Plan for Consumer Quirkiness (Jim Karrh on Marketing)

Imagine that you were shopping for Easter candy a couple of weeks ago and came across this tasty choice.

You could buy a rather decadent chocolate truffle for 15 cents (a significant discount from the usual price of 50 cents) or a familiar if mundane Hershey’s Kiss for a penny. Which would you choose? What if the price were dropped by 1 cent for both so that you could have the truffle for 14 cents or the Hershey’s Kiss for free? Would your decision change?

In either case you would save 14 cents by choosing the Hershey’s Kiss or take advantage of a great deal on the truffle. A coolly rational analysis would predict that most consumers’ choices would not be affected by a 1-cent shift in prices for both candies.  

Yet when researcher Dan Ariely and a few colleagues set up a temporary candy stand to test those very choices in the field, a quirky thing happened. When the Hershey’s Kiss was a penny, 73 percent of the chocolate lovers chose the superior and deeply discounted truffle. When both prices were reduced by 1 cent, demand reversed and 69 percent of people chose the free Hershey’s Kiss instead.

The "power of free" is just one of the phenomena that have been made clear from recent research in behavioral economics. Marketers and other business leaders have a new bundle of insights, based on actual consumer choices in carefully controlled experimental studies.

Here are three you might find helpful:

Set the anchor. I’ve shared with you the phenomenon of "anchoring and adjustment" in which a specific piece of information (the anchor) has an irrationally large impact on consumers’ subsequent price judgments – even if said anchor is based on something irrelevant. In another study by Ariely, people were asked to recall the last two digits of their Social Security number just before buying a bottle of wine. Those with higher numbers paid more for the same bottle of wine than did those with lower numbers. So before you present price information about your product or service, try to set the anchor yourself.

Certain beats likely. Let’s say I gave you the choice of $40 or an 80 percent chance of $50. The purely rational view would be that those options are equivalent (both with an expected value of $40). Behavioral economics reveals that consumers are subject to a "certainty effect" through which sure things are far more preferred. You can frame your messages through the certainty effect by mentioning track records, ironclad guarantees or quality data. (As you might have suspected, the "power of free" draws from this certainty effect as well.)

Hedonic trumps mundane. Just because a consumer pays the same amount of money for two different items doesn’t mean that she assigns them equal value. Spending $4 on a greeting card carries different emotional consequences than spending $4 on a large jar of salsa. Consumers are subject to feelings of guilt for more hedonic purchases (even small ones), so discounts or special offers carry greater power because they serve to counteract potential guilt.

There is a note of caution to all of this, however. Adopting behavioral economics for your business doesn’t mean that by flipping a few psychological switches you can expect all potential customers to react in the same way; the fundamentals of targeting and segmentation still apply.

During the Q-and-A portion of a talk I gave in Little Rock several years ago, I was asked, "What’s the No. 1 thing you’ve learned about consumers?" My reply: "That they are wonderfully strange."

The strange part will drive you nuts if you try to pigeonhole consumers as rational, because you’ll constantly ask yourself, "What were they thinking?" The wonderful part will emerge if you have the discipline to leverage what we are learning about the way consumers behave. 

(Jim Karrh is the founder of Karrh & Associates and director of MarketSearch, both of Little Rock. Email him at JimKarrh@AOL.com.)