As I perused the menu at a restaurant recently, my waiter came over and casually mentioned that the salmon had been really popular and they were about to run out. I ordered it on the spot!
This was entirely instinctive and irrational behavior on my part. I had no idea if the salmon – one of the more expensive items on the menu – was actually good. But it was popular! Other people chose it, and so I did too.
This sort of irrational decision making is one of the key topics of my latest book co-authored with Professor Ryan Hamilton of Emory University, The Intuitive Customer: 7 Imperatives for Moving Your Customer Experience to the Next Level. We explain how companies can position themselves for success by understanding and embracing customers’ inherent irrationality. Customer irrationality is a concept rooted in behavioral economics, a field that uses psychological insights to explain economic decisions.
I enjoyed reading this Fast Company article because it dovetails with the theories in our book and neatly explains how companies shortchange themselves and lose out on sales successes by ignoring three basic behavioral economic principles.
First is the rule of loss aversion. Research shows that people like to receive gains and rewards, but they are even more motivated by a fear of loss. All other things being equal, fear of loss trumps desire for gain by a margin of 2 to 1. In a customer experience context, this means that customers need to understand not only the benefits of your product or service, but also what they’ll lose if they don’t do business with you.
Second is the rule of social norms. Social norms are based on our inherent need to fit in and behave like everyone else. They’re what make you join in a standing ovation, or dress in the same general style as everyone else at the office, or order the salmon because it’s the most popular thing on the menu. Like the waiter in my example, companies can use social norms to influence customer behavior. The Fast Company article cites a hotel that told guests that most occupants choose to re-use their towels. The guests took this as the norm and re-use increased by 26 percent.
Third is the concept that nothing of value is free. When you give away a ‘free’ gift or a ‘free trial’, you’re assigning it a value, and that value is zero. Subconsciously, your customers don’t value it either. But when you offer a ‘30-day risk free trial valued at $250’ or a bonus that would ordinarily sell for $99, people take notice. They suddenly think they’re getting a deal, and we all love a bargain!
Many companies ignore these and other principles of behavioral economics, focusing on customers’ rational responses to things like price and quality instead. The trouble with this is that customers are not rational at all. They – like all humans – are irrational beings, and at least half of their decision making is governed by subconscious and emotional factors that even they don’t understand. Customers make irrational decisions, and then they use rational reasons to justify them.
When our customer experience consultancy helps organizations with behavioral journey mapping, we investigate these subconscious and emotional factors. We help them see how they can alter the way they do things to influence irrational decision making in a way that meets business goals and promotes customer loyalty.
And customers often appreciate it. I certainly did when my waiter suggested salmon. I really didn’t want to think too hard about what to order, and my waiter relieved me of that task, leaving me free to enjoy myself. And in fact, the salmon was really good!
Do you think customers are irrational? Tell me about it in the comments section below.
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Fascinating Insight! How You Make Decisions
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Colin Shaw is the founder and CEO of Beyond Philosophy, one of the world’s leading Customer experience consultancy & training organizations. Colin is an international author of six bestselling books and an engaging keynote speaker.
Follow Colin Shaw on Twitter @ColinShaw_CX