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Behavioral economics for marketing: Turning data into persuasion

One of the biggest mistakes companies make when trying to use data to influence customer behavior is assuming that people make rational choices.

Many businesses have begun using data to influence a customer’s buying decisions, but they’re leaving out the human element when trying to put that information to use.

As a result, businesses’ forays into the world of behavioral design often result in disappointment and the jump to a conclusion that the data itself is bad.

In reality, however, it’s not the data that’s to blame. It’s the fact that most companies don’t know how to package it properly. It’s failing to consider that when a person decides to buy something, it’s usually out of a combination of rational and irrational factors.

But just because people aren’t always rational doesn’t mean they’re unpredictable. To paraphrase words of wisdom from “Predictably Irrational” by Dan Ariely, people may not act rationally, but they can be relied upon to react irrationally.

And marketing is all about behavioral changes, after all. Data can be extremely effective in persuasion, but only if it’s deployed in the right areas. The challenge is figuring out what those areas are.

Understanding irrationality

People are complex, and not every action can be boiled down to a few simple impulses. That said, there are some common themes when it comes to predicting human behavior. The problem is that they’re not readily apparent in the data, because they don’t come out of logical thinking.

The impulse buy is a great example of an irrational purchase that everyone has succumbed to. In a recent survey from Business Insider Intelligence, 49 percent of those who responded said they had made an impulse purchase within the past three months. The impulse decision is rarely logical but always alluring.

How a customer feels about a purchase is at least as important as what they think about it. Invoking good feelings is why advertisements such as “I’d like to give the world a Coke” are so effective. Or why choosing Colin Kaepernick as a spokesperson is good marketing: It makes consumers feel a certain way about a company’s products, even if they know it doesn’t change what’s being sold.

Coupons, for instance, are extremely effective because they quite literally make people happy. Adding in free shipping or a free gift with a bigger purchase might cause a person to actually spend more than he would have otherwise. But to that person, it feels like a good deal, and that’s what matters.

The power of persuasion

People tend to see only what they want to see. This is true when it comes to big things, like what news they choose to consume (and believe). And it’s true for smaller things, like how they feel about a particular purchase. If people expect a certain result, they’re most likely to believe they achieved that result, regardless of the facts.

This is known as confirmation bias, and it’s just as important in retail as it is in psychology and politics. It’s why people tend to think that brand name products work better than the store brand alternative, even if they’re nearly identical.

Confirmation bias can be used in a variety of ways, such as a means to create customer loyalty. A customer who has already purchased a service or is far enough along in the initial purchasing process is ready and waiting to hear how his or her time and money was well-spent and is thereby more willing to become a repeat customer.

It isn’t rational, it’s rationalization, but it can be a powerful tool.

The key thing to remember when attempting to apply data to influence customer behavior is that the customer’s behavior should drive the data, not the other way around. The true power comes in knowing a customer’s previous purchases and patterns. It’s from there that future purchases can be influenced using irrational methods, such as confirmation bias.

Real-estate and rental marketplace Zillow is leading the charge when it comes to using customer behavior for the purpose of persuasion. The company recently announced its “Best of Zillow” program, which is designed to give agents the ability to track the journeys of homebuyers and learn which of their behaviors lead to success.

Customers provide real-time, anonymous feedback throughout the purchasing process, and a scoring system will differentiate the best agents over time. As a result, agents are incentivized to follow best practices and adapt their approaches based on what customers are expecting now.

Turning data into persuasion

Not all behavioral design is created equal. Here are some steps companies can take to ensure they’re picking relevant data points that can be applied to customers in a truly effective manner.

1. Start with the human at the heart of the transaction

Data shouldn’t be the end goal; your user should be. Focus on identifying what behavioral shift will have the best impact on your business. This will help prevent you from getting mired in unnecessary endeavors.

Gallup found that companies that utilize behavioral economics, the overlap of human nature and economic decisions, experience 85 percent more sales growth and 25 percent higher gross margins than competitors who don’t focus on the emotional element of consumer spending.

Effective marketing offers real value to real people in real time. Achieving this requires complementary ingredient parts of both precision and empathy, applied at scale.

A prime example of a company developing smart commerce, where data-driven experiences reduce barriers to purchase by enhancing electronic transactions for consumers, is Domino’s and its “If This, Then Domino’s” initiative.

On a newly launched microsite, Domino’s customers can choose a number of life events from a preset list (or create their own events) during which they would like to enjoy pizza (for example, when your favorite college basketball team plays on TV). When these events happen, customers receive a simple text message asking whether they’d like to initiate an order.

This campaign is the newest initiative from Domino’s to make ordering a pizza easier and more relevant in people’s lives; it’s also the next step in linking their various digital ordering channels.

2. Figure out where your data fits in the context

Use your resources to better understand user context and behavior. Ask yourself a few simple questions:

  • What is the inherent bias?
  • Where is the conflict of interest?
  • How best can you intervene in the process and influence your users?

Context is the rudder that steers your data in the right direction, helping you to identify opportunities when your actions can change user behavior. For instance, 65 percent of consumers cited personalized promotions as the most important element of a good shopping experience. This is a perfect opportunity for contextualized data.

3. Adapt, refine, optimize

Don’t stop at your first taste of success. Use the power of continuous data optimization to create new habits and ensure a differentiated customer experience. According to Business Insider Intelligence, 41 percent of customers expect sales associates to be aware of their previous purchases, but only 19 percent have actually experienced it. Track your users’ progress and use what you know to show them they’re on the right track and to encourage further engagement. Behavioral design isn’t just a push in the right direction; it’s an ongoing relationship that’s beneficial to both parties.

Consider the possibilities when it comes to voice assistants such as Alexa and Siri; as consumers become more comfortable with the abilities of these programs, they will be able to persuade and encourage specific purchases based on accumulated data, customer preferences, and shopping patterns.

Human beings will never be as rational as computers, but computers can learn to be as irrational as humans. By not relying on raw data, and instead attempting to shape that data to persuade people, companies can harness the true power of technology and forge a healthy, long-lasting relationship with their customers.

Shravya Kaparthi leads Strategy & Decision Sciences at RAPP.

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