How Behavioral Economics Can Help Businesses 

In a world where everything is linked, there is a chance to bring consumers and businesses closer together. 

Over the last three decades, behavioral economics—a relatively young topic of study—has emerged and is assisting marketers in enhancing the client experience. 

The website BehavioralEconomics.com states that behavioral economics is the study of “cognitive, social, and emotional influences on people’s observable economic behavior.” 

Our economic decisions are influenced by our emotions; in fact, behavioral economists claim that consumers make 70% of their decisions based on their emotions and 30% on reason.

Marketers need to recognize that consumers are real people with feelings influencing their purchases in order to increase customer engagement. 

Marketers may benefit greatly from behavioral economics’ insights by using it to recognize consumer behaviors and adjust their strategies to meet their emotional needs and illogical biases.

In this article, we go over how behavioral economics can help businesses. 

Social proof

When deciding what to purchase or utilize as a service, consumers turn to other people for advice. Consumers may decide based on social standards in an effort to be accepted by others.

Even while conventional word-of-mouth helps grow your clientele, internet evaluations on sites like Facebook, Yelp, and Amazon are crucial since they provide customers with social evidence. 

Nearly 90% of customers reported reading reviews for nearby companies in a BrightLocal poll from 2019, and the typical consumer needs to read 10 reviews before deciding which local company to trust. 

To create social proof, marketers might focus on asking for and promoting good customer evaluations.

Loss aversion

Harrison Tang, CEO of Spokeo tells us: “Rather than pursuing gaining things, consumers are more likely to accept chances in order to prevent a certain loss. 

Improving the consumer experience requires an understanding of the emotionality associated with taking risks. Two times as much psychological suffering results from a loss as from a gain. 

Product marketers have the ability to convey to consumers how their purchase would prevent loss. 

Instead of tweeting, “Save $100 a year in energy by buying our programmable thermostat!” a marketer pushing thermostat improvements on Twitter may write, “Stop losing $100 every year in energy!”

Anchoring

Whether or not it makes sense, consumers will mostly depend on the first piece of information provided and use it as a standard and reference for all subsequent choices.

By making other alternatives seem more affordable, marketers may persuade consumers to make successive purchases by presenting a high price for one option. 

An internet retailer may, for instance, sell a coat that was originally priced at $399 but is now just $99, giving the impression that a more costly and hence more desired garment is now a wonderful deal.

By using behavioral economics’ insights, marketers may foster a favorable connection with customers and drive business growth.

To create more insightful business models

Tommy Mello, owner of $100 Million+ business A1 Garage shares: “The main goal of behavioral economics is to get a deeper comprehension of human thought and behavior. 

You may find and fix issues by seeing how your consumers use your goods and what’s going through their minds at the same time. Determine the source of their negative experience and eliminate it.” 

Avoid The Sunk Cost Fallacy

Percy Grunwald, co-founder of Compare Banks shares: “Consider the below situation:  After investing a great deal of time and money in a new project, the data indicates that it isn’t succeeding and that you need to make a change. 

You know you need to give up on the endeavor, but you’re reluctant to.  Your natural inclination is to simply take the chance and see if you can turn it around since you’ve already put so much into it. 

However, this might have disastrous effects on your company, so what should you do?

It is essential that you first identify what is happening in order to decide on the best course of action. 

The scenario I just described serves as an example of the sunk cost fallacy, a potent prejudice.” 

Sunk Cost Fallacy: What Is It? It’s the propensity to carry out an undertaking due to prior resource commitments.  In other words, it involves making a choice by looking backward rather than forward.  

You may see more clearly and muster the rational thought required to base choices on the future rather than the past once you acknowledge the influence and inherent risk of this bias.  

Display The Work Done by Others

Have you ever been to a show and seen spectators giving the artists a standing ovation after it was all over? 

Do you feel compelled to rise and applaud when more individuals in your immediate vicinity join in?  

Even if it was not your intention to stand up, if you are like most people, you will probably find yourself doing so. 

How come?  Why does it seem so strange to resist the temptation to rise, and what power made you do so? 

The social standards that behavioral economists refer to as the most likely explanation for the phenomena that just transpired. 

These expectations or norms of conduct have a big impact. 

There are several applications for social norms. Individuals tend to follow when you model behavior for them based on how most individuals in similar circumstances behave. 

Sayings like “Many people in your situation..” or “Our most popular option is..” may do this.  

Additionally, share polls, anecdotes, and statistics that show what a large number of individuals are doing. You’ll discover that others will see what you are advocating more favorably.

Provide incentives

One of the most potent motivators is an incentive according to behavioral economics. To get them to act, provide incentives like deals, free trials, or access to exclusive material. 

This has the potential to be very successful in attracting new clients.

Apply scarcity

The concept of scarcity holds that items that are uncommon or difficult to get are valued more highly. 

Make use of scarcity in your marketing by emphasizing limited-edition products or time-limited sales. Customers may feel pressured to act as a result and take action.