Your customers are irrational.
Right, you might be thinking. Tell me something I don’t know. The good news is, consumers are irrational in predictable ways, and understanding that can help your business, from marketing to setting prices to offering choices.
“...consumers don’t in fact have a good handle on their own preferences and the prices they are willing to pay for different goods and experiences,” writes Duke University’s behavioral economist Dan Ariely in his book, Predictably Irrational.
It’s all relative. And we can influence consumer perceptions through relativity.
Ariely explains, “We don’t have an internal value meter that tells us how much things are worth. Rather, we focus on the relative advantage of one thing over another and estimate value accordingly.”
So, a prospect may not know how much a six-burner professional range is worth, but will assume it costs more than a four-burner range.
Most people don’t know what they want unless they see it in context. Consumers don’t know what kind of cabinets they want until they see a finely glazed finish on an exotic wood grain, and compare it to a white foil door.
Homeowners don’t know they want a large shower with multiple jets, a seat and a light until they compare it to a stall with one showerhead and no light. They don’t understand the benefits of a quiet vent until they hear it next to a louder one.
Our job is to create the context for decision-making. Given three price choices, most people will take the middle one. So, decide what you want to sell, and then offer a higher priced and lower priced option. Make your margins the best on the middle one. If there are only two options, people tend to choose the least expensive.
Introducing a higher priced option can generate more revenue. Not that people generally buy the highest priced item. But they will often select the second highest.
A consultant found a restaurant boosted revenue by creating a new, expensive dish. People then began buying the second most expensive entree, which previously had been passed over because it was the most expensive.
Want to sell more $700 sinks? Be sure you have ones that are $900.
Consumers like to make decisions based on comparisons. And they want to focus on things that are easily comparable. Introducing a decoy choice, Ariely explains, helps them do that.
You show a client three kitchens, all about the same price. One is contemporary, the other two are traditional. The two traditional kitchens are very similar except one has an island and one does not. The ‘decoy’ is the kitchen without the island.
Consumers will approach the decision this way, Ariely says. They will dismiss the contemporary kitchen because they have nothing to compare it to. They will focus on the two similar kitchens. And of those two, clearly the one with the island is the better choice. So you have helped the consumer make a choice. (This assumes, of course, that you know the consumer wants traditional.)
Providing comparisons is especially important if you’re introducing a new product. Say you’re going to offer bidets. You bring in one model at $550. Nothing happens. But then you add an $800 model. Now, the first bidets begin selling. Why? “Because people have two models to choose from, they could make an easier decision. They are not making a decision in a vacuum,” Ariely explains.
Relativity & Anchors
Relativity works in another way, too. People will drive across town to save $7 on a $25 item, but will not make the drive to save $7 on a $455 purchase. It makes no rational sense, since it’s the same amount of money. But the $7 is relatively larger to $25 versus $455. So clearly on a larger ticket item, you have some price flexibility.
Once people have committed to a $75,000 kitchen, it’s relatively easy to get them to decide on a $700 special faucet. But if they are just replacing a $200 faucet, they may be unlikely to spend that much. The relative additional cost of the faucet is small in the context of a big project. But a few dollars will make a difference if it’s just a replacement.
How do consumers know what a faucet costs? They learn through manufacturers’ suggested retail prices, ads and promotions. Market prices themselves influence consumers’ willingness to pay, Ariely says. This sets the anchor by which consumers judge prices in a category.
Price tags are not necessarily anchors, though, notes Ariely. If a consumer sees a faucet for $1,500, it only becomes a relevant anchor if the consumer considers actually buying a faucet at that price.
“From then on, we are willing to accept a range of prices, but…we always refer back to the original anchor. The first anchor influences not only the immediate buying decision but many others that follow,” Ariely stresses.
Understand the context in which your client operates. Where have they looked? What brands have they considered? Where might their anchors be?
Anchors can drive decisions for years. Remembering what their first kitchen cost will affect what prospects are willing to pay. Find out how recently your prospects have done a kitchen or bath. What pricing are they likely to have in their minds as an anchor?
“Once a choice is made on how we’re going to spend money, we tend to repeat it over and over,” Ariely writes.
So how is a new anchor set? By creating a new experience, the old anchor no longer applies. That’s how Starbucks set a new anchor for the price of coffee – by changing the experience.
If a consumer goes to a big box store and then a high-end showroom, their anchors could change because the experience is so different. But if they go from one big box store to another that offers a similar experience, their anchors will stay the same.
When it comes to pricing, one of the biggest emotional hot buttons is the word free. “Free gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is,” Ariely observes.
For example, which is the better choice – a free $10 gift certificate or a $20 gift certificate for $7? Most people choose the first option, even though the second option provides greater profit ($13 vs. $10).
A free dishwasher won’t get people to come in and buy a kitchen. But if they’re deciding between you and someone else, the free dishwasher will often sway them.
“Free” can encourage add-on purchases, i.e. offer a free towel bar if a bath customer buys a group of accessories (paper holder, toothbrush holder, tissue box, etc.). Having a showroom seminar or cooking demo? Be sure to say “Free!”
In-depth descriptions can influence expectations, too. Consider “a stainless steel six-burner range” versus “a finely crafted, heirloom-quality cooking appliance created in the centuries old French gourmand tradition.” Which creates higher expectations?
“Marketing is all about providing information that will heighten someone’s anticipated and real pleasure,” Ariely concludes.