Consumer Psychology in a Recession: Harvard Business School Video

Recessionary consumer behavior is discussed in this video with Professor John Quelch of Harvard Business School. He also talks about 4 types of consumers who are reacting in different ways to the economic environment, whether current consumer behaviors will become permanent, and when you should invest in marketing in a recession.

Behavior Often Contradicts Attitudes

seattle marketingOften times positive attitudes lead to behavior that mirrors the attitude. For instance, whether you like Obama or you like McCain, you probably voted for them. However positive attitudes don’t always predict behavior accurately. For instance, most American’s think it is important to eat a healthy diet, however two out of every three Americans are overweight (1). Most American’s think it is important to save for retirement, however our national savings rate was recently below zero, while Europe’s savings rate is about 20% and Japan’s savings rate is about 25%.

Why does behavior often contradict attitudes? One explanation is Lewin’s Equation, which describes behavior as a function of the person and the environment B=f(P+E). In other words environment often has a strong influence on our behavior.

For instance, if we personally have the belief that education is important, but all our friends think it’s a waste of time and encourage you not to study, then you may skip school or drop out. You may believe it is important to donate to charity, but you are broke, and so you don’t donate money to the Salavation Army bell ringer.

Often marketing assumes that if we can just improve the attitude of our brand, more people will buy from us. However there may be many environmental influences that make this ineffective. I really like the Geico commercials, but I buy my insurance from Esurance because they cost less. I really like Miller, but all my friends don’t, so I end up buying Coors a lot.

As a result, focusing all your marketing resources on attitudes can be ineffective. Spending lots of money on entertaining television commercials could mean more people have a favorable attitude about your brand, but it doesn’t necessarily mean they will buy from you. If environment is a big factor in the behavior of your consumers, it is smart to invest in improving the environment side of the equation. This can include focusing on only the consumers that are in an environment that is conducive to buying from you. Pay per click ads target people who have the means and the desire to buy. Rewarding existing customers focuses on the people who have already displayed the desired behavior. Word of mouth campaigns can create a favorable environment by using social influences of an individual’s peers.

The 5 Cent Hot Dog: How Value Attribution Affects Consumer Behavior

best marketing booksSway by Ori and Rom Brafman is a brilliant book about the forces than lead to irrational decision making. Understanding these forces can have many marketing applications since marketing often involves persuading customers to act irrationally.

One very interesting topic from Sway that relates directly to consumer behavior is value attribution. Basically this is when an individual is primed with a signal that forms a strong belief of the value of the item that sticks in the mind.

There are several fascinating examples of value attribution in action that are described in Sway. The authors tell a story of a Coney Island hot dog salesmen who attempted to undercut the competition by selling hot dogs for 5 cents instead of 10 cents back in the 1910’s. However, the pricing strategy didn’t work because people assumed there must be something wrong with them if they are only half the cost of the typical hot dog. Therefore people had associated a low value to the hot dogs even though they were made with real beef and tasted just as good at the 10 cent hot dogs.

There are numerous other examples of individuals who irrationally base value on one aspect of a product or person, even though additional information is present that contradicts their assumption. Sway describes an experiment in which a world renown violin player played a difficult piece on a million dollar violin at the subway while wearing jeans and a hat. Over a thousand people passed by and almost no one stopped to listen. NBA players who were picked later in the NBA draft played less minutes than players who were selected early in the draft, despite having statistics that were just as good.

The tendency of consumers to value something based on little information is very common. How can marketers use this to persuade individuals to make a desired buying decision? One method is dressing up an average product with superior packaging. Charging a higher price than competitors, having a celebrity endorse a product or advertising a single attribute that is superior to competitors can also sway consumer to assume a high value.

Learn more about the book at www.swaybook.com

Managing the Environment: A Study on the Broken Window Theory

by Gareth Kay

There’s a ton of good stuff out there about how people really do things, and how behavior really spreads (Mark clearly has contributed a huge amount to this). And as someone working in advertising, it’s often quite depressing learning that it’s not what we do that really matters, but what people do to what we do; that advertising hasn’t got the strong influence we might like to think it does (shock horror, people don’t do what we tell them or think about things how we ask them to).

So, is there a role and future for communications? Well, perhaps there is but it’s a little different to what we tend to think. This week’s New Scientist has an excellent article about some research at the University of Groningen that empirically proves the ‘broken window’ theory. Here’s an excerpt:

In the most striking experiment, Keizer left a €5 note protruding from a fully addressed envelope that itself was poking out of a mailbox. The team discovered that people were less likely to steal the money if there was no graffiti or litter on or around the mailbox.

With no litter or graffiti, 13% of the passers-by stole the money. Thefts doubled to 27% when the mailbox was daubed with graffiti, or to 25% when it was surrounded by litter. “It’s quite shocking that the mere presence of litter doubled the number of people stealing,” says Keizer.

In another experiment, motorists returning to collect their cars were three times more likely to trespass through an illegal, 200-metre short-cut to the car park if bicycles had been illegally locked to railings next to the forbidden entrance.

A massive 87% took the short cut when they saw the illegally parked bicycles, despite a police sign saying “No Trespassing”. This compared with 27% trespassing when the bicycles were not locked to the fence.

Another experiment in a cycle park bearing a clear anti-graffiti sign, revealed that cyclists were twice as likely to leave litter if the researchers had daubed graffiti on the walls. The team attached bogus flyers to the bikes’ handlebars to put the owners in a situation where they had to decide whether or not to litter.

So, perhaps we should think about communications as being more about environment management, creating an environment where people are more likely to behave in a favorable way. About seeding the right environment where behavior is more likely to take hold. Which puts us squarely back in the culture business…

Image by Nesster

You can read more great marketing content by Gareth Kay at his blog Brand New.

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.

Herding
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.