This article was taken from the Toronto Sun, and is located here. It has been modified slightly to fit this blog.
Did you know that a restaurant can increase sales for its most expensive entrée, simply by adding a higher-priced selection to the menu?
Researchers like Dan Ariely, a professor at Duke University and author of Predictably Irrational, design experiments that delve into the minds of consumers, revealing why we buy. This new field, known as behavioural economics, is bringing to light some startling findings. You won’t find esoteric discussions about supply and demand here!
How can you use this information to increase sales and profitability? Ariely outlines the top seven irrational things that strongly influence customer behaviour.
1. Decoys. When a customer has two dissimilar options, you make one appear more attractive by adding a third decoy. The trick is to make the decoy similar to the item you want them to choose, only noticeably worse.
2. Middle ground. Studies have shown that if you want to sell a particular product, you will get the best results by giving it a mid-range price, as people usually avoid both the most expensive and cheapest options. Take the restaurant example. When you add a more expensive entrée, customers will rationalize the decision to buy an item that is not quite as expensive. Ariely noted that this works particularly well for electronics.
3. Over-emphasis and the power of free. Decisions are surprisingly difficult to make, so customers will often over-emphasize a particular feature when evaluating competing products. For example, you might over-emphasize the importance of mileage when buying a used car and end up with a car that was driven less but poorly maintained. This is particularly true when something “free” is added to the equation, as people react very strongly to offers that include something for free.
4. Number of choices. Giving customers fewer choices could generate higher sales. In one well-known experiment, researcher Iyengar found that while customers were more likely to stop at a display with a wider selection, too many choices made those customers much less likely to buy. Displays with 24 jams drew in more customers, yet only 3% of those people made a purchase. When only six jams were offered for sampling, almost 30% bought a jar of jam!
5. Framing. An idea that is presented in two different ways can cause customers to make completely opposite choices. An important element of framing is whether you emphasize what the customer could gain or lose. Studies have found that people respond more strongly to a potential loss than they do to a potential gain, and may be more likely to take action if it will prevent a loss.
6. Price anchors. How much is that doggy in the window? As it turns out, our answer will likely depend on a price that we imprinted at some point in our life. And once a price anchor is set, it is very difficult for a customer to accept a higher price. As a wise friend said many years ago, it is always easier to discount a high price than it is to start low and then raise your price.
7. Others did too. People are highly social, making what our friends and colleagues do a strong influencer. One way to help customers select your business over a competitor is to show them how others like them chose to do business with you.
Strangely enough, we also create strong, silent testimonials for certain businesses simply by having done business with them before. In our minds, because we went somewhere before and it was okay we feel more relaxed about making that decision again and again and again. Ariely explains that it is like seeing a line of customers waiting to get into a restaurant, only the people in that line are all us!
These seven points are the beginning of a new era of understanding customers. The key in business is to experiment to see if you can improve results, both in terms of making sales and in other aspects of the business. Ariely encourages businesses to do this systematically, measuring results and using a scientific process to learn what is truly working — and what is not.
— Julie King is the publisher & managing editor of CanadaOne.com® a website that helps Canadian entrepreneurs start, run and grow their businesses.
