Behavioral economics postulates the concept that people make “irrational” decisions because they are influenced by social factors. Identifying the resulting emotions helps to understand why people take the actions they do.
Behavioral economics can help us better understand users, along with providing us with insights to make stronger growth and product decisions.
There are many facets to behavioral economics that can make great experiments for start-ups looking to improve their metrics. Here are some frameworks to consider:
1. Limits instill a belief of scarcity.
In Thinking Fast and Slow, Nobel Prize Winner Daniel Kahneman discusses two systems of how the mind thinks. One example elaborates on how scarcity increases our desire for objects and how we value them.
A grocery store in Iowa had a 10% off promotion for Campbell’s soup. Some days, a sign next to the cans read “Limit of 12 Per Person”, while other days there was no limit. Customers bought 7 cans on average when the limit was enforced, compared to an average of 3 cans on days with no limit.
The scarcity heuristic biases people, pressuring them into taking action.People associate the availability of a product with its quality. A limit creates the perception that something is scarce. People think it’s more difficult to acquire, so they place more value on it. People fear that they will lose access to the promotion, so imposing a limit often leads more people to redeem a promotion.
Scarcity is also applied through limiting the number of invites to join a community. For example, Product Hunt grants people with access to comment and post 3 invites to give others the same privilege.
The restriction not only helps to screen users, encourage insightful responses, and limit new products, but also instills a tighter community because of the exclusivity.
The scarcity of invites may encourage people to become active in the community by up-voting products to prove they belong — while others may decide to be-friend people with invites left.
People want what they can’t have.
2. Coupon codes with expiration dates tap into user emotions of FOMO (Fear Of Missing Out).
The paper Procrastination of Enjoyable Experiences by Associate Marketing Professors Suzanne Shu (UCLA) and Ayelet Gneezy (UCSD) shows that only6% of people redeemed a gift certificate that expired in 2 months, while 31% of people redeemed the same voucher with a 3 week expiration.
The core idea that people like to save is not necessarily enough to drive them to make a purchase. By understanding that many people don’t like losing an opportunity to save money, you can tap into their FOMO — in this case, fear of missing out on a deal.
Last year I created a new email account to subscribe to over 125 startup emails for a blog post, 8 Steps to Optimizing Emails. I checked the account again to compare coupon code expiration dates, specifically for first orders.
Some startups like Jet, threadUp, and fitmob/ClassPass first order coupon codes had no expiration date:
Other first order coupon codes from Instacart, DoorDash, Threadflip, Rent the Runway, fitmob/Classpass, and Zendesk included an expiration date:
Many people get excited with “free money” or “savings”, but an expiration date is motivating to take action so the discount isn’t lost.
I hypothesize that a first time offer with an expiration date is able to more effectively drive conversion, but I think it can be taken to the next level.
UberEats has begun pre-loading coupons into user accounts. I hypothesize this eliminates the friction of customers needing to remember or find the code — making it easier to redeem the promotion.
Of course, this could simply be an experiment. But from an outside perspective of someone with a growth mindset, this approach sounds promising. Having no coupon code takes away the friction of having to search your email for the code, or search Google and Twitter for possible codes. You know that you have a code already applied to your account, so you may also skip checking the menus of other food delivery apps.
But a negative to this strategy is attribution. It is difficult to determine if someone made a purchase because of an auto-uploaded coupon code, or if they would have still redeemed a coupon code they had to type it in.
Uber’s promotion with an expiration date removes the friction in redeeming the code.
3. Offer products for a limited time to instill scarcity.
McDonald’s has continuously added and removed the McRib sandwich from its menu for the past 30 years, even though there has been a consistent supply of pork.
McDonald’s actively updates their menu to create excitement among customers when an items returns to the menu. Then when a limited time item is offered again, the artificial sense of scarcity forces consumers to think about ordering their favorite items again soon before they’re gone.
Additionally, creating scarcity for one product incentives people to return to the store or restaurant, where they’ll make additional purchases. Scarcity increases revenue.
Some start-ups release products or services for a limited time, with the goal of increasing users.
Uber launched a carpooling service, UberPool, in Aug. 2014, and on Nov. 5, 2014 they sponsored a cash car to publicize the new service. Only a few cars provided riders the opportunity to win $500 in cash.
When I began using Uber Pool as a beta user when it launched, I was frequently the only passenger. But after the cashPOOL, every ride became a real carpool. The scarcity of the promotion attracted more riders who continued using the service.
The one caveat to the advice above is that limiting options for the long-term is not a strategic decision for e-commerce companies who want to dominate the market.
You may be familiar with the Pareto Principle of the 80/20 rule that attributes roughly 80% of revenue to 20% of users. However, in e-commerce, the 98% rule applies. In The Long Tail (2004), Chris Anderson explains that a majority of demand in e-commerce is for a long tail of niche items — notpopular items. For example, 98% of Amazon’s top 100,000 books are purchased once a quarter and 95% of Netflix’s 25,000 DVDs (now over 42 million) are rented once a quarter.
More e-commerce options increases demand. The more products available, the more the platform caters to niches. E-commerce profit lies in the compounding of niches. If a niche is absent on the platform, consumers will search for another marketplace or service.
Niches are the heart of a company’s growth.
4. Establish high prices to make the product or service be perceived as more valuable or luxurious (if that’s your goal).
Cognitive economics examines what a person is thinking before they make a decision, and what factors are influencing them.
If you believe something is true, often times you can force your brain into thinking it too. (Tweet)
A company’s views can be forced upon others through controlling the company’s profile the press portrays, and establishing a pricing strategy.
In Hooked: How to Build Habit-Forming Products, Nir Eyal mentions a study of how wine pricing influences the perceived taste.
The experiment participants first tasted $5 wine, and progressed to tasting up to a $90 bottle. The more expensive the wine, apparently the better the wine tasted. In fact, participant brains reflected their voiced opinions, as areas of the brain associated with pleasure showed higher spikes. But in reality, participants were tasting the same wine.
In relation to startups, sometimes it’s important to raise prices to increase brand perception. The Sequoia Guide to Pricing explains how pricing is one of the most important strategic decisions for a company. But unfortunately it’s often an afterthought.
Tesla and Uber have released luxurious products and services before creating a lower price alternative.
Tesla Roadster launched in 2008. Within 3.7 seconds it can accelerate from 0 to 60 mph, and it lasts for 245 miles before needing to recharge the lithium ion battery. But all this comes at a price of over $100,000.
Tesla launched an electric sedan, Model S, in 2012. Within 5 seconds it can accelerate from 0 to 60 mph, and last 265 miles per charge. Two years later, Elon Musk unveiled a two dual motor all-wheel drive version of the Model S. Within 3.2 seconds, the car accelerates 0 to 60 mph — the fastest of any previous Tesla. The lowest price point is $59,900 (for 40 kWh).
Tesla launched a luxury car, before releasing a more “affordable” model. The exclusivity creates a sense of class. Many people who can’t afford a Tesla view it as a dream car. This sensation will likely last for years. When Tesla eventually launches a cheaper version, consumers will already be hooked.
In March 2009, Uber was founded as UberCab, a black car service. In July 2012, Uber announced UberX, at 35% less expensive than a black car ride. In August 2014, Uber announced UberPool, a carpooling ride that launched at $5, then $7, and now dependent on distance and time of the ride.
Tesla launched as a luxurious car for purchase, and Uber launched as a classy chauffeur. They launched to a niche group with more disposable income, before creating a lower price point alternative to widen its market size.
5. Optimize your site to have key features in the toolbar so the customer isn’t overwhelmed.
I asked the American Apparel Chief Digital Officer about a successful experiment he’s run to increase conversion. Answer: they increased conversion by 12% when they changed their homepage from 9 tabs to 4 tabs.
Many toolbar tab headers complicates site navigation. Websites should have limited homepage toolbar links to be less distracting, and encourage people to click a link.
Here are some startup homepage toolbars that appear to be optimized after deleting previous tabs:
Decreasing links in the toolbar provides a heuristic for making it easier for consumers to decide which link to click. People need focus to help them make a decision.
Less words on the page also makes the site easier to navigate by having a simpler site design and product experience.
6. Establish anchoring to manage people’s expectations.
At Zumper, we release a national rent report every month. It provides people with an anchor price of what to expect when comparing listing prices for every city when they browse the site.
To retain value, we add value. People like to compare prices. (Tweet)
Here’s the November National Rent Report:
The Zumper monthly rent report spurs discussion over the latest fluctuation in rental prices. People lament over the seemingly incessantly increasing rental prices. Who knows, maybe the rent report will or has contributed to helping someone select a city or neighborhood to relocate to with cheaper rent.
Zumper is in the business of long-term rentals. So if we do our job well and people find a great home, consumers use us and don’t return until they need their next rental.
7. It is important to get people excited because it drives them to take action.
Companies can spur excitement by helping consumers plan, make waiting less grueling, and creating a platform to reminisce after an event.Essentially, they can instill excitement by reminding people about the event.
It’s beneficial for startups to help customers anticipate an event purchased,because getting people excited bribes them to take action.
Examples of companies who have successfully excited users through anticipation include Virgin Galactic, Birchbox, TripAdvisor, Sprig, and UberEats.
Virgin Galactic charges $250,000 for people to spend six minutes in space.The benefit of the purchase is the anticipation. Virgin Galactic sends the future astronauts frequent updates, and creates a community for the astronauts to communicate with one another.
In another example on creating excitement, Birchbox sends their customers a monthly email when their boxes filled with beauty samples have shipped. The email reinforces the uncertainty of the contents. Readers turn to social media and try to guess the products, creating a buzz around the delivery.
Also, once most people have received their boxes, customers can post photos of their boxes on Twitter or Instagram to potentially be featured on the website.
Additionally, TripAdvisor visitors can view photos, read reviews of hotels, restaurants, events, and sign up for TripWatch emails with the most current updates about their destination city. 20% of TripAdvisor users return to the site after booking to view photos of their destination.
“We really upstream in the planning process, and I believe that people derive as much pleasure from that phase as from the trip itself. It’s the dreaming phase, the fantasizing phase, when they think about how great the tapas and the sangria are going to taste.” — TripAdvisor CMO, Barbara Messin
Startups should focus on how they can increase user excitement through anticipation. Virgin Galactic, Birchbox, and TripAdvisor provide updates that result in consumers messaging others in the community to discuss the mystery — whether it’s what visiting space would be like, what this month’s mystery makeup items are, or what to expect in a new city.
On demand food delivery startups have recently begun to email menus in advance to create anticipation.
Sprig sends daily emails for their dinner menu:
On the other hand, Uber sends daily emails, along with an email at the start of the week with the highlights:
The advanced Sprig and UberEats menus can help people plan their meals in advance. The photography makes almost any meal appetizing, and can convince someone to order one of those meals instead of making their own food, eating at a local restaurant, or purchasing food at a local grocery store hot food bar.
8. How you frame something impacts people’s perception.
In an experiment cited in Happy Money, people who were told that they were going to be seeing a funny cartoon laughed more. Additionally, people told that a politician would perform well in a debate evaluated his performance more highly than those who were told that he was feeling sick.
People are influenced by how events are framed. If people are primed before an event, they will likely be hooked to think that way if they haven’t been persuaded to think any other way.
People can make irrational decisions because they are self-conscious, and care about how they are perceived. People want to be right. If primed to believe a specific view, many people will align their expressed public opinion to match it.
Besides priming people about how to interpret an event, also prime people about that they’re getting a deal.
People have a higher completion rate if they are led to believe that they are getting something free.
Hooked describes the Endowed Progress Effect with an example of punch cards. In an experiment, one group received a blank punch card with eight squares, while the other group received a punch card with ten squares — with two free punches. Although both groups still needed to purchase eight car washes to redeem the free wash, the second group with two free punches had a 82% higher completion rate.
Frame opportunities and deals to incentivize others. People want freebies. Two stamps feels like you received something “free”.
I’ve seen this strategy replicated at a few independent sandwich shops and dry cleaners.
9. Proper timing is crucial to control outcomes.
People are more agreeable after eating.
Thinking, Fast and Slow mentions an experiment cited in the Proceedings of the National Academy of Sciences, with eight parole judges in Israel. The judges devoted an average of 6 minutes deliberating on each case, and 35% of requests were approved. But after eating, the judge’s approval score increased to 65%. The approval rating steadily dropped the longer the time since eating, to about 0% right before a mealtime.
When people are hungry, it’s more difficult for them to cognitively think about anything else. They’re “hangry”. But after people have eaten, they’re “satisfied”, and much happier.
Thus, people behaviorally elicit different emotions before and after eating.
My advice is to ask people to make a decision after they’ve eaten.
Gilt, the flash sale site, starts most sales at 9 a.m. PST — conveniently after breakfast.
Rue La La, another flash sale site, begins most boutiques at 11 a.m. EST, which is 8 a.m. on the west coast for me.
A challenge with flash e-commerce sites optimizing timing is trying to balance different time zones. Since it’s difficult for them to optimize boutique start times for after meal times, they have optimized their timing for potential work breaks.
A focus on behavioral economics has an impact on bottom line numbers. More and more companies are recruiting behavioral economists, and there’s even a new leader in the C-Suite: Chief Behavioral Economist, as explained in Re/code.
Insights from behavioral economics can influence products to create scarcity, instill FOMO, create a perception of luxury, decrease being overwhelmed, manage expectations, drive people to take action, and influence perception and outcomes.
These are focuses for every company. If you weren’t thinking about your product or service with a behavioral economics mindset before, I hope you are now.