June 15, 2016
Last updated on October 1, 2024
According to behavioural economics, we’re all irrational consumers, making poor decisions that make no sense. Understanding the motivation behind how your customers will behave predictably irrationally could give your business a competitive edge.
Here at Proposify, we spend a lot of time trying to understand why our customers do the things they do, why they make certain decisions, what motivates them. But the answers aren’t always straightforward, predictable, or even rational. At least from our perspective.
We’re often surprised by the choices our customers make when purchasing certain subscription plans, how they interact with the software, why they decide to choose us over the competition, and why they sometimes decide to leave us for the competition.
We learn from testing, measuring, and experience but we still sometimes make assumptions, assumptions we think are based on rational thought, but those assumptions end up being way off.
Because as it turns out, humans can be pretty irrational.
Even you. Most definitely me.
Recently I watched an interesting documentary on Netflix called (Dis)Honesty: The Truth About Lies, based on the research of Dan Ariely, a professor of psychology and behavioural economics at Duke University.
The film explores why people lie, how they justify it, how common lying is (even among ‘good’ people), and the social and economic impacts of lying. During the film Ariely talks about the irrationality of human behaviour, which is what usually leads people to lie, and do a lot of other things.
Ariely first became interested in the idea of irrational behaviour after being badly burned in an explosion and had to spend a very long and painful time in hospital recovering. While in the hospital he witnessed and experienced a lot of irrational decision making when it came to the treatment of his injuries. Once he recovered, he was inspired to conduct research into how and why we repeatedly and predictably make bad decisions.
It got me thinking about how irrationality might also affect marketing and consumer behaviour.
I didn’t have to dig very far to discover that Ariely has spent a great deal of time thinking about, and researching, the very same thing. In fact, he published his findings in a New York Times bestselling book called, Predictably Irrational: The Hidden Forces That Shape Our Decisions.
Ariely’s premise goes against traditional theories that humans behave in fundamentally rational ways. That when we make a decision, we do it based on reason, analysis, and intellect.
Nope.
But just because we may behave irrationally doesn’t mean our behaviour is random. Irrationality is quite predictable so learning the how and the why can be extremely beneficial to business owners, marketers, entrepreneurs, retailers, and anyone who wants to understand and impact consumer behaviour.
What’s the definition of ‘irrational’?
I think a lot of times when we hear the term ‘irrational behaviour’, we imagine someone being out of control, agitated, and, well, dumb.
Not to name names...
But Dan Ariely has a different definition and it changes the word from being subjective and judgemental to one based on relativity:
“Being irrational are the cases where we think we will behave in one way but we actually don’t. And those are the cases when people are likely to make decisions.”
I have a friend I thought of in relation to this definition. He’s super frugal, budgets his money, and I admire his financial discipline. But then I found out that in his efforts to get the best deal, he’ll drive his car to a grocery store that is at least 20 minutes away when there are lots of comparable options closer to home.
Whatever money he may save on groceries, he ends up spending on gas. By Ariely’s definition, this is totally irrational to me. It’s the opposite of how I thought my friend would behave.
You can watch Ariely explain his definition here:
So what can we learn about marketing from Ariely’s theory of irrational behaviour?
We are all under the influence
If you can convince someone to behave in a particular way, even just one time, you’ll be influencing them far in the future based on their experience, good or bad. That’s why it’s critical for marketers and advertisers to influence the first decisions consumers make about something.
We learned this lesson at Proposify. Last year we introduced a freemium plan - it had reduced features compared to the premium paid plans but it offered the very basics for creating a proposal. We assumed that this would attract people to sign-up and try Proposify and then once they discovered how awesome it is, they’d upgrade to a paid plan.
But that’s not what happened.
While lots of people did discover how awesome Proposify is by signing up for a free plan, most of them never upgraded to a paid plan. Once they had exposure to the benefits of free, once their experience with Proposify was based on free, that was their expectation. That they could get Proposify for free.
Meanwhile, lots of new customers were signing up directly for our premium paid plans, no questions asked.
You can guess what happened next. So long, freemium.
Everything is relative
Most people don’t know the value of something so they try to figure it out by comparing it to something similar, or comparing themselves to others.
That why some companies place their products or services next to similar products that are more, or less, expensive.
The value-seekers will often choose the lower priced product based on their perception of getting a deal, while the premium shopper will choose the more expensive version because they associate high price with luxury or quality.
Retail stores like Winners and Marshalls are brilliant at this. All their tags show two prices: one is the Winners or Marshalls price, and other price says “Compare at”. The Winners and Marshalls price is ALWAYS lower than the “Compare at” price, of course.
So it makes you — OK, ME — feel like I’m getting a deal with every single thing I buy. And it feels amazing.
What a deal!
The fact is, I have no idea where that “compare at” price is coming from or if it’s even accurate. But they’ve planted the idea of value and comparison in my mind and I’ve fallen for it. Judging by the number of Winners and Marshalls stores across North America, I’m not the only one.
Your takeaway? Make it easy for your customers to compare value so you can influence their perception of the value your product or service.
We don’t like making decisions
According to Ariely, when it comes to making decisions, most people take the path of least resistance, even when it’s not the better choice. It’s almost like we’re making the decision to not make a decision.
By understanding your customer, you can design certain experiences to make it easier for them to decide to do what you want them to do (like sign-up for a trial or buy your product), and more difficult to do what you don’t want them to do (like cancel their account, or return the item).
This doesn’t have to be as sinister as it might sound.
For example, we try to make it super easy for new customers to discover Proposify. We offer a free 30-day full feature trial that you don’t need a credit card to sign up for so there’s no risk or obligation.
We make the process simple and quick - you can have an account in minutes. Then we provide a kick-start guide to creating your first proposal.
Obviously the thing we don’t want our customers to do is to cancel their account, to go to a competitor’s product. So we try to make it difficult to leave by ensuring they have an incredible experience with Proposify.
We focus on designing our product and our support service to fit our customers’ needs so perfectly that their lives and businesses would be negatively impacted without our tool.
We try to make it difficult to leave by becoming an essential part of their business.
Money isn’t everything, but we love free.
Often times we are motivated more by the offer of a thing itself than the money it would take to buy it.
I experienced this firsthand really early in my career when I was involved with event management and marketing.
I was an organizer for a very large charity sporting event that had a beer sponsor. In addition to cash sponsorship, the brewery donated flats of beer that we could give away to the participating teams as incentives for hitting certain fundraising milestones or other activities. Awesome, right?
There were 24 beer on each flat and at the time it would have cost about $35 to buy, which worked out to roughly $1.45 a beer.
Whenever I told the teams (each made up of 12 people) there was a flat of free beer up for grabs for any team who completed a particular task or raised a certain amount of money, there were no questions asked. They jumped to it. They took the idea of free beer VERY seriously.
I got them to wear ridiculous costumes, to register by a certain deadline, to run an all-night marathon. Anything for a flat of free beer.
But imagine the response if I had gone to each person on that team and offered them the monetary equivalent of their share of the flat, their two beers? Do you think I could have convinced anyone to do anything for $3?
So sometimes the perceived value of a thing is more valuable than the monetary value. Think about how this kind of incentive could work with your customers, like getting them to participate in a beta test, or upgrade to a more premium service.
Expectations are everything
Setting expectations can have a profound effect on how your customer perceives an experience, whether it’s a service, product, or an event.
I have another beer story to illustrate this point. (It’s noon somewhere, right?)
I don’t like ‘hoppy’ beer. A few years ago I attended an event at a local Halifax micro-brewery. I was familiar with a number of their brews but found them too hoppy for my delicate palate. I didn’t like the taste.
Hold the hops.
So when I went to the bar and they had several choices on tap, I told the bartender I didn’t really like hoppy beer and asked for a recommendation.
He poured me a sample and said, “You’ll find this beer really tastes like grapefruit, it’s quite fresh and tart.”
I love grapefruit. I sipped the beer. It did taste like grapefruit! The beer was yummy for the rest of the evening.
But when I tried the beer again on another occasion I realized that hoppy actually tasted like grapefruit.
It was the very same beer that I had previously found ‘hoppy’ but by changing my perception of the taste, and he wasn’t lying, the bartender changed my perception of the beer.
I still don’t drink that beer regularly but when I do, I always think ‘grapefruit’ before I take a frosty, thirst quenching sip.
Establishing and communicating expectations, both positive and negative, helps you manage the consumer experience.
Make it easy for your customers to find positive reviews of your product or service while they’re in the decision-making process.
Offer a glimpse of how bad things could be without your product or service.
This is where good branding can do a lot of heavy lifting and why it’s critical to craft clear, compelling messaging.
Your brand creates the expectation, it communicates a beneficial promise to your customers. It prepares them for the experience of interacting with you and your company.
Focus groups aren’t that great
I’ve lost track of who’s winning the ping pong battle over the value of focus groups, but Dan Ariely is definitely lobbing one over the net with his research.
As a result of his work in human behaviour, Ariely has little confidence that people are able to understand their own decisions. Which is why he doesn’t put a lot of stock in the results of focus groups.
“One of the things that I think companies do to a large degree that makes very little sense, is the use of focus groups.
So think about what a strange idea is that we take 10 people who know basically nothing about your project and you put them in the room and you let them talk for a while and then you take the, whatever they came up with, as a consequence of these two hours of random thinking and you base your strategy on it, to a large degree
And I don’t want to say that focus groups are always useless and also uninformative, but I think that taking this data and then relying on it as extensively as companies do, I think it’s crazy in many ways.”
–Dan Ariely
Instead of asking people for their opinions, run experiments and observe real-time, real-life behaviour, not subjective reflection.
I’m OK, You’re OK
But we’re all irrational. The key is to accept that irrationality influences how your customers make decisions about your business, how they interact with your brand, how they talk about you on social media, and how they decide to stay or go.
Your challenge is to learn how to predict irrational consumer behaviour so you can harness it into an opportunity.
The Rational Choice is Dan Ariely
I highly recommend checking out Dan Ariely and his research. This post just scratches the surface of his fascinating exploration of human behaviour and there’s so much more to learn. I got lost down a lot of interesting wormholes while working on this.
He’s a really engaging speaker, you can check him out on any of his six Ted Talks and he is a clear and compelling author of four books.
