When a customer chooses to buy a product, either online or in-store, several factors influence the decision to purchase. Everything from price, timing, need, savings, and how the purchase affects their bigger picture is considered. Successful businesses understand how behavioral economics affects their customers, and play into these theories to optimize the buying experience and increase profits.
Behavioral economics is where neuroscience, psychology, and economics intersect. It looks at why people make the decisions they do, predicts what decisions we're going to make next, and applies the information to economic decisions, such as purchasing, saving, and investing. By looking closely at heuristics, or the “rules-of-thumb” people use to make judgements, you learn how customers behave, and how to capitalize on those behaviors. The goal is to make the experience better for customers, while making more money for the business.
One example of this is the Frequency Illusion. This is when you hear about a product and then start to “see it everywhere.” You're not actually seeing it everywhere--you've just started noticing it more often because you're more aware of it. Another example is the Endowment Effect, which is when there's an item you'd only buy if the price fell below $10, but when you own it, you're only willing to sell it for $20 or higher.
By understanding the heuristics your customers are using to make purchase decisions and determining what motivates them to buy from you, you get a clearer picture of why customers shop with you. Using this information you can make predictions about what customers would do under certain circumstances. Would they buy more if you discounted a product? Would they renew their subscription if you added more features? This info helps you personalize your approach for each customer, influencing them to make their decisions toward a conversion.
Optimizing Your Business for the Sale
According to Dr. Avi Grushka, Chief Data Scientist at InPsych, data collection and analysis should be an integral part of most, if not all, businesses. Data on customer behavior helps map out his or her decision-making style under uncertainty. This includes behavior such as historical transactions, inspection of goods, and even site registrations.
“With cognitive heuristics, you can analyze behavior and explain it according to underlying motivations manifested in the data--all of which lead to a customer's likelihood to do a certain action,” he said.
InPsych's algorithm translates customer data and information into heuristics and score intentions based on these. By identifying customers’ intentions and motivating factors, you can then optimize and personalize your approach for the sale. For instance, you can focus on the customers that the platform has scored as most likely to be interested in the product.
Big Data and Customer Insights
Big data may seem intimidating to the small business, but any company that has collected data on past and/or prospective customers can benefit from it. Big data gives you access to customer insights. Without it, you cannot use heuristics and behavioral economics to better target your customers and enhance the sales process.
Netbiscuits is an analytics platform that allows businesses to track data across multiple devices – PC, wearables, smartphones, tablets, and more. The information is designed to help increase mobile engagement. Beyond showing you who, Netbiscuits aims to show you why, so you can solve marketing problems. Customers can see which device the customer is on, screen size, time on site, bounce rate, and visitor flow, among other things.
CoolaData is a similar analytics tool. It tracks data across all your online channels and aggregates to make it easier for analysis. It helps you track clicks, downloads, video plays, sales, and even social network activity.
This information can help you see customer pain points that might help you create a better product. The platform also gives stats that help show who your most active customers are, so you can better market to and serve them.
Some Examples of Successful Targeting
Mass retailer giant Target famously once found out about a teen girl's pregnancy before her own father did, and it's an interesting example of how companies use behavioral economics. Every Target customer gets a guest ID, which is tied to his or her credit card number and email address. The company also uses demographic information it obtained from customers or purchased from other sources. All of this allows them to send pregnant women coupons and promotions for baby items — from the second they sign up for a baby registry, or start buying baby items. While this particular scenario probably resulted in an awkward situation for those involved, it demonstrates the power of data in optimizing the business.
Facebook has massive amounts of data on their users, from basic demographics and likes to friends and connections. They've turned into a giant monetization machine by letting businesses run ads specifically targeted to such demographics as gender, age, location, income, and more. Beyond ad revenue, the company also derives revenue from games that are hosted on the site. In Q4 2014, the company saw a 49 percent year-over-year increase in revenue, to $3.9 billion, partly from a surge in mobile monetization.
This is also effective in politics. President Obama used big data in his 2012 re-election campaign. With a team of 100 data analysts, the campaign went through terabytes worth of data to determine how to make the campaign as successful as possible. That team of course was highly successful.
Data collection and analytics, along with a healthy dose of heuristics and behavioral economics, can go a long way towards optimizing customer buying experiences. It's not just smart business from a sales perspective, it's also an effective way to drive customer loyalty.