with the lowest-ending numbers bid the least. Once people are willing to pay a certain price for one product, their expectation of prices for other products in the same category are based on the first price (the anchor). This has major implications for how to influence consumer behaviour.

2. Consumer decision making is a rational and linear process.

This idea is from the A.I.D.A (Attention, Interest, Desire, Action) advertising model which explains consumer behaviour. Many blog posts for instance refer to the sales funnel which is a different version of AIDA.

  • However, experiments by behavioural economists (BE) suggest that most consumer behaviour is much more complex than this. Decision making is driven subconsciously by implicit (psychological) goals, whilst social norms and peer behaviour have a strong pull on our decisions. The context, including the environment we find ourselves in, and cognitive biases are also strong drivers of consumer behaviour. BE indicates that we then unconsciously review and post-rationalise after the event. This means that we usually act before we consciously consider our decisions. Our memory of what drives our decisions is unreliable and often wrong.
  • Most of our decisions come from the unconscious mind. We cannot assume that customer behaviour is a linear process as many popular models would have us believe. Mark Earls suggests that it is more likely to be similar to a game of snakes and ladders. Positive influences, such as what we hear from our peers, nudge us towards a purchase. However, negative influences, such as our emotional state, may move us away from a decision.
  • In the model below consumer behaviour is like a leaking bucket, as people are dropping out of the process all of the time. The model highlights how complex human behaviour is. Our brains are constantly over-working, so we rely on System 1 to make fast, intuitive decisions.

The behavioural economics decision bucket shows how complex consumer behaviour is

3. People have clear preferences and know what they want!

  • As Dan Ariely points out in his book Predictably Irrational, “everything is relative”. People often don’t know what they want until they see it in context. Priming, anchoring, and framing are key to consumer behaviour when it comes to decision making. People like to compare things that are easily comparable. The context of how we present items heavily skews our response to them. This is why it is particularly important how we position new ideas or products. For once we have presented something new as being positioned in a certain category (see category bias) it is very difficult for people to accept much movement away from this initial anchor.
  • This partly explains why asking people about future purchase intentions can be highly misleading. People are often not fully aware of their psychological motivations for past purchases. You can’t expect them to predict how they will respond in a future hypothetical situation.

4. Consumers act independently of each other and express their individual preferences.

  • Humans are a “super social species” (Mark Earls, Herd) and so consumer behaviour is often unconsciously influenced by what other people do or what we think they are doing. When faced with uncertainty we look to how other people behave and will often follow their lead (see Herd Instinct). Indeed, Mark Earls argues that human-to-human interactions about a brand are much more influential than business-to-consumer interactions. Furthermore, he suggests that consumer generated word of mouth (WoM) is much more powerful than that created through marketing WoM campaigns. This is because people are very good at spotting cheating and deception.
  • The insight here is that brands are interactions between people and not brand values or brand footprints. Whether it is consumer-to-consumer interactions or staff to consumer conversations, its people that matter most when it comes to consumer behaviour. Marketing departments may be more productive if they encourage C2C interactions rather than trying to control brand communications. There is some evidence to suggest that the C2C interactions potentially generate greater returns than short-term B2C marketing activities.
  • This challenges current thinking about targeting and the Customer Relationship Marketing (CRM) approach to influencing consumer behaviour. If B2C communications are indeed more short-term and less powerful than C2C interactions then does this undermine some of the expected benefits from CRM? Certainly recent research does not suggest that most customers want a relationship with your brand! The key to unlocking the power of WoM is about giving power back to your customers. It allows them to interact rather than trying to police brand communications.
Further reading:
Predictably Irrational
The Paradox of Choice

The Psychology of Loss Aversion

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Why do people suffer from loss aversion?

  • As anyone who has bought stocks during a bull market will know, making a quick profit is great. But making a loss is difficult to stomach! Behavioural scientists call this loss aversion. People are intrinsically afraid of losses. When compared against each other people hate losing more than they enjoy winning. Thus losses loom larger than gains even though the value in monetary terms may be identical.
  • Research by Daniel Kahneman and Amos Tversky into the psychological value of losses and gains indicated that people may have a loss aversion ratio of between 1.5 and 2.5. This means a loss that is identical in money terms, a gain may be up to 2.5 times more than the gain. This is an average as some people are more or less loss averse than others.
  • For example professional gamblers are more tolerant of losses. This seems to be because they are less emotionally involved in individual bets than the amateur gambler. The key for any risk taking behaviour appears to be to think like a professional trader or gambler. Don’t get emotional about a purchase or a bet. Think of it as purely a transaction.

Loss aversion influences how we take gambles

Implications of Loss Aversion

Loss aversion is one of the most important drivers of human decision making. It is a powerful technique often used in conversion rate optimisation. This is because it inevitably leads to risk aversion and a number of predictable behaviours in certain situations:

Threat to lifestyle:

Risks that threaten our lifestyle are normally avoided due to loss aversion

  • Where a loss could be ruinous or would threaten their lifestyle, people will normally dismiss the option completely. This is one reason why spread betting companies force customers to set automatic stop losses on most of their accounts. This protects customers from their bad bets by limiting potential losses. If there was no such stop loss in place most people would never consider this type of betting.

Winners and losers:

  • When people are given a situation where both a gain and a loss is possible there is a tendency to make extreme risk averse choices. For instance the choice between a small but certain gain and a chance for a large gain that also has a low chance of a large loss. People have a tendency to focus on the potential for a large loss. They will often select the former, more certain option. Even a small probability of a large loss is enough to make people shy away from certain types of investments.

 Bad choices and loss aversion:

  • Where the choice is between a certain loss and a larger loss that is just a probability (i.e. there is a chance of no loss), diminishing sensitivity can result in excessive risk taking. This helps explain why people will sometimes throw more money at a loss making venture. Hoping that they can turn the business around. Gamblers are also prone to putting more money at risk after making substantial losses. They focus on the potential for their next gamble to win the jackpot and wipe out their losses. People become so emotionally involved in trying to avoid a loss. They fail to see they are just making the situation worse.

When faced with all bad choices we are prone to excessive risk taking

Power of ownership:

  • Where a person buys something with the intention of consuming or using it. The minimum price that they sell the item for is often higher than the maximum price they want to pay themselves. This is called the endowment effect. The ownership of goods appears to increase the value of an item, particularly for goods that are not frequently trading.
  • This is the result of our reluctance to give up an item that we already own. Such behaviour can be seen in the housing market where sellers often have to lower their initial asking price. This because buyers do not want to pay the price sellers value their homes at. The endowment effect is most prominent for new goods, such as cars. Owners value their goods much closer to the original purchase price than potential buyers do.

Status quo bias:

  • Loss aversion is also powerful force in preventing change. People have a general preference towards the current state of affairs (e.g. their existing supplier) over changing to a better alternative. This is often a combination of loss aversion and the endowment effect. However, fear of regret in making a wrong decision can also play a part in status quo bias.
  • This is why it is important to understand the effect of loss aversion and emotional factors when researching how to encourage switching. Money back guarantees and free trials are often used by companies. This reduces the risk of loss and regret that stops people switching away from what they know. However, the fear of loss and feeling regret are such powerful emotions that these activities often fall on deaf ears. Loss aversion is probably the most effective loyalty program most companies have on their side.

“Loss aversion is a powerful conservative force that favors minimal changes from the status quo in the lives of both institutions and individuals”. Daniel Kahneman, Thinking, fast and slow.

How People React to Risk or Probabilities:

  • Loss aversion and risk are intrinsically linked. Research into the psychological value (i.e the weight) that people give to different probabilities has identified two key biases that influence human decision making in the face of uncertainty.
  • The possibility effect results in highly unlikely (low probability) events being given more weight than they justify. People naturally overestimate the probability that these events occur. They are more willing than they should be to respond to offers that tap into these perceptions.
  • This helps to explain the attractiveness of betting on unlikely outcomes (e.g. a horse with odds of 100 to 1) and insurance policies that cover uncommon events (e.g. extended warranties). If people assessed odds rationally they wouldn’t gamble on such unlikely events. They would over time be better off keeping their money in their pocket.
  • In market research this means that people tend to express more concern about low probability events such as crime or freak accidents than we might expect them to. This may also explain certain risk averse behaviours that give the impression that the chance of an event is higher than it is in reality.

More About How People React to Risk or Probabilities:

  • The certainty effect leads to events that are almost certain being given less weight than their probability justifies. Due to loss aversion it is human nature to want to eliminate risk rather then reduce it. In horse racing this means people place fewer bets on the favourite than we would expect if they were totally rational. Instead the possibility effect encourages people to bet on rank outsiders when the odds don’t justify it.
  • In retail, rather than offering 4 for the price of 3, people respond better to 1 free with every 3 purchased. The latter is more compelling because the zero price has more certainty. For websites it also means that if visitors are slightly unsure about how genuine or secure a website is they will have a tendency to magnify the risk. This may lead to visitors abandoning a transaction. It also explains why we are so responsive to guarantees. A guarantee eliminates any uncertainty about the situation, whether it’s about an application being accepted or getting the advertised offer/rate. People are often unsure if they will qualify for offers so a guarantee removes this concern.
  • A study carried out by Kahneman and Tversky for their Prospect theory indicated that unlikely events (1% to 2% probability) are over weighted by a factor of 4. However, for an almost certain event the difference is even larger. In experiments a 2% chance of not winning was given a weighting of 13% (or an 87.1% chance of winning).

The Risk of Rare Events:

  • Where the odds of an event are very small (e.g. around 0.001% or less) people become almost completely indifferent to variations in levels of risk. Rather emotional factors and how a risk is framed are the key drivers of how people react to these levels of risk. This helps to explain why people are often too willing to bet on extreme events happening or why they buy multiple lottery tickets when there is a large jackpot.

“When the top prize is very large, ticket buyers appear indifferent to the fact that their chance of winning is minuscule.” Daniel Khaneman, Thinking, fast and slow

  • Research has also found evidence that rich and vivid descriptions of an outcome (e.g. fantasies about your lifestyle as a lottery winner) help to reduce the impact of probabilities. In particular people are more heavily influenced (in terms of weighting of probabilities) if an event is using frequencies (e.g. the number of people) than by using standard indicators of probability or risk.
  • This is why gaming sites tend to promote the number of winners rather than the chance of winning. From a marketing perspective it suggests using rich media to bring events to life and avoid using abstract concepts of probability that people struggle to understand.

Conclusion:

So, loss aversion and related biases are a key driver of human decision making in many situations. It explains how uncertainty skews surveys that ask respondents direct questions about risk and uncertainty. If there is any uncertainty about an outcome people are likely to exaggerate the potential risk and respond accordingly. For this reason more value is likely to be gained from observing consumer behaviour and analysing the choices they make (e.g. through conjoint analysis or online experiments).

Further reading:

Thinking Fast and Slow