You, like many people, aren’t stupid, but it’s an unfortunate fact of life that you can be fooled. Since the dawn of time, the best salespeople, rightly or wrongly, have been known to exploit vulnerabilities and weaknesses of the human mind to their own gain.
The thriving field of behavioural economics has begun to codify these mental weaknesses in terms of social, cognitive and emotional factors. Drawing from the insights of psychology, behavioural economists (such as Dan Ariely, Robert Cialdini, Christopher Chabris and Daniel Simons) have explained why we buy more things at 99p rather than £1 (the left-digit effect), why we commit to memberships of clubs and other organisations that we’ll never use or attend (optimism bias), why we attribute more value to things we own than things we do not (endowment effect) and why we don’t return purchases nearly as often as we perhaps should (post-purchase rationalisation).
Knowledge of human behaviour is now being used by the giants of the web, from Amazon and Apple to Groupon and Zynga, to keep us coming back to their websites, playing their games and buying their products and services.
Amazon has mastered eliminating small frictions, which in turn radically alters decisions and behaviour. For millions of people, Amazon is the default purchasing solution because it has all our credit card and address details on file. Amazon has removed the pain of retyping these details each time we make a purchase. This may not sound like much since many other websites also allow us to save our details, but during the few seconds in which we make our buying decisions, when we are not thinking very deeply, the barrier to entering that data seems too forbidding and we default to Amazon.
That’s not the only friction that Amazon has eliminated, they’ve created smart solutions to the problem of shipping, which has always been one of the biggest psychological hurdles to buying online. The first is Super Saver delivery, which is free in the UK if dispatching to UK locations. This option often tempts customers to add an extra item to their order.
The second, more interesting shipping mechanism is Amazon Prime. For an upfront fee of £49 per year, you get free next-day delivery on the majority of items. Knowing that one shop has free shipping compared to another, makes us less likely to shop elsewhere and because the barrier of shipping is removed, we’re more likely to impulse buy. Furthermore, because investment in shipping is essentially made upfront, we try to offset the investment by purchasing more.
If, like millions of other people, you’re an Apple customer, you may have noticed that email receipts for your purchases don’t arrive immediately after you’ve made the purchase. Whilst the delay could be related to Apple batch-processing transactions, there is an important psychological benefit to the company: the delay reduces the pain of paying and hence the potential for customers to request refunds.
The mechanism of the transaction remains the same, money is still debited from your credit card, but by not receiving a receipt immediately, the payment is decoupled from consumption and the pain of paying, however small the value may be.
It’s not all bad news for the consumer. Apple made the mistake of allowing apps to sell too cheaply or even for free through the AppStore. There’s an economic phenomenon called anchoring, which occurs when people overly rely on a specific piece of information to govern their thought-process. Once the anchor is set, there is a bias toward adjusting or interpreting other information to reflect the “anchored” information. Once a price point is set, it’s extremely difficult to displace the anchor. iPhone and iPad apps take many hours of work to design and build, but on the AppStore, the expectation now is that they can’t cost more than £4.99, whilst most should cost £0.69. The pull of free is just too strong—dragging down what people will pay for everything else.
What has become increasingly clear is that the Facebook actively develops features that challenge our limited ability for self-control, since that is what will get us to come back again and again.
Much of Facebook’s genius revolves around the Wall: a public space that we curate but that other people can add to. Within the universe of the site, where everyone is a “friend”, you feel compelled to respond to Wall posts, to comment on others’ posts to yours and to reciprocate by writing on theirs.
We want our Walls to reflect ourselves or certain persona. It’s analogous to the way we curate our belongings, which itself is a window into our personalities.
The psychologist Sam Gosling has shown you can learn more about people from their possessions than from spending time with them. Walls are basically the same—a storefront window to the self.
Groupon has not just revolutionised social-buying websites through offering remarkable discounts, but more importantly by removing the embarrassment of coupon shopping.
The stigma of coupon use is real and broad-based. A 2008 paper in the Journal of Consumer Research found that shoppers would describe people standing near coupon users, not to mention the coupon users themselves, as “cheap” or “poor”. With Groupon, by contrast, the social acceptability is baked into the premise – into the name, even. The perception of crowd behaviour can be a powerful motivator when it comes to modifying people’s behaviour.
Groupon also uses time constraints to further influence behaviour. Consumers have one day to decide whether to buy a coupon. Usually, when we don’t buy something, we have the opportunity to go back and buy it later. But with Groupon, our choice becomes explicit. If we don’t buy the coupon now, we’ll never be able to buy it. Presented with that choice, many customers will consider how much they might regret the choice not to buy. And because people hate feeling regret, they become more inclined to buy it now. Amazon do a similar think by alerting the buyer to the fact that there are only n-number of items left, whilst “bricks and mortar” stores such as Zara regularly update their clothes range to drive demand.
Lovefilm’s business model is based upon the simple premise: people hate late fees. With the traditional video shop model, customers had a simple choice: accumulate late fees or return the unwatched film. Added to this, traditional shops often only stocked a finite amount of “blockbuster” movies. Lovefilm not only resolved the late fee issue by allowing customers to return films whenever they wanted, but also created a long tail of films; and exhaustive collection from which each customer could assemble a queue.
In practice though, Lovefilm customers end up watching fewer films than they might have expected. Why? One reason is that Lovefilm forces us to choose based on what we think we want to see in the future; and we’re bad at predicting our future habits. This isn’t bad for Lovefilm since it is based upon a subscription model, so it saves on postage whilst boosting profits.
The future for Lovefilm will be in the streaming business, much like Netflix does in the US. With streaming, consumers will no longer need to predict what they want to watch in the future. Instead, watching films becomes an on demand service; we’re paying for the right to watch any film at any time, regardless of whether that is what we end up doing.
Much like with Facebook, users want to display a self that is somewhere between their real-life self and how they would like to be perceived, which creates a substantial motivation for constant monitoring and updates to their status list and Wall.
Perhaps the most addictive feature for both Twitter and Facebook is that it allows us to enhance our status relatively cheaply, in a way that was not possible 5 years ago, whilst also providing the ability to share; we get tremendous social capital from being seen as generous and as someone whom other people mention.
People become emotionally invested in things they’ve built or created. This emotional investment leads people to value their own possessions or creations irrationally high. The longer the emotional investment, the higher the value. Dan Ariely dubs this the “Ikea effect” in honour of how your rickety Swedish bookshelf seems perfect after you’ve put hours of frustrating work into assembling it.
This emotional investment is exactly what Zynga uses to great success with FarmVille, CityVille and other social games. Once someone takes a little time to start building a farm, they become invested in maintain it and hence value it more highly. The more complex and time-consuming the task, the more we fall in love with the creation (assuming the appropriate level of reward) and the more we become engrossed in the game.
The compulsion to create is reinforced by social interactions. Much of the action in these games is about reciprocity: people give you useful things and you’re expected to respond in kind. Reciprocity is a powerful motivator. When someone does us good, we want to return the favour; in FarmVille that translates into spending more and more time playing the game.
- Journal of Behavioural Decision Making – Mixing virtue and vice: combining the immediacy effect and the diversification heuristic
- Journal of Consumer Research – Stigma by Association in Coupon Redemption: Looking Cheap because of Others
- Journal of Marketing Science – Zero as a Special Price: The True Value of Free Products
- Snoop: What Your Stuff Says About You by Sam Gosling
- Foundations of Human Sociality – Measuring social norms and preferences using experimental games: A guide for social scientists by Colin Camerer and Ernst Fehr (PDF 150KB, pp.40)