Utilizing Behavioral Economics to Improve Sales Outcomes
Customer behavior, such as emotions, social influences, and personal preferences, influence whether consumers are willing to pull out their wallets. This type of behavior is called behavioral economics. Understanding this concept can lead you to improve your sales outcomes.
The better you understand the issues that drive customer behavior, the easier it will be to tailor your sales presentation to the customer in front of you. The end result can make a huge difference in your sales numbers.
To help you optimize your sales strategies, we’ll define behavioral economics, provide an overview of practical applications, and highlight some case studies. We’ll also describe challenges and ethical concerns about behavioral economics and look forward to future trends.
Shortcuts:
Key Principles of Behavioral Economics
How Is Behavioral Economics Different From Traditional Economics
Why Salespeople Should Choose a Behavioral Economics Lens
Practical Applications of Behavioral Economics in Sales
- Framing Effects
- Anchoring Techniques
- Scarcity and Urgency
- Social Proof and Authority
- Defaults and Choice Architecture
Leveraging Behavioral Economics: Challenges and Ethical Considerations
What Is Behavioral Economics?
Much as it sounds, behavioral economics combines the principles of economics and human behavior. By understanding how customers think about buying, you can devise the best strategies to get better results from your sales efforts.
Psychological and cognitive processes are at work in every purchasing decision right from the start.
From a cognitive perspective, no two people think alike. It’s important to consider this because what speaks to one person may be meaningless to another.
Psychologically speaking, humans don’t always think rationally. This is because our emotions, biases, and social interactions influence our thinking.
You might think of behavioral economics as a systematic analysis of how a customer’s environment, emotions, and socialization impact whether they’re inclined to buy from you.
Key Principles of Behavioral Economics
While you can create many different sales strategies based on behavioral economics, three key principles guide this science:
- Heuristics and Biases
- Prospect Theory
- Choice Architecture
Heuristics and Biases
Heuristics and biases refer to taking mental shortcuts in making decisions (availability bias). For example, a customer’s first thought may be, “I’ve wanted that for a long time” or “I wouldn’t pay more than $100 for that item.”
In simple terms, it means holding onto the first piece of information received (anchoring).
Prospect Theory
The basis for prospect theory is risk aversion versus loss aversion. Essentially, this means people are more likely to avoid a loss over acquiring a gain when they’re on the fence about making a purchase.
For example, choosing to work for a company that provides a stable income and great benefits may be more attractive for some rather than accepting the risks of becoming an entrepreneur with higher earning potential.
Choice Architecture
Choice architecture aims to lighten a customer’s cognitive load when making a buying decision.
One way to do this is by giving them a default option. In other words, you automatically give them a choice, and they can opt out if they want to. People are often happy to stick with the easy choice unless they have a good reason to choose something else.
A third aspect of choice architecture is framing. A way to do that is to present the best product first, followed by less popular items. If the first item will work, it may not be worthwhile to entertain any other options.
How Is Behavioral Economics Different From Traditional Economics
With the exception of being classified as sales strategies, behavioral and traditional economics don’t have much in common.
Here’s a brief look at what differentiates them.
Traditional Economics Approach
The traditional selling approach presupposes that people do their research and carefully analyze the features, benefits, and costs of a particular product before finalizing a purchase.
It’s natural to assume that people automatically think rationally without regard to emotions and other influences. Regardless of how you present the information or what order you present it in, customers won’t change their minds.
While you can use slides in virtual selling to highlight a product’s benefits, a behavior economics approach may yield different and better results than a traditional economics approach.
Behavioral Economics Approach
By contrast, the behavioral economics approach considers the fact that consumers can, and often are, influenced by other factors.
A customer who is in good spirits and is having a great day might be more inclined to entertain a sales presentation and learn about something new.
On the other hand, someone who is in a bad mood after having a rough day may prefer to make the easy choice to avoid cognitive overload.
Consider the example above of using slides and sharing your screen during a sales appointment to increase conversion rates. Using a behavioral economics approach, you can create additional slides to demonstrate how your product’s features and benefits will enhance a customer’s life.
Why Salespeople Should Choose a Behavioral Economics Lens
Simply put, salespeople should choose a behavioral economics lens because it’s more effective than traditional sales approaches.
Rather than just letting the facts speak for themselves, a behavioral economics sales approach taps into all of the underlying issues that drive customer behavior. This tactic benefits you and your customers.
As you cater to your customers’ state of mind, they will have greater perceived value as you meet their psychological needs.
As you fulfill customers’ emotional needs, they will find you more credible and trustworthy. Your customers are apt to reward you with a sale. They’ll also be happy to tell their friends about their good experience.
With time and experience, you will become more adept at factoring emotions, biases, and social influences into your sales presentations. Ultimately, you’ll reach your goal of increasing conversion rates while ensuring customer satisfaction.
Check out our article on 11 Collaborative Benefits of Screen Sharing to learn even more about how CrankWheel can help you close more sales.
Practical Applications of Behavioral Economics in Sales
Thus far, we’ve helped you understand the overall concept of behavioral economics in sales, but how does it work in practice?
This section goes into greater detail on specific strategies for implementing behavioral economics.
Framing Effects
This strategy falls under the key behavioral economics principle of prospect theory.
A framing effects strategy refers to influencing customer perceptions based on how you present ads and other marketing efforts.
An effective use of this strategy is to emphasize a product’s benefits rather than showing how it prevents a loss or harm to the consumer.
For example, you might say that 80% of insurance applicants will receive the best rate on an insurance policy versus only 20% of policyholders won’t qualify for the most favorable rates.
Anchoring Techniques
Anchoring techniques fall under the class of heuristics and biases. This technique is widely used in marketing, pricing, and negotiations to steer choices. The reason behind this is that people unconsciously use the anchor as a reference point, even when it’s arbitrary or unrelated.
Comparisons are a good way to set a reference point to subtly guide customers’ choices.
A common example of an anchoring technique is to display the discounted price beside the regular price to show how much of a deal the customer is getting. The discounted price then becomes the new standard for a product’s pricing.
Another strategy is to offer a drastically discounted initial price to get the customer on board.
Scarcity and Urgency
If you’ve ever purchased something because it was hard to come by or the seller had a limited quantity of the item, the seller used scarcity and urgency as a marketing strategy. Whether the item is a fantastic deal or not, customers form a perceived value of the item because of the challenge of getting it.
Examples of scarcity and urgency are limited-time offers and exclusive deals. This is an effective strategy for customers who don’t like to miss out on things. You may have seen internet ads that display a countdown clock highlighting the exact second a sale ends.
This strategy falls under prospect theory as the customer does not want to face regret over missing out on the deal of the century. Scarcity or urgency is a good marketing strategy when the goal is to gently nudge customers to get out of analysis paralysis and make a final decision faster than they might have otherwise.
Social Proof and Authority
Social proof and authority fall under heuristics and biases. These strategies work much like referrals.
The concept of social proof and authority refers to the notion that if someone you know and trust is happy with a product or service, you will be, too.
Testimonials, reviews, and endorsements can effectively give new customers the perception of trust and credibility. Trusted testimonials may come from a customer’s friends, family members, or an industry professional such as a doctor.
Social proof and authority strategies are effective because they reduce uncertainty and simplify decision-making.
Defaults and Choice Architecture
We all have days when we’re simply too mentally exhausted to think things through.
Defaults and choice architecture are strategies that simplify the customer’s choices, making it easier for them to decide.
An example of a default marketing strategy is setting up an automatic enrollment or renewal. Everything happens automatically at the time of the sale, when the offer ends, or at both times.
The idea is that if a purchase happens with no effort on the customer’s part, they’re likely to continue with it rather than cancel it.
Retail stores use choice architecture all the time. The items on the endcap of an aisle draw attention to products that are out of the norm. Stores also often place certain items they want you to buy at the customer’s eye level.
Other examples of behavioral economics marketing strategies are bundling products, free trials, and complimentary services.
Real-World Examples of Behavioral Economics
We’ve put together a few real-world examples to demonstrate how some companies have tapped into their customers’ desire for monetary rewards and convenience to improve their sales.
Amazon Prime
Amazon’s Prime membership offers its customers lots of perks, including:
- No shopping fees
- Free movies and TV shows
- Free music
- Free or reduced books
- Deals on prescriptions
- Early access to lightening deals
Amazon rewards its customers with even more offers and discounts to keep its customer base loyal.
Starbucks
With a revenue of nearly $61 billion dollars, Starbucks is one of the top coffee companies in the world.
Starbucks offers its customers a reward program where they can earn stars and redeem them for food, drinks, and more.
The program also offers:
- Bonus star challenges
- Double star days
- Fun games
- Discounts from partners (Delta Airlines, Bank of America, Marriot Bonvoy
Walgreens
With nearly 8,000 stores, including 24-hour stores and drive-thru pharmacies, Walgreens caters to family health needs around the clock in many places.
Walgreens created its myWalgreens program, which offers:
- 1% in cash rewards (including pharmacy items)
- Special savings
- Digital receipts
- Same-day pickup and delivery
Members who opt to apply for a Walgreens credit card can unlock even more savings.
Loyalty and rewards programs help differentiate a brand by keeping customers engaged and offering them the best the company has to offer.
Leveraging Behavioral Economics: Challenges and Ethical Considerations
While behavioral economics aims to increase sales by influencing customer decisions, there are challenges and ethical considerations in using this approach.
Salespeople who overuse the strategies or use them to boldly mislead customers may find that customers perceive them as salesy and disingenuous. This strategy can be a huge turnoff, resulting in buyer mistrust.
For example, buyers watching for a deal are likely to notice a limited quantity of two or three items in stock day after day, week after week. When the seller actually has a larger quantity in stock, this is an unethical strategy.
Another unethical strategy is preying on customers’ vulnerabilities, such as trying to build your clientele by promoting products they don’t need. In the end, this will only damage your company’s reputation.
If you’re concerned about whether your marketing decisions are ethical and in the customers’ best interest, it’s wise to ask yourself whether your strategies genuinely add value to someone’s life.
The key to overcoming sales challenges is to strike a balance between effectiveness and transparency when applying behavioral economics.
It pays to establish ethical guidelines as part of your marketing plan to ensure that your strategies allow customers to make informed decisions and foster trust.
Your ultimate goal should be to build long-term customer relationships through transparency and value as opposed to looking for short-term gains that a customer could view as false-hearted and unprincipled.
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