Behavioral Economics Helping Marketers Better Understand Consumers

Interesting article from Advertising Age on Behavioral Economics. While reading this, it crossed my mind that companies pouring millions into untangling how people make gut decisions on what to buy while in the store, might be looking for increasing certainty and precision in places where, at best, we can only provide probabilistic estimates.

“Behavioral economics gives Ph.D. credibility and academic rigor to intuition,” Mr. Jones said. “It's really hard today to make million-dollar decisions based on intuition. This helps clients realize there is data behind the decisions and there is research behind the decisions.”

And indeed financial pressures, ad-agency marginalization and greater availability of sophisticated consumer data are all reasons ad agencies and marketers are increasingly drawn to this formalized process of analyzing consumer spending choices.

DraftFCB, New York, has adopted behavioral economics as a key discipline within its recently launched Institute of Decision Making, which also looks at other emerging areas of study such as neuroscience. It recently pitched a utility company using behavioral economics.

“It's easy to get people to agree that they should use less energy — 86% of them strongly agreed they should — but they don't do it,” said Matthew Willcox, who heads the institute as executive director (and continues to serve as director of account planning at DraftFCB, San Francisco). So DraftFCB researched and included specific ideas in the pitch, such as the number of things the utility could ask and people would be willing to do to reduce energy, or the things they would be willing to tell others about saving energy.

One concept of behavioral economics that's particularly practical for marketers is framing — the way in which an offer is framed or put in context for consumers, along with the bias and experience that each consumer brings to that purchase.

Another concept, called anchoring, refers to the fact that when people are given a number, they tend to use that number as a kind of permanent benchmark for future thinking.

Behavioral economist Daniel Kahneman, a psychologist who won a Nobel Prize in economics and is considered the “father” of behavioral economics, described anchoring in a McKinsey Quarterly video in May 2008. He said when people are thinking about quantities, the first number that gets mentioned has “enormous impact.” So if he asked people if the tallest tree in the world is more or less than 900 feet, most people would correctly guess that is way too tall and say it's less. However, he points out, he's now made you think of very tall trees. The opposite would have been true if he used 100 feet as an “anchor” number.

Behavioral economics is not about whether a person might be into a new brand of coffee or what they think of coffee brands in general, but what coffee a person picks off the shelf, said Joel Rubinson, chief research officer at the Advertising Research Foundation.

Also, as brands have become less powerful today, thanks to a plethora of choices and information, it's become more important to figure out how and why consumers purchase. “Market research today is studying purchase intent, but not really studying how people make decisions,” said Mr. Rubinson. “When only half of people who say they plan to buy something actually go out and purchase it, and 50% of decisions are made at point of purchase, that's leaving a lot on the table.”

He adds that marketing does a good job of studying brand equity, a less than perfect job at studying brand activation, and mostly very little in studying how consumers purchase. “Brand equity and purchase intent are fine, just incomplete,” Mr. Rubinson said.

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