Behavioural Economics: Part Three – Understanding Purchasing Pains

Are your customers behaving as you would expect? Traditional models of consumer behaviour are continuing to change, and as such, retailers need to change their attitudes accordingly.

For example, standard economic models for decision making in consumption adopt a consequentialist approach. Such approaches infer that an individual will make choices based on maximising present and future utility in order to satisfy personal preferences. Therefore, we can conclude that when people are faced with a decision to make a purchase or not, they will perform mental calculations by weighing the desirability of the product (or present good) versus the future consequences (or future good versus future loss).

However, neuroeconomic studies conducted by George Loewenstein, Professor of Economics and Psychology at Carnegie Mellon University, along with his team, suggests anomalies that contradict the above models. These studies, using functional magnetic resonance imaging (fMRI) techniques, explored how people make decisions by examining what occurs in the brain at the time of evaluation.

Rather than having to use inductive reasoning from shopping behaviors, new technology allows us to delve into the formation of preferences in the brain. The studies found that areas of the brain responsible for both pleasure and pain are activated when choosing whether to buy something or not and that “rather than weighing the present good versus the future alternative, people instead try to decide between the immediate pleasure of consumption and the immediate pain of paying for it”.

What is Happening in the Consumer’s Brain?

fMRI techniques provide somewhat of a ‘map of the mind.’ When facing a purchase decision, two areas of the brain ‘light up’: the insular cortex (or insula) and the nucleus accumbens (an indicator of preference). During the studies, when people were shown the prices of goods that they could purchase, the insula – the area associated with experiencing pain – was activated. This shows that the very idea of spending money produces pain. Loewenstein and his team concluded that this brain activation actually deterred people from spending.

From this research, the researchers developed the ‘tightwad-spendthrift’ scale, based on individuals’ different levels of experienced ‘pain’ and consequently, their likelihood in making purchases.

Classifications of the three types of buyers:

  • Spendthrifts: People that are more easily able to spend before they reach their pain threshold. They comprise 15% of shoppers.
  • Unconflicted (61%): This is your average shopper. These people most reflect deliberate decision making and the standard consequentialist approach.
  • Tightwads (24%): People that spend least before reaching their maximum buying pain threshold. As a retailer, these are the customers you want your marketing to appeal to and convert; lowering their experience of buying pain will increase their spending.

How to minimise buying pain:  

  1. Bundling: Not only does bundling work for managing choice overload, but also in reducing pain points. Instead of having to decide to purchase many items individually (especially if they are add-ons to the main purchase), bundling facilitates consumer’s only having to make one decision, thereby reducing their pain levels. This is still the case even if the bundle package costs more than the sum of each individual product.
  2. All in the details: It’s amazing the affect one word can have on purchase probability. In a study conducted at Carnegie Mellon University, researchers found that changing the pricing description of shipping an item from “a $5 fee” to “a small $5 fee” increased the response rate of tightwads by 20%. Try incorporating these kinds of ‘padding’ words into your marketing and watch your sales incease.
  3. Make paying by credit card an option: According to Loewenstein, “credit cards effectively anesthetize the pain of paying” because unlike paying with cash, it doesn’t feel like we’re really giving anything up when purchasing.
  4. Utility versus pleasure: Tightwads are more likely to purchase when considering utility rather than pure pleasure.  While spendthrifts wouldn’t object to paying for luxury items, it is easier to justify buying for utilitarian purposes.  Marketing techniques that incorporate a combination of the two will likely see the best results.
  5. Delay payment: The classic case of “it’s-future-me’s-problem”. When consumers are given the option of delaying payment, it makes the purchase decision less “viscerally unpleasant” and we are therefore more likely to buy.
  6. Loss aversion: Our emotional reaction to loss is about twice as intense as our reaction to gains.  In an example offered by Behavioral Economist Dan Ariely, he states that “finding $100 feels good, whereas losing $100 is absolutely miserable.”  Because of this, marketers should focus on conveying what a potential customers will miss out on (or lose) if they decide not to purchase. According to Derek Halpern, Founder of Social Triggers, the most effective strategy is to combine both gains and losses into your marketing strategy.
  7. Re-framing: Framing can work in a number of ways and is all about changing the perspective of your customers. Consider offering a comparatively expensive purchase or something that has a recurring cost and breaking it down into small, incremental payments. To the tightwad, a cost of $84 dollars a month sounds far better than $1000 a year (which is the same amount).

New findings in behavioral economics and neuroscience are not only changing previously entrenched views of economic theory, but also provide a wealth of information and insight into our decision making when purchasing. Marketers who arm themselves with such knowledge and utilise it effectively will be ahead of the curve when it comes to anticipating spending choices and consumer emotion.

Leave a Reply

Your email address will not be published. Required fields are marked *

PowerRetail Extra Enewsletter