It’s that moment of truth, the split second in which they make the call: “Yes – I am going to take it” or they decide “no – not this time”. It may have taken months of pondering to build up to this decision point or they might be operating on pure impulse. Either way, it ultimately comes down to a telling moment when a potential customer finally says “yes” or “no”.
For any business owner, positively influencing customers in this moment of truth can be the difference between success and failure. It’s no secret that the more times you can sway customers to say “yes” to your product or service, the more likely you are to have a thriving business.
The key question is whether there is anything you can do to help them make that choice?
There is a field of study called behavioural economics, which integrates psychology and economic theory to understand how and why people make the decisions they do. Behavioural economists are particularly fascinated with irrational decisions like why some people pay R8 for a bottle of “branded” water that they know is no different from the free water in the tap or why others will drive 20 minutes to the right store to save R15 on a R30 pen but they won’t do the same to save R15 on an R800 jacket.
Although the field of behavioural economics examines decision-making in an array of different settings many of the principles are very useful for understanding buying decisions. As a business owner, some of these experimentally proven principles may aid you in getting customers to say yes to your product or service.
Many of the big corporations are hiring expensive marketing consultants to help them integrate some of these principles into their selling process. Therefore, if you want to compete with the big players, you need to apply these principles as part of your pricing, promotion and selling practices.
1. The Principle of Relativity:
We always tend to evaluate offers in relation to other options
In order to be in the game you need to make target customers aware of what you do. There are multiple ways of doing this but the key is to build awareness in a way that appeals to your target customer base and to stand out from the crowd in the process.
When Gary Erickson launched Cliff Bar he built awareness of his sports bars by giving them away at endurance events and by sponsoring mediocre but passionate local athletes. By creating a presence at local sporting events and being part of the community, the company soon became top of mind for grassroots athletes and Erickson effectively cracked into a tightly held sports nutrition market.
Because it is difficult to evaluate the real value of most things we consider buying, if we are able to compare one option to another, we are far more likely to actually make a choice. Consider this example: suppose somewhere in this magazine there is an offer to subscribe to the publication. Because you have been buying the publication over the counter for the past few months and have found the content valuable you consider subscribing.
If you are given the following options, which would you choose:
- Entrepreneurmag.co.za web only one-year subscription – R159,95
- Entrepreneur magazine print only one-year subscription – R289,95
- Entrepreneur magazine print and web one-year subscription – R289,9
- Research would suggest that more than 80% of the people who are given this choice would choose the third option – the print and web subscription. But what if option two was removed and only the following was on offer:
- Entrepreneurmag.co.za web only one-year subscription – R159,95
- Entrepreneur magazine print and web one-year subscription – R289,95
In this case nearly 70% of the people asked selected option one – the less expensive web only option. The mere presence of a close comparison option to the more expensive print and web subscription caused the vast majority of the audience to select that but when the close comparison was removed from the choices, people tended to go for the cheaper web only option.
The reality is that we are all fooled by relativity and it influences our perception of value in a big way. Our mind is wired to make comparisons and when we get to choose between a number of different options we automatically focus on the things that are easy to compare and avoid those that are less easy to compare.
Suppose you are shopping for a used luxury German car. When you arrive at the dealer, you describe what you want and the dealer says he has three cars that meet your criteria in your price range. One is a Mercedes Benz and two are BMWs.
All three cost about the same and have very similar engine power and features. But one of the BMWs has a big scratch on the bumper. The salesman promises that it will be repaired and you should not factor that into your decisions.
Which car are you most likely to choose? The chances are good that you will choose the BMW with no scratch. Why? Because you had a direct comparison in making the decision. The BMW with no scratch is way better than the one with the scratch.
We like comparisons when making decisions. This affects a range of decisions from our choices of holiday destinations, the way we choose washing powder from the supermarket shelf and our selection of a movie while standing in a queue at the theatre, to our decisions about house purchases.
We are wired to make comparisons and we are much more likely to make a buying decision when we are able to make a direct comparison. One of the first things a consultant will do to increase the revenue in a restaurant is place a high price item in each section of the menu.
People will seldom, if ever, buy the new over-priced items but they will feel much more comfortable selecting the second most expensive item. Thus, by creating an expensive dish, a restaurateur can lure the customer into buying the second most expensive dish on the menu (which used to be the most expensive before she added the more expensive decoy).
This simple insight can aid you in making sales in many different fields of business. When selling your products or services, give potential customers a higher priced or less appealing alternative. This will help them make a choice and commit to the buying decision.
2. The Principle of Anchoring:
We always tend to establish anchors and make buying decisions in relation to those anchors
What do you expect to pay for a cup of coffee? What are you likely to spend on your next house? What will it cost to send your child to university? Your immediate answer to these questions is an indication of your anchor price for all these potential purchases.
Whether we like it or not, we tend to establish anchor prices for almost everything we have once considered buying. Sometimes these anchor prices are realistic and sometimes they are way off the mark. Think about the family that moves from Middleburg to Cape Town.
They sell their four-bedroom, two-bathroom house in Middleburg for R750 000 and expect to get something similar in Cape Town for marginally more. But after a week of house hunting their expectations change drastically when they realise they cannot even get a two bed-roomed apartment in Cape Town in their original price range.
In the USA it has been proved that people moving from expensive housing zones (like San Francisco, New York City or Seattle) to less expensive zones (like St Louis, Omaha or Durham) often end up overpaying for their first property, especially when they buy it soon after they move.
Their housing anchor price is out of sync with the market in which they are buying and as a result they end up overpaying for their property. It is possible for a savvy entrepreneur to adjust an anchor price for a product and in so doing profit handsomely.
Starbucks has adjusted the anchor price for a cup of coffee. Twenty five years ago Americans expected to pay no more than a quarter (25c) for a cup of coffee. When Howard Schultz established Starbucks he worked diligently to separate Starbucks from other coffee shops.
He paid very close attention to every aspect of the coffee experience in an effort to make Starbucks feel like a continental coffee house. He used European names for the coffees, such as Caffé Latte, Macchiato or Mocha Java and the words Short, Tall, Grande or Venti to distinguished cup sizes instead of small, medium or large.
Starbucks did everything in its power to differentiate the experience from any other coffee option in the USA. It was so different that Starbucks did not need to use the established anchor prices for coffee. It created a new anchor price at somewhere around the $2 mark. Because of the proliferation of Starbucks the anchor price for a cup of coffee in the USA is now $3. According to standard inflation measures it should still be less than a dollar.
Something similar is currently happening in endurance sports events in South Africa. For many years marathon runners and cyclists have been spoiled with having to pay very low entry fees to participate in world-class events such as the Comrades Marathon, Two Oceans Marathon or 94.7 Cycle Challenge.
Our anchor price for such events is well out of line with global standards. For example, the entry fee for Comrades is R130 whereas the entry for the New York Marathon is ten times that at $170 (R1 360). A few enterprising individuals, such as the organisers of the Cape Epic mountain bike race and The South African Ironman triathlon have realised this.
They have created endurance sports events that are substantially different from the traditional marathons in South Africa and as a result they are able to charge entry fees aligned with international standards. The Cape Epic mountain bike race costs R12 600 per person and The South African Ironman costs R3 500 per person.
Both events tend to sell out. The differentiating efforts of the teams behind these events have had the effect of adjusting the anchor price for local athletes who are now willing to pay prices that are completely out of line with the price of other endurance sports events in South Africa but consistent with international standards.
The lesson for entrepreneurs is to search for opportunities to establish a new anchor price for their product or service. Most managers and business owners assume that they need to be “price takers” – accepting that the price the market is currently paying for similar products or services is what they can charge.
If Howard Schultz or the organisers of the Cape Epic or The South African Ironman believed this, they would not have a viable business right now. Because they were proactive in establishing a new anchor price by adequately differentiating their product, they have created thriving businesses.
3. The Principle of Possession
We always tend to become attached to things in our possession
We have all heard about people camping out for days on end to get tickets to a U2 concert or the World Cup final. Experiments that have been conducted with such people, suggest that those who actually acquire a ticket place a much higher value on it than those who go through all the pain of trying to get a ticket and not succeeding.
This is because we tend to value things in our possession much more highly than things we never manage to possess. Statistics in the car sales industry suggest that if the salesperson manages to get you in the car for a test drive your chance of buying the vehicle increases three-fold. Once you have driven a car you feel what it is like to possess it. You get a clear picture of what it will be like to own it and you are more likely to buy it.
Dan Ariely, the behavioural economist from MIT and Duke, points to three reasons why possession of something has such a big effect on us. Firstly we fall in love with what we already have because we start to incorporate it into our identity.
Secondly, we focus on what we may lose rather than what we will gain if we have to give it up. Thirdly, we assume others will feel the same way as we do about the object and we don’t want others to have what we could have to forgo.
The principle of possession creates interesting implications for businesses wanting to increase sales. If you allow people to “take possession” of what you are selling, they are more likely to buy that item. Taking possession can come in many forms, it could mean allowing customers to “test” the product or service, it could mean encouraging them to vividly imagine themselves owning the product or receiving the service or it could mean giving away an introductory package of the product or service.
Many companies have seen the benefit of a liberal returns policy as this enables people to take the product home and bring it back if they decide they don’t like it (they very seldom do). In Seattle, one innovative property developer furnished four apartments in a new downtown block and allowed interested buyers to spend a weekend in the beautifully furnished apartments.
He provided them with vouchers for local coffee shops, theatres and restaurants, giving them a wonderful taste of inner city life. The apartment block is now completely sold out, despite the housing recession and complete oversupply of new homes in the area.
Another variation of the possession principle is allowing people to take ownership of something small related to the product prior to their next purchase decision. One bicycle company in the USA did an experiment in which they provided a bunch of randomly selected weekend cyclists with high quality cycling jerseys branded with the company’s name and logo.
The randomly selected individuals who were given the jerseys were four times more likely than the average cyclist to buy that company’s bike on their next purchase. The $30 cycling jersey induced a $3 000 purchase – sounds like good business to me. The key is to make people feel like they have some connection with your brand prior to their next purchase.
Some Things to Think About
These are three very simple principles with powerful implications for making sales in your business. The way that you interpret and use these principles will depend on the kind of business you are running.
The application of the principles will vary depending on whether you are selling a product or service, selling high value or low value items, selling to consumers or businesses, or selling frequently or infrequently. No one knows your business as well as you do so you need to spend some time thinking about:
- How you provide the right type of comparison to help your customers make a buying decision
- How you differentiate your product or service to establish a higher anchor price for your offering
- How you enable customers to take possession of your product or service before they have even made a buying decision
If you can come up with innovative and effective answers to some of these questions, research suggests that you are likely to see a significant jump in sales in your business.
For more information on behavioural economics and decision making within business read these three books:
- Predictable Irrationality: The Hidden Forces That Shape Our Decisions, by Dan Ariely. HarperCollins. 2008.
- Sway: The Irresistible Pull of Irrational Behavior, by Ori and Rom Brafman. Broadway Business. 2008.
- Blink: The Power of Thinking Without Thinking, by Malcolm Gladwell. Little, Brown and Company. 2005.