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Neil GandhiVice President of Data ScienceRevTraxEmail: NGandhi@revtrax.com
Jura Liaukonyte, M.A., Ph.D.Professor of Strategic Pricing and Economics of Advertising Cornell UniversityEmail: Jurate@cornell.edu
Agenda
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What is Behavioral Economics and why is it important for business?
4 mini cases on Behavioral Biases and their application to consumer behavior
How can RevTrax help with behavioral testing?
What Is Behavioral Economics?
Behavioral economics is a branch of economics that integrates psychological factors into traditional models of economic decision-making.
Economics is powerful because it helps us make predictions about concepts such as market prices, costs, and resource allocation.
Behavioral economics is even more powerful because it retains the formalization of economics, while enriching it with insights from other disciplines which allow it to make better predictions about real-world behavior.
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Behavioral Economics
Why is it Important for Business
Behavioral economics can be a valuable toolset for shaping the behaviors of consumers.
Insights from behavioral economics can inform the construction of choice architectures, as well as can be used to create powerful incentives to act in particular ways.
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Why is it Important for Business?
Behavioral economics can be applied to all aspects of the consumer experience. We will focus on four mini-cases that have yielded interesting results:
Mental Accounting
Anchoring
Scarcity
Bundle Framing
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How Can Behavioral Economics be Used?
Part 2:
Applications of Behavioral Economics
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Case 1:
Mental
Accounting
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Case 1: Mental Accounting
Mental Accounting is a term in behavioral economics uses to describe people’s proclivity to divide up their money into separate accounts based on certain criteria
The term was first coined by behavioral economist Richard Thaler, in an attempt to explain his discovery that propensity to consume differed between separate mental accounts
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Let’s do a quick example to illustrate this:
Imagine you have set aside $5 each day for your lunch, so that you can buy yourself a hot dog from your favorite stand…
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Case 1: Mental Accounting
Scenario 1: Say you get to the stand, and you discover that because of a hole in your pocket, you have lost exactly $5. However, you still have enough money left in your wallet to buy the hot dog. Do you still buy the hot dog?
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Case 1: Mental Accounting
Scenario 2: This time you didn’t lose any money before arriving at the hot dog stand. You buy a hot dog, but as you are walking back to your office, before you have taken even one bite, you drop it on the ground! Do you go back and buy another hot dog?
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Case 1: Mental Accounting
It turns out that more people answer yes to the Scenario 1 question than the Scenario 2, even though they are economically speaking the same question.
In the first question, most people do not see the lost $5 as coming from the “lunch account,” so they feel comfortable still making a withdrawal from that account.
In the second question, most people perceive the lost hot dog as a $5 loss from their “lunch account,” so they do not feel comfortable making another withdrawal from that account.
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Case 1: Mental Accounting
How can this phenomenon be applied to a business situation?
We tested online coupons that originally contained a simple phrase like “SAVE $2.00”
We added different phrases to these coupons and tested their effectiveness compared to the control:
We saw significant gains in coupon printing and redemption for the groups with these added phrases.
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Case 1: Mental Accounting
SAVE $2.00SAVE $2.00
FOR YOUR FAMILYvs.
Why did this happen?
In additional tests, we saw that participants felt that the money saved was contributing “for their family,” which are different accounts than money for their personal use.
This is a prime example of how businesses like yours can target the correct mental account of your customers and see significant improvements.
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Case 1: Mental Accounting
Case 2:
Anchoring
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Case 2:
Anchoring (i.e
context
matters)
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What are the sizes of the two horses?
Use coupons to drive CRM acquisition. Coupons can include standardprint-at-home offers as well as high value and free coupons.
Example:Through a social sharing campaign, a client delivered over 60,000 high value coupons and received over 100,000 CRM opt-ins in under three months.
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What are the sizes of the two horses?
Anchoring is a psychological term, commonly referred to as anchoring bias, that refers to the cognitive bias where an individual “anchors” their response toward the first information they are presented with, even if that information is completely irrelevant.
In one of the first studies on anchoring, researchers Amos Tversky and Daniel Kahneman gave subjects five seconds to calculate the product of the numbers one through eight.
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Case 2: Anchoring
Anchoring is a psychological term, commonly referred to as anchoring bias, that refers to the cognitive bias where an individual “anchors” their response toward the first information they are presented with, even if that information is completely irrelevant.
In one of the first studies on anchoring, researchers Amos Tversky and Daniel Kahneman gave subjects five seconds to calculate the product of the numbers one through eight.
They showed half of the subjects the numbers in forwards order, and half of the subjects the numbers in backwards order.
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Case 2: Anchoring
1×2×3×4×5×6×7×8 8×7×6×5×4×3×2×1
Anchoring is a psychological term, commonly referred to as anchoring bias, that refers to the cognitive bias where an individual “anchors” their response toward the first information they are presented with, even if that information is completely irrelevant.
In one of the first studies on anchoring, researchers Amos Tversky and Daniel Kahneman gave subjects five seconds to calculate the product of the numbers one through eight.
They showed half of the subjects the numbers in forwards order, and half of the subjects the numbers in backwards order.
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Case 2: Anchoring
1×2×3×4×5×6×7×8 8×7×6×5×4×3×2×1
Quick estimate:
512Quick estimate:
2,250
Anchoring is a psychological term, commonly referred to as anchoring bias, that refers to the cognitive bias where an individual “anchors” their response toward the first information they are presented with, even if that information is completely irrelevant.
In one of the first studies on anchoring, researchers Amos Tversky and Daniel Kahneman gave subjects five seconds to calculate the product of the numbers one through eight.
They showed half of the subjects the numbers in forwards order, and half of the subjects the numbers in backwards order.
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Case 2: Anchoring
1×2×3×4×5×6×7×8 8×7×6×5×4×3×2×1
Quick estimate:
512Quick estimate:
2,250
Correct answer:
40,320
In a modern demonstration of anchoring, MIT professors offered to sell various valuable consumer products (computer accessories, wine bottles, luxury chocolates, and books) to MBA students
First, students were asked whether they would buy each good for a dollar figure equal to the last two digits of their social security number.
Then, after giving a yes/no response, subjects were asked to state the most they would pay for those items.
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Wine Spectator Experiment
The results showed that those with high SSN numbers were willing to pay more for the products across the board.
Evidently, these participants did not have, or were unable to retrieve personal values for ordinary products,
The values they provided were anchored to their social security number which is essentially a random figure.
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Wine Spectator Experiment
What not to do: disregarding anchoring bias
Instead of listing an item with a severely marked-up original price, and then almost always selling it at a major “discount” of 30%, 40% or 50% off, JCPenneyknocked down all prices by about 40%
This policy eliminated the anchor of the full-price item upon which to base their savings.
Even though prices were lower, the customer did not have a reference price to compare the prices to, so their was no “hype” around any of the products.
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Case 2: Anchoring
As a result, they saw steep declines in sales all around the country, and shareholders began to sell their stocks in the company.
New policy took away consumers'’ feeling of small achievement when they got rid of deals
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Case 2: Anchoring
As a result, they saw steep declines in sales all around the country, and shareholders began to sell their stocks in the company.
New policy took away consumers'’ feeling of small achievement when they got rid of deals
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Case 2: Anchoring
Now let’s look at two positive ways of applying the anchoring bias to your business:
In the first experiment, we randomly assigned low or high values to the first set of “lead” offers. The value of the rest of the “follower” offers was held constant.
We found this framing significantly increased the printing and redemption of the “follower” offers, even though their value stayed the same.
When anchored with the high value coupon, consumers spent more time exploring the rest of the offers and felt that the perceived value of the rest of the coupons was greater.
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Case 2: Anchoring
- ❒ X
Lead Offer 1
Lead Offer 2
Lead Offer 3
Follower Offer
1
Follower Offer
2
Follower Offer
3
Follower Offer
4
Follower Offer
5
Follower Offer
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Low or High
Values held
constant
In the second experiment, we tested different anchoring messages to see how they affected coupon printing and redemption
The messages on the right were displayed at the top of the offers screen:
We found higher printing rates for customers who saw anchoring messages versus the control.
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Case 2: Anchoring
Anchor Message Tested
You can print coupons and save money! (Control)
The average person prints $24 in coupon savings!
Most people print at least $15 in coupon savings!
You can print up to $75.50 in coupon savings!
Case 3: Scarcity
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Scarcity is a heuristic, or a decision making tool, in which people are more likely to perceive an item as having greater value if it is scarce
There are two types of scarcity appeals: those driven by low supply and those driven by high demand.
To the right, we have an example of a low supply scarcity appeal. These appeal to people who value uniqueness.
High demand appeals typically involve phrases like “almost sold out” and “while supplies last.” These appeal to people who value group
conformity.
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Case 3: Scarcity
In 2012, researchers performed a well-known experiment that illustrated the importance of scarcity in the marketing world.
The item in question was wristwatches. They exposed subjects to two different advertisements for a new watch:
“Exclusive limited edition. Hurry, limited stocks”
“New edition. Many items in stock”
The findings of their study were very significant: there was a 50% increase in the amount customers were willing to pay for the “exclusive” watch compared to the “new edition.”
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Case 3: Scarcity
We conducted a series of experiments to test the effects of different scarcity-suggesting messages on coupon printing and redemption: “Act Now!”
“Limited Time Only”
“While Supplies Last”
“Grab It Now”
“Maximum 2 Prints per Coupon”
“Don’t Miss Out!”
Among these, we found that all scarcity messages were effective and “Limited Time Only” and “Don’t Miss Out” had the most significant effects in increasing printing and redemption rates.
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Case 3: Scarcity
Case 4: Bundle
Framing
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Bundling is a familiar tool to many businesses, and is used encourage sales of products in a way that is profitable to the business and beneficial to the customer.
Bundle framing deals with the way that bundled offers are presented and the particular combinations of stimuli that most encourage the customer to purchase the bundled products.
Framing is an important tool in behavioral economics for understanding consumer behavior, and this tool can be used effectively with offer bundling to produce significant results.
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Case 4: Bundle Framing
What kind of results in behavioral economic research led to the interest in bundle framing?
A 1995 study at Columbia Business School revealed several interesting results dealing with framing of bundled products:
When bundles are composed of complements, people are more likely to buy them.
Presenting the price of the bundle differently causes significant changes in likelihood of purchasing.
People who are more familiar with products inside the bundle respond differently to framing than people who are less familiar with said products.
With all of these results, it is no surprise that research into bundle framing is very useful for marketing today.
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Case 4: Bundle Framing
First we tested coupons of the form “Buy Product 1, Get $X.XX of Product 2” and switched around the order to see if it altered customer behavior
We found that when the more popular product was placed first, the customer engagement was the highest.
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Case 4: Bundle Framing
Buy Product 1, Get $X OFF Product 2
Buy Product 2, Get $X OFF Product 1
Get $X OFF Purchase of Product 1 and
Product 2
Next, we tested whether placing bundle coupons and standalone coupons on the same coupon page would increase printing compared to just one or the other.
We found that adding bundled promotion to standalone offers drastically increased total engagement with both products.
Finally, we tested whether this combination worked on a variety of products and coupons. And found this effect to be true for multiple different combinations.
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Case 4: Bundle Framing
Agenda About RevTrax
RevTrax is a leading provider of personalization & promotional marketing technology to CPG brands and retailers.
Leader in personalized offers and online to offline analytics since 2008
Client base of 350+ national brands & banners with our technology deployed on hundreds of brand sites and owned properties
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1st Party Purchase Data
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RevTrax captures 1st party path-to-purchase data to understand consumer behavior
Receive data from the brand’s clearing house
Understand which digital channels, marketing tactics, and executions drive the highest engagement for each consumer at each individual retailer
Create the opportunity to optimize media spend, CRM efforts, shopper marketing initiatives, etc.
Unique Identifier Channel Campaign Keyword Purchase Date Barcode ID Retailer
12344321 Search Branding Laundry Detergent 1/2/15 169294683 TARGET
23455432 Email CRM N/A 1/2/15 169301942 SAFEWAY
34566543 Search Acquisition Hair Care 1/3/15 169351160 WALGREENS
45677654 Social Facebook N/A 1/9/15 169401668 PUBLIX
56788765 Display Branding N/A 1/11/15 169416484 KROGER
Engagement Data Barcode ID Transaction Data
1st party purchase data that ties marketing messages/tactics to actual purchase Silent observation vs focus groups, surveys, and panels which can distort true behavior Multivariate design vs simple A/B tests
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Why is RevTrax able to uniquely support
BE testing effectively?
Thank You!
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Neil GandhiVice President of Data ScienceRevTraxEmail: NGandhi@revtrax.com
Jura Liaukonyte, M.A., Ph.D.Professor of Strategic Pricing and Economics of Advertising Cornell UniversityEmail: Jurate@cornell.edu
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