Richard Thaler, who is considered the father of behavioral economics, won a Nobel Prize in 2017 for proving that psychology plays an important role in economics. It took the famed economist over 4 decades to develop the concept of behavioral economics which serves as a fundamental component of every-day businesses as well as government policy-making.
Importance of Behavioral Economics
Behavioral economics provides crucial insight on why humans behave the way they do, and how their behavior affects the decision they make in their personal and professional lives. But why should businessowners care about behavioral economics? Richard Thaler explains that humans are the agents of economy and no matter how hard they try to make rational decisions, they are constrained by their limited willpower and cognitive abilities.
In his research Gallup proved that firms that apply the principles of behavioral economics are more successful than their peers and make almost 85 per cent more sales growth in any given year. He also showed that behavioral economics can also help businesses grow their gross margin by 25 per cent.
You can also implement behavioral economics into your business strategy to align your services with the consumers’ values by understanding behavior that drives their purchase decisions. Understanding human emotions and behavior will not only help you put consumers in the center of your business strategy but also help you deliver excellent services and products that people actually want to buy.
Think About the Way You Deliver Information
The way information is presented to market a product makes a huge difference on how the target audience responds. 10% fat or 90% meat? What is the best way to frame a product to receive the results you want? In other words, can you say the same thing in a different way to achieve more impact on your target market?
Without the knowledge of behavioral economics, most businesses tend to make the mistake of miscommunicating their message which creates the opposite of the desired effect. Always pay close attention to the way you deliver information and test different techniques to see which one works best with your target audience.
Minimize Uncertainty Around Product
Uncertainty often leads to a status quo bias, which makes us more likely to stick to our current predicament and focus on avoiding losses. This is why you should minimize uncertainty within a product or service during the sales process.
With complicated IT or software products and financial instruments, it is quite common to run into uncertainty which increases our tendency to minimize potential losses while taking our attention away from gaining the product’s potential benefits.
Don’t Confuse Customers with Too Many Choices
Having too many options isn’t always a good thing for clients. If there’s one thing that behavioral economics has taught us, it is that people tend to become confused in the face of too much variety and end up choosing the easiest option: nothing. The problem can become even worse when technical products are involved which is why designing a sales pitch or a proposal with only a few setup options is the best way to encourage clients to take desired action.
A study with the sale of jams showed that a store which had several flavors of jams on display attracted more potential consumers but the visitor to buyer conversion rate was extremely low due to the sheer amount of choices, and people ended up leaving without buying anything. On the other hand, a store with only 5 to 6 jam flavors attracted less visitors but sold more products than the store with more variety.
Use Social Proof to Minimize Uncertainty
Providing social proof of your product’s past success is a great way to minimize uncertainty in the minds of potential consumers. For example, consider the impact of these statements: 65 percent of our clients found work within the first week; 95 percent of our customer purchased subscription for a second year.
This tactic instills trust in an indecisive potential client and steers them towards the social norm. Using references and storytelling from other customers also helps potential clients visualize the value in your services and products.