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What is Behavioral Economics? ft. Common Consumer Behaviour

With this piece, we take a look at what is Behavioral Economics. We understand how various techniques are used in order to motivate consumers to make decisions that may not be completely rational.

Let’s jump right in the piece!

So, What is Behavioral Economics?

“Pay INR 1500 for the course and get free benefits worth INR 3000” – the moment this flashed on my screen, that’s where I stopped my endless scrolling.

This was a fairly recent incident where I was browsing through a number of websites, wanting to purchase a particular online course. There were dozens of offerings, but the one highlighted above caught my attention. The word ‘Free’ has such a captivating impact on consumer psychology.

Try and remember the times when you would be walking around in a retail store, trying to spot that banner that screams out ‘Free’! This is just one simple example from a pool of many – where certain psychological biases affect our purchase decisions.

Quoting an interesting fact here – more than 90% of our decisions are guided by subconscious urges and every consumer decision-making is 70 percent emotional and 30 percent rational. This is where behavioural economics comes into the picture – to help us understand how our emotions and other psychological factors have an effect on our economic decision-making process.

This presents immense scope to marketeers who can tailor their strategy according to common behavioural patterns. In fact, marketers have been doing this for ages – earlier it was in the form of simple ‘BOGO’ offers which is gradually migrating to more complex strategies such as ‘freemium’ and ‘decoy pricing’. The remaining part of the article will discuss a few commonly used marketing techniques that are derived from behavioural economics.

Related : Take a look at Pschycology of Pricing - How Companies make you buy
The Power of Limited-Edition Products

We, as consumers, often value things more if they are rare. Owning something scarce gives us a sense of accomplishment. This is a clear example of emotions playing a major role in buying decisions. Companies often take advantage of this to drive up the sales of any of their particular product line.

If you are a fan of Toys R Us, you’d know how they bring out limited edition toys for the Comic-Con every year – needless to say, this sees immense demand from customers.

This strategy was very beautifully followed by Coca Cola in 2017. They took advantage of the social setting in Australia, which was then in the middle of its Marriage Equality Movement. Coca Cola released a limited-edition coke that featured the word ‘Love’. Another smart addition to the strategy was the fact that two cans had to be bought together to form the word and a heart shape. This was an instant hit, giving the company an increase of about 80% in their sales figure.

What is Behavioral Economics
The need for Social Validation

Our affinity towards owning a particular product increases manifold, once we know it adheres to social norms. This is particularly applicable to online businesses, where customers heavily rely on reviews and feedback before making a purchase. To understand how marketers use this particular behavioural economics bias, we can take a very recent example, that of Zomato.

During the pandemic, when safety and hygiene concerns were at their peak, people relied on peer reviews and rating more than ever before. We were more likely to order in from a restaurant that was trusted by the majority of the consumers. The psychology was quite simple – “If most people in my neighbourhood trust this restaurant, it must be safe”.

To leverage this, Zomato introduced a very simple feature – they started displaying a simple figure that would denote how many people ordered from that particular place since the start of lockdown. This was a brilliant implementation of a marketing strategy that relied on this concept of social proof.

The Need to Avoid Losses

A statistically proven data says that the psychological pain from losing is twice as much the psychological gain from winning. If you want to make a product attractive to a customer, tell them what they are set to lose if they don’t own it.

The fear of missing out (FOMO) drives more purchase decisions than rationality.

Think about the flash deals or Lightning Deals that you see on Amazon – that’s nothing but taking advantage of our loss aversion psychology – you see that a product is just available for the next 24 hours, which means if you don’t make a purchase decision soon you will lose out.

A Sense of Ownership

You see so many online companies offering free trial period membership. Does that make you wonder if that is a loss-making proposition for them?

It’s quite the opposite. Take the simple example of Netflix.

You don’t own a Netflix membership, you know it costs INR 799 a month, which you feel is too much. The purchase decision in this case is actually a choice is between not owing it and owning it. Now, how can the company influence consumer psychology through a free membership offer?

By subscribing to a 30 -day free membership with Netflix, you don’t stand to lose anything, so you end up taking it. Now at the end of a month, when you have to switch to a paid subscription, the choice is between losing the ownership and retaining the ownership. This completely changes the decision making process from the earlier one- you already have a partial sense of ownership on the product, which establishes an emotional connect, thus making it more difficult to give up that ownership.

The Choice Paradox

We have all heard about the problem of plenty. This is more prominent in the field of marketing than anywhere else. Providing dozens of choices to a customer leads to decision paralysis and reduced satisfaction. Now, what the optimum option quantity is, might vary from one kind of business to another.

Quoting a famous study here,

‘In a study of jam purchases at a supermarket, 30 per cent of shoppers who tried samples made purchases when presented with a choice of six jams, while only 3 per cent of shoppers ended up making a purchase when presented with a choice of 24 different jams.’

Look at the below plan offerings from SiteGround, they offer 3 basic plans to customers to choose from. However, once a customer is onboarded, he/she is presented with an array of additional services and add on offerings. This is a classic example of a company trying to avoid the choice paradox for its customers.

The Power of Anchoring

We as customers, are often not rational. We often rely heavily on the initial information being provided to us and use it as a reference for all our subsequent decisions.

How do companies take advantage of this?

You’ll often see brands giving us the most expensive option first, just so that all subsequent offerings look cheaper.

Most companies use this strategy, be it an online offering or a physical purchase.

You walk in to a mobile phone outlet, the sales representative will be inclined to show you the most expensive model first, even when he/she knows that you are not the target audience for the product. But how does that help?

You might not buy the most expensive model, but you’ll find all the other models cheaper, since now you are using the first product shown to you as a reference.

MailChimp uses this bias very effectively while deciding the placement of its subscription plans. The most expensive option is the one that is shown at the very beginning.

Setting the Context Right

Another common bias in the field of behavioural economics is framing bias. It simply means how marketeers set the context and present the information to prospective buyers, just so that the product becomes more appealing.

Look at the below figure, essentially both the options say the same thing. But as customers, which one do you think we are likely to choose more?

Are we rational? Not quite so.


The above-mentioned biases are just a few from an array of common behavioral economics principles. What do these tell us?

A small tweak in a product offering can hugely impact our buying decisions. These decisions are governed by behavioral economics and common consumer psychology. Companies have long been aware of the irrationality of their customers and have been designing their marketing strategies accordingly.

No matter how irrational these biases sound, that’s just how our mind works!

After all, ‘The heart wants what it wants’.

The Author

 The author of this piece is Averi Chakraborty. The piece is, without a doubt, a real treat to the eyes. If you liked the piece, share it with your best friend on WhatsApp. Follow us here if you are looking to see more of these pieces.

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