How companies use behavioural economics to squeeze your wallet

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Here’s a piece from Farnam Street, one of my favourite blogs.

It is interesting enough as a standalone article about a fascinating subject BUT, as ever, I am interested to “draw out” and highlight the significance of the (mis)use of complexity.

We have become used to marketing tricks and, instinctively, develop our own strategies to counter them…with varying degrees of success! I refer to these tactics as “bad” complexity…

In a recent blog item (Greedy, lazy and stuck…) I drew the comparison between Cholesterol and Complexity. What we know is that “bad” cholesterol is most associated with processed foods i.e. food that has been modified to alter its original properties. Whatever way you look at it, such human intervention to extract as much value as possible, is done at the expense of unseen [potential] damage to the consumers’ health. Hence the growing lobby for clear product labelling…TRANSPARENCY.

Health or wealth – we want to hold on to both so BEWARE!

Complexity is best kept where it is needed, inside products, such as mobile phones, that couldn’t function without it.

Similarly, business systems, performing multiple interdependent functions, demand complexity. But the threat of excessive, particularly, “man-made” complexity – in the form of complex  products, sales processes, weak Supply Chain, etc. – is sufficient to threaten their very existence…unless, like Lehman Bros. they are content to be victims of their own success!!!

If unscrupulous companies can use “bad” [man-made] complexity to WIN whilst consumers LOSE what does it tell you about our mental and physical ability to cope with complexity? We NEED TO TEST FOR IT to make sure it isn’t slowly killing the system that feeds it…

The very best behavioural economic “parlour tricks” aren’t all used for good. In fact, it’s often the marketing departments of consumer goods companies that implement new research the fastest. Behavioural economists study the psychology of economic decision-making, and if they are any good at their task they will discover something the unscrupulous salesman could use to his advantage. You need to protect yourself.

Some companies, like airlines, are unbundling prices to make decisions for consumers more difficult. Other companies, like retailers, artificially inflate prices so that 50% off sale seems so sweet. Other companies, like Car manufactures, use drip pricing and milk those extra charges.

Here are some excerpts from an article at popeconomics on how companies use behavioural economics to make your wallet a little lighter:

“On sale”, “50% off”, and anchoring

…One clever strategy the marketer employed was to set his course price extremely high in the beginning, but offer a seemingly steep discount promotion after a couple weeks. The course started at $1,000, but by the next month, it dropped to $500. Since I, and his other targets, already thought of his course as a $1,000 investment. Five hundred seemed like a great deal.

The technique is called anchoring, and it’s one of the older tricks in the book. You give the target a “reference point”, and then negotiate around that reference point to achieve your desired effect.

Drip pricing: Pile on the little charges after the decision to buy

Ever bought a car? Maybe you negotiated hard down from the sticker price (probably already facing anchoring bias). But after the dealer shook your hand and said “We have a deal”, the extra charges started to pile up. Water-proof seat treatments, a delivery charge, rust-proofing…you name it. The charges didn’t seem big relative to the overall purchase, but they probably added up to several hundred dollars.

You see, the best time to hit someone with nasty surprises like that is after they’ve already decided to buy. Once that decision is made, the target starts to think as if he already owns the car. Even though no money or product has been exchanged yet, it’s hard to back away from that decision in the face of new information.

…But second, we also tend to have trouble with “complex pricing.” Unless it’s added up for us, we don’t make the connection that a $500 purchase—with $15 S&H, a $40 warranty, and a $50 required battery charger—is actually a $595 $605 purchase. (One of my all time favs on complex pricing is — What the airlines learned from cell phone companies )

Creating a sense of urgency

This was also something the guy with the $1,000 course employed. “This course becomes unavailable at midnight. I’ll probably never sell it again, but if I do, the price will only go up.”

Of course, that was a few days before he cut the price in half, but putting that aside…

Loss aversion also extends to a perceived lack of availability or exclusivity of a product. On T.V., you’ve probably seen dozens of products “not available in stores.” The Nintendo Wii stayed hard to buy for years after its debut (though Nintendo would argue that was because they couldn’t keep up, not because they wanted to create a sense of urgency to buy).

Continue Reading @ Pop Economics.

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