The strangeness of consumer decision-making

So this shopper visited a well-known retailer looking to buy an Apple TV.

The advertised price was $107, but knowing this retailer was open to price matching, the shopper did an online search while in store and found it available at a competitor for $89. When asked, the assistant agreed to match the competitor’s offer.

The shopper then asked whether they needed any cables to connect the unit to their TV. The assistant walked them to the correct aisle, handed them the $34.95 cord which they then dutifully took to the counter and paid for.

This, my friends is an illustration of the strangeness of consumer decision-making.

For the primary purchase (Apple TV) the shopper was sufficiently willing and motivated to search for a better price. In this case they saved themselves $18 and felt like a winner.

Contrast this with the unexpected additional purchase of a cord moments later where they were willing to accept the assistant’s direction without any further searching or negotiation. No doubt they could have found this cord cheaper elsewhere – the point was it didn’t even occur to them to try.

Why?

Mental accounting – we transact from different mental buckets

This is an example of “mental accounting”, which effectively means we all carry around rudimentary mental bank accounts in our heads from which we debit and credit. Feeding $3.50 into a parking meter feels like we’re being fleeced where spending the same on our coffee is acceptable. We drive further to claim $3 off our petrol with a discount voucher where that same $3 as a discount on our groceries would pass by unnoticed. We ignore the fees on our superannuation accounts because they are subsumed in annual balances but go out of our way to renegotiate power bills that probably cost us less in total.

In this case the reason the shopper was in store was to buy the Apple TV – they had mentally spent the money by deciding they wanted one. The shopper was therefore able to mentally claim the discount on the purchase because they had a frame of reference (same product sold at a competitor).

The cord was different. The shopper had no mental bank account for this and no frame of reference – all they knew was that to make the Apple TV work they needed to also buy the cord, whatever the price.

Then guess what happened? The shopper was able to make themselves feel okay about buying the cord by attributing the discount they received on the unit to the cord. In their mind they justified it as “$34.95 less $18”.

Strange as mental accounting seems, it pays you to think it through as a business because it can shape your pricing strategy. Discounting a primary good to secure the sale while adding full priced accessories is just one approach available to you.

Authority – when in doubt we follow the leader

When the assistant handed the shopper the cord it became very difficult to refuse it. People respond to authority, particularly in times where we don’t know what to do. In this case the shopper didn’t know anything about cords so needed to rely on the assistant’s expertise.

Think about how and when you use authority in your sales process. Your objective should be to provide expertise right at the moment the customer realises they need to find a solution. In this case rather than relying on the shopper to ask the question about whether they needed a cord, the retailer could have been more effective by prompting the shopper through point of sale, proximal product display or by asking them when they picked up the Apple TV unit.

Reciprocity – we give back to others who have given to us

People are more likely to comply if there is an act of reciprocity. If I do something for you, you are more likely to do something for me. By agreeing to price match, the shopper felt that the assistant had done them a favour. To refuse the cord would have felt like they were contravening the delicate balance of the assistant-shopper relationship.

I know some of you might be screaming at this stage and suggesting that all’s fair in love and retail, that the shopper should have pushed for a deal on the cord – but that is a rational response to behaviour that happens in the moment. The point is that people’s behaviour can be influenced by emotions and factors beyond rationality.  Don’t underestimate how apparently ‘flawed’ people’s decision-making can be.

Consider how, what and when you do something for your customer and whether you are creating the right circumstances for reciprocity. Offering to wave a delivery or service fee can be an inexpensive way to have your customer feel like you’ve done something for them and may diminish the chances they will push for a better deal.

There are rules to how consumers behave

As this example illustrates, consumers often act in ways that defy logic. The good news is that while they may defy logic, they don’t defy behavioural science. You can anticipate what your customers will do by understanding the behavioural biases and rules of thumb we all use to make decisions. Knowing about mental accounting, authority and reciprocity for example, means you can design your offer and environment to better influence the decision outcome.

And by the way, knowing about these behavioural principles doesn’t necessarily make you immune to them when you are shopping for yourself. The shopper was me, and I am pleased to say the cord works perfectly.

Bri Williams runs People Patterns, a consultancy specialising in the application of behavioural economics to everyday business issues.