The Good, the Bad and the Irrational – Understanding the Irrational Consumer (Gerhard Fehr, Fehradvice)
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The Good, the Bad and the Irrational – Understanding the Irrational Consumer (Gerhard Fehr, Fehradvice)

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Through interactive lecture you will find out what influences consumer behaviour and how to forsee their decisions.

Through interactive lecture you will find out what influences consumer behaviour and how to forsee their decisions.

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The Good, the Bad and the Irrational – Understanding the Irrational Consumer (Gerhard Fehr, Fehradvice) The Good, the Bad and the Irrational – Understanding the Irrational Consumer (Gerhard Fehr, Fehradvice) Presentation Transcript

  • The Good, the Bad and the Irrational Understanding the Irrational Consumer Gerhard Fehr, Karoline Bauer 28 November 2013
  • How to use the Voting Devices Do not press anything except the number you want to vote for, the answer will be registered automatically. In case you see “new channel?” on the screen, follow these steps: 1 Press «Channel»-Button 3 Finally, press «OK» 2 Insert the number «41» FehrAdvice & Partners AG, November 2013 2
  • Which table is longer? FehrAdvice & Partners AG, November 2013 3
  • Which patch is darker? Clearly, the upper patch is brown and the lower patch is orange. When all the rest is stripped away, we realize: they are both the same color! FehrAdvice & Partners AG, November 2013 4
  • The power of perception (I/II) 1 Which of the three women do you find most attractive? 1. A 2. B 3. C Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 69 0% 1  70% of all male respondents choose 0% 2 3  Our perceptual system is able to base option B.  0% decisions on extremely subtle The secret lies in the hips/waist ratio: differences. 0.67 is considered most attractive in a indo-european culture  These differences can have a crucial impact on the success of a product! Devendra Singh and Robert K. Young (2001). Body Weight, Waist-to-Hip Ratio, "Breasts, and Hips: Role in Judgments of Female Attractiveness and Desirability for Relationships FehrAdvice & Partners AG, November 13 5
  • The power of perception (II/II) 2 Which of the two bottles holds more? 1. A 2. B 0% 0% 1  Consumers use the height of a product as the primary signal for larger volume. 2  Win-win situation for marketers: This influences their perception of  More purchases value-for-money and at the same time   Faster consumption-rate increases consumption. Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 70 FehrAdvice & Partners AG, November 13 6
  • Please answer the following question Griotte Praliné € 0.05 Lindt Praliné € 0.20 1 Which of the two chocolates would you prefer? 50% 50% 1. Griotte Praliné 2. Lindt Praliné 1. 2. FehrAdvice & Partners AG, June 13 7
  • Please answer the following question Griotte Praliné free Lindt Praliné € 0.15 2 Which of the two chocolates would you prefer? 50% 50% 1. Griotte Praliné 2. Lindt Praliné 1. 2. FehrAdvice & Partners AG, June 13 8
  • The power of “0” contributes to the “zero price trap”  The price of 0 completely changes human decision-making The power of FREE!  Offers that are free lead to an affective/emotional reaction  People use this affective/emotional reaction as a decision criteria and choose the free option – even if the other option is of significantly better quality and is better value for money In versus 1 2 Which chocolate would you prefer? Griotte Praliné € 0.05 30% Lindt Praliné € 0.20 70% Ariely, D. (2009). Predictably Irrational. New York: Harper Collins Publishers Which chocolate would you prefer? Griotte Praliné free Lindt Praliné € 0.15 69% 31% FehrAdvice & Partners AG, June 13 9
  • Please answer the following questions (I/III) 1 A bat and a ball cost €1.10. The bat costs one Euro more than the ball. How much does the ball cost? 1. 2. 3. 4. 5. € 1.05 € 1.00 € 0.20 € 0.10 € 0.05 0% 1 0% 2 0% 3 0% 4 0% 5 FehrAdvice & Partners AG, November 13 10
  • Please answer the following questions (II/III) 4 5 machines need 5 minutes to produce 5 units. How long do 100 machines need to produce 100 units? 1. 2. 3. 4. 5. 1 minute 5 minutes 10 minutes 20 minutes 100 minutes 0% 1 0% 2 0% 3 0% 4 0% 5 FehrAdvice & Partners AG, November 13 11
  • Please answer the following questions (III/III) 5 A pond is covered in water lilies. Because the water lilies continue to form new leaves, the area covered by them doubles each day. If it takes 48 days until the water lilies cover the entire pond, how many days does it take to cover half the pond? 1. 2. 3. 4. 5. 6 days 12 days 24 days 36 days 47 days 0% 1 0% 2 0% 3 0% 4 0% 5 FehrAdvice & Partners AG, November 13 12
  • People think in 2 different systems – on the one hand intuitively and impulsively, on the other hand rationally and slowly The previous questions are from Shane Frederick‟s Cognitive Reflection Test. The right answers are as follows:  The ball costs 5 Cents (intuitively: 10 Rappen)  100 maschines need 5 minutes (intuitively: 100 minutes) to produce 100 products  It takes 47 days (intuitively: 24 days) until the water lilies cover half the pond People think in two different systems*: System 1 is... ...intuitive, ...fast and ...impulsive. System 1 causes people in certain situations to…  … be impatient  … have low self-control and  … display little stamina. System 2 however is... ...rational, ...slow and ...lazy. *Kahneman, D. (2011). Thinking, Fast and Slow. System 2 can easily solve the previous questions, but it often is not even involved in the decision. FehrAdvice & Partners AG, November 13 13
  • Even students of Ivy League Universities don’t have control over their system 1  Even the great majority of Ivy League students don‟t answer these questions correctly  This shows that not only cognitive skills are key to this test, but mostly also non-cognitive skills.  Thinking can be difficult.  Most people try to avoid difficulties if possible and will often make intuitive decisions instead (system 1). *Shane, F. (2005). Cognitive Reflection and Decision Making. FehrAdvice & Partners AG, November 13 14
  • The implications of explicit and implicit image for market research Our product experience is mostly influenced by implicit processes, for example expectations, implicit reference points, etc. If those are positive and reference points are not violated, brands and products are more likely to be considered by the consumer We can draw one clear conclusion from this: market research, based on cognitive decisions, has very limited power. *Kahneman, D. (2011). Thinking, Fast and Slow Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 33 The only thing able to tell us something reliable about consumer behavior are close-to-reality experiments FehrAdvice & Partners AG, November 2013 15
  • What is a Brand? And why does it matter? Newspaper 1 RAIL TICKET PRICES TO DOUBLE NEXT YEAR Newspaper 2 RAIL TICKET PRICES TO DOUBLE NEXT YEAR Evidence shows that media brands greatly influence the credibility of news items – more than the actual content. Brands are a type of overall frame for different products It‟s not a question of „brand or product‟, „sales or image‟, „functional or emotional‟ benefit. Brands provide a background leading to a product‟s higher perceived value. FehrAdvice & Partners AG, November 2013 16
  • Lessons learned: Consumers behave pretty irrational  Latest behavioral economic research provides empirical insights about systematic human skills and abilities  These human skills and abilities need to be taken into account when analyzing behavior of employees and managers People can only assess a limited amount of information, systematically overweigh losses compared to equal gains and tend to be overconfident. For instance, they cannot always assess risks and often act according to stereotypes. Thus, they often act in a way that does not seem fully rational. People‟s behavior is influenced by social preferences. Emotional skills like empathy influence how these social preferences are put in action. People Human behavior is influenced by limited willpower and limited self-control, presence-biased time preferences as well as heterogeneous levels of motivation. People have different social identities (job, leisure, family) with different social norms. The sense of belonging to a social identity can overwrite social preferences. FehrAdvice & Partners AG, August 13 17
  • The good and the bad consumer (I/III) 1 How ethically appropriate / inappropriate do you think the other people in this room will judge… … buying clothes at Abercrombie & Fitch? 1. Very inappropriate 2. Inappropriate 3. Neither nor 4. Appropriate 5. Very appropriate 0% 1 0% 2 0% 3 0% 4 0% 5 FehrAdvice & Partners AG, November 13 18
  • The good and the bad consumer (II/III) 2 How ethically appropriate / inappropriate do you think the other people in this room will judge… … concealing the actual content amount of a product through extensive packaging? 1. Very inappropriate 2. Inappropriate 3. Neither nor 4. Appropriate 5. Very appropriate 0% 1 0% 2 0% 3 0% 4 0% 5 FehrAdvice & Partners AG, November 13 19
  • The good and the bad consumer (III/III) 3 How ethically appropriate / inappropriate do you think the other people in this room will judge… …marketing sugary yoghurts as healthy snacks for kids? 1. Very inappropriate 2. Inappropriate 3. Neither nor 4. Appropriate 5. Very appropriate 0% 1 0% 2 0% 3 0% 4 0% 5 FehrAdvice & Partners AG, November 13 20
  • No homogeneous values regarding ethical behavior can be observed Some people might argue that… 1 … Abercrombie & Fitch supports sexism and superficiality by employing tan, half-naked men with six packs. 2 3 … concealing the product‟s actual amount through packaging is equal to lying to the customer. … marketing sugary yoghurt as healthy for children is contributing to the obesity epidemic. But homogeneous values about ethical behavior do rarely exist. FehrAdvice & Partners AG, November 2013 21
  • Your ethics compared to others in the audience 3 How ethical do you judge your own behavior compared to that of the other people in this room? 1. 2. 3. 4. 5. Very unethical Unethical Neither nor Ethical Very ethical 0% 1 0% 2 0% 3 0% 4 0% 5 FehrAdvice & Partners AG, November 13 22
  • Overconfidence is a widespread phenomenon People are systematically overconfident, which has tremendous impact on the decisions we make. Overconfidence regarding own skills and capabilities:  As the questions demands a relative consideration of the present audience, the shares above and below average should be equally big  Assumptions: a roughly normal distribution  A variety of empirical studies shows that people systematically overestimate their skills and performance  Men are more overconfident than women (which can already be observed in childhood)  Wherever overconfidence applies, it is more difficult to change behavior ++ + Ø - -- Siehe Niederle, M. and Vesterlund, L. (2007). Do Women Shy Away From Competition? Do Men Compete Too Much? FehrAdvice & Partners AG, November 13 23
  • Lessons learned The good consumer The bad consumer 1. Our self-image Reality (sometimes) Irrational consumption behavior People think they are “good consumers”, however, sometimes “makes” bad decisions 2. Marketers can design products in a way that consumers are “nudged” into good decision making FehrAdvice & Partners AG, November 13 24
  • Non-binding Defaults and “green” consumer behavior – Example from the Energy Sector Conversion Rate = 8.8% Conversion Rate = 8.0% FehrAdvice & Partners AG, November 13 25
  • Choice Architecture plays a major role in the pricing policy (II/II) The effect of Choice Architecture can be illustrated with the aid of the following example:  In a field experiment* participants were able to choose between different subscription offers for “The Economist”  When the choice was between web subscription only and print & web subscription, most participants chose web subscription only  With an additional, clearly inferior, choice that nobody chose, the previous preferences were changed completely Subscriptions Subscriptions Pick the type of subscription you want to buy or renew Pick the type of subscription you want to buy or renew 1. Web subscription 1. Web subscription $59.00 2. Print subscription $125.00 3. Print & web subscription $125.00 2. Print & web subscription $59.00 $125.00 68% 32% 16% 0% 84% Because we find it difficult to assess the absolute value of different options, we rank them relative to the available choices *The experiment was conducted by Dan Ariely FehrAdvice & Partners AG, November 13 26
  • A 2. How to change consumer behavior in an undesirable way: Introduction of a quarterly fee does increase churn-rates considerably and decreases customer satisfaction The annual fee will be replaced by a quarterly fee and increased by 20% p.a. ...which increased the churn rate and decreased customer satisfaction Resultate Vorgehensweise 8% +20% %Churn Customer Satisfaction 7% 120 6% 100 5% 4x 4% +7 %Punkte 3% 2% 1% Annual Fee 0% Jahr 1 Framing to the customer: The quarterly invoice of the fee increases the flexibility of the customers, because contract durations will be shorter Control group Kontrollgruppe* Jahr 2 10 9 8 7 6 5 4 3 2 1 0 Quarterly fee Quartalsgebühr Explanation  The effects can be explained in the following way:  Consumer prefer one-off payments over multiple installment payments, because oneoff payments only „hurt“ once (loss-aversion, prospect theory).  The Framing of the increase is very important. The „hidden increase of the annual fee via a split of the annual fee will, on average, be considered as unfair. Unfairness very often triggers a „negative reciprocate behavior“, i.e. customers are willing to incur own cost by harming the company (negative referral, churn ,etc. ). Additionally, additional flexibility is „very seldom“ a sufficient argument for price increases. -7% Kontrollgruppe* Control group Quarterly fee Conclusion  Loss-Aversion is the main trigger for customers in the case of splitting annual payments into multiple installments. This approach in order to increase prices will not be accepted by customers. FehrAdvice & Partners AG, Mai 13 27
  • „Status loving“ Gold costumers have a willingness to pay a premium in order to increase their privileges A new status is introduced: „Gold Premium“ – three months later the prices is increased ...which will be accepted by predominantly male consumers with high income Result of the choice architecture Approach Gold Premium Status Annual Fee 300 CHF Income beyond 125„000 CHF Contact customer service Männer 6.5% 91% 9% 7% 93.5% 93% 9% Time   In a second step (after 3 months) the annual fee will be increased – but only, if the customer will keep the new level of status. Income below 125„000 CHF In a first step, a «Gold Premium Status» will be introduced, which all Gold Costumers will receive  11% Annahme Opt-out Frauen 16% 84% 89% The increase of the annual fee will be introduced by an opt-out structure Explanation  The „Gold-Premium Status“ was given to all customers. The idea was to create an „endowment-effect“. Consumers do not want to lose the status and suffer „loss-aversion“. Due to this effect, overwhelming part of the customers accept the price increase due to the fact, that they do not want to lose the new privileges  This effect is considerably higher by male consumers with high income.  The opt-out (old status, old price) option was used in a modest frequency. Conclusion  Status matters and has its price  Choice Architecture matters and has low impact on customer dissatisfaction. FehrAdvice & Partners AG, Mai 13 28
  • Putting the pieces together – lessons learned • Irrational consumer behavior is systematic and can be observed in different cultures, markets or customer segments • Traditional market research asks the “pilot” and produces feedbacks that do not reflect real consumer behavior in the real world • Overwhelming part of consumers believe, that their consumption behavior reflects ethical standards, however, in the moment of truth, they regularly act against their beliefs • Good and bad consumption behavior does mainly reflect choice architecture and framing of campaigns and products • Marketing Managers can often design their products & campaigns in a way, that consumers are “nudged” into better behavior, without harming business goals FehrAdvice & Partners AG, Mai 13 29
  • The management team of FehrAdvice consists of experts from science and practice Univ. Prof. Ernst Fehr Chairman of the Board Harald P. Stoehr Managing Partner Gerhard Fehr CEO and Managing Partner Bergstrasse 114 8032 Zürich Bergstrasse 114 8032 Zürich Bergstrasse 114 8032 Zürich Tel: +41 44 256 79 00 Tel: +41 44 256 79 00 Tel: +41 44 256 79 00 ernst.fehr@fehradvice.com harald.stoehr@fehradvice.com gerhard.fehr@fehradvice.com FehrAdvice & Partners AG, November 2013 30
  • Contact FehrAdvice & Partners AG Bergstrasse 114 8032 Zürich info@fehradvice.com www.fehradvice.com FehrAdvice & Partners AG, November 2013 31