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Why Retail Marketers Turn To Behavioral Economics

  • Written by  Meg Goodman, Jacobs & Clevenger

0aaaMeg Goodman JacobsClevengerWith the amount of messaging that inundates individuals on a daily basis, it can be frustrating for retailers to make their mark. Here is the problem: retailers spend a majority of their time and resources thinking about what to sell, not necessarily how to sell it. Well, the social science known as “behavioral economics” shows us that how a product is presented to consumers is often the most powerful driver in a purchase decision.

Behavioral economics is no longer just taught in college lecture halls; it is now learned by marketers all over the world to help drive growth and increase revenue. Research by Gallup shows that companies that apply the principles of behavioral economics to their overall marketing strategy outperform their peers by 85% in sales growth and more than 25% in gross margin.

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Retailers can use behavioral economics to accurately predict customer behavior, which allows them to improve marketing effectiveness. Major brands like Coca-Cola have turned to behavior economics in an effort to guide public perception and boost sales. They have even gone as far as creating high-ranking positions dedicated to translating behavioral economic theories into practice.

Over the years, economic theorists assumed that individuals made most of their purchasing decisions based on rational thought. As it turns out, these scholars may have given consumers a little too much credit. According to Gallup, economic decision-making is 70% emotional and 30% rational. Marketers have long been aware that irrationality helps shape consumer behavior, but they are now using behavioral economics to make that irrationality more predictable.

Every retail company has the ability to use behavioral economics to accelerate customer growth and increase ROI. Below, I have highlighted several actionable insights and techniques that should be part of every retail marketer’s arsenal.

The Zero Price Effect

It’s been said before that consumers negatively associate the word “free” with “cheap” and are thus turned off by the term. According to Dan Ariely, professor of psychology and behavioral economics at Duke University, that may not be entirely true. In his book, Predictably Irrational, he outlines his “Hershey’s Kiss” experiment, where his research team sold Lindt Truffles for 26 cents each and Hershey’s Kisses for one cent each on the Duke University campus. He found that a near equal number of participants bought each candy. However, when he reduced each candy’s respective price by one cent, he found that 90% of people took the free Hershey’s Kiss. Now, according to traditional economics and common intuition, reducing the price of two products by the exact same amount shouldn’t reverse original consumer preference. But according to Ariely’s study, that’s exactly what happened. It seems the word “free” can make consumers irrational.

Enter the Zero Price Effect, which suggests that there will be an increase in a good’s intrinsic value when the price is reduced to zero. The most popular use of this theory is in the retail phrasing, “buy one, get one free.” Really, it should be listed as “50% off when you buy two,” but that doesn’t capture consumers’ imagination quite like the word “FREE.”

The Postponement Of Pain

What do you do if free is not a possibility for your retail brand? The next best option is “free for now.” Simply put, saving money feels a lot better than spending it. Credit card companies have been able to exploit this notion and have experienced tremendous success in response. That’s why retailers are taking a page out of credit card companies’ playbooks and creating their own deferred payment solutions. Stores know that allowing customers to pay later can dramatically increase their willingness to buy now. Major retailers like Macy’s, Costco and Target have issued their own proprietary credit cards, tied in with reward programs. They have effectively created a tab system that encourages shoppers to spend money freely without feeling the immediate negative effects. In doing so, they remove one of the most important barriers to a purchase.

The Aversion To Loss

Loss Aversion is a characteristic instilled in humans through evolution. It’s the idea of protecting what you already have. People are more willing to take risks in order to avoid losing things than to pursue gaining things. Additionally, people don’t want to lose out on beneficial opportunities. Marketers used loss aversion early on, as evidenced by Listerine Antiseptic’s successful “Halitosis” ad campaign from the 1920s. The current mouthwash giant showed advertisements aimed at young women stating that they were risking losing their boyfriends if they had bad breath. According to Steven D. Levitt and Stephen J. Dubner's book Freakonomics, in just seven years after launching the campaign, the company's revenues rose from $115,000 to more than $8 million.

The psychology of marketing has evolved quite a bit since the 1920s, but the fear of loss still holds plenty of weight. When tested among other cognitive biases on a controlled research study conducted at the ISM University of Management and Economics, loss aversion vastly outperformed its counterparts (countdown effect, bandwagon effect and gain effect), reaching the highest rates of conversion.

Retailers should frame their offers in terms of loss rather than gains and inspire a sense of urgency and scarcity. This can include simple tactics like listing how much of a certain product is left in stock, having short sale windows or highlighting the risk of overpayment with competitors.  

The Isolation Effect

The isolation effect states that a certain choice can be made to look more attractive if it’s put next to an alternative to which it is distinctly better. For example, a price will appear more attractive if the product in question is placed next to a similar, more expensive product. Williams Sonoma famously did this when they introduced a $275 bread maker in the 1990s to little fanfare. Their solution was to introduce a slightly bigger bread maker listed at $429 and stock it right next to the original one. Sales of the $275 bread maker nearly doubled without ever having to reconsider the price point.

Price isn’t the only factor. The isolation effect also helps when it comes to contrasting quality. This was on full display during commercial breaks between Super Bowl LIII when Anheuser-Busch InBev unveiled its “Corn Syrup” campaign. They displayed ads that took two fairly similar products, Bud Light and Miller Lite, and insinuated that Bud Light was the superior choice because it did not contain corn syrup, making the two similar products look vastly different.

Predicting Irrationality With Behavioral Economics

Consumers are irrational. Behavioral economics serves to make that irrationality more predictable. This social science focuses on where human nature and economics meets while giving us valuable insights on the emotional traits of consumers. As seen above, marketers have been applying some of these behavioral economics theories for years. However, retailers can institute a more holistic and systematic approach to these marketing strategies to unlock a much greater value.


Meg Goodman is the Managing Director of relationship marketing agency Jacobs & Clevenger. She has brought measurable, data-driven results to Chase, Serta, United Airlines, First National Bank of Omaha, Allstate and PayPal. When she isn’t riding her motorcycle, you can connect with her on LinkedIn or by emailing her at mgoodman@jacobsclevenger.com.

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