Predictably Irrational: Marketing Applications of Irrational Decisions

Predictably IrrationalI just finished reading Predictably Irrational and think it is a must read for all marketers because of all the marketing applications Dan Ariely describes in his book. Here is a list of some of the marketing applications of social psychology that I found most interesting and useful for marketers.

The Influence of Free
Ariely describes several experiments which show that people are more likely to choose something that is free because of the strong influence free has. In one experiment he discounted a premium chocolate to an attractive price but discounted a Hershey’s Kiss from 1 cent to free and this altered the behavior of customers dramatically with many more people choosing the Hershey’s Kiss. He observes that we often make irrational decisions when we are presented with a free option such as taking a radio promotion shirt that we don’t even want. Another example he uses is when Amazon advertised their free shipping and got a substantial boost in sales. Free has a tremendous influence on consumers.

Price Priming
In some experiments Ariely primed subjects to write down the last two digits of their social security number and then had them bid on items for sale. He found that people who wrote down higher numbers were willing to pay more for the items and suggested that priming people with high numbers can influence them to pay more. He also auctioned off a poetry reading and depending on whether he asked how much they were willing to pay to attend or how much they would need to get paid to attend, greatly influences the price they were willing to pay. This suggests that the price consumers are willing to pay can be influenced by priming them with a suggestion.

People tend to assume that a restaurant must be good if it is crowded or there is a long line to get in. This effect is called herding and has a great influence on perceived value. But Ariely also suggests that there is self herding, where we assume something has value because have often bought a product or service in the past. Many customers of Starbucks go to Starbucks simply because they have been customers many times in the past. Ariely says this is irrational because we often bypass a cost-benefit analysis when we buy out of habit. He also observes that Starbucks was able to create an experience so different from anything else on the market that people were not anchored to what they previously paid for coffee. Soon customers became accustomed to paying much higher prices for coffee and never asked if the high cost was worth it.

Placebo Effect
The placebo effect may be one of the most powerful effects in psychology and represents the cause to a lot of our irrational decisions. In the middle ages kings had “the royal touch” and it was widely believed that people could be cured from debilitating diseases just from being touched by the king. Marketing can use the placebo effect to create a belief in the mind of consumers that is so strong that it becomes a reality. Marketers can actually improve the satisfaction of customers by using the placebo effect in this way, thus creating real value.

Predictably Irrational has many more interesting examples of how psychology can affect the behavior of people. Economic theories often assume that humans will act rationally, but most marketers know that consumers often act irrationally when making purchasing decisions. If you are interested in understanding the irrational decisions that consumers often make, then it would be irrational not to pick up this book.

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