Updated: Sep 5, 2022
I just finished a book that's long been on my list: Predictably Irrational: The Hidden Forces that Shape Our Decisions by Dr. Dan Ariely, a professor of psychology and behavioral economics now at Duke University. The book was required reading at a top business school where I worked, and I also really enjoyed Ariely's Coursera course. Ariely offers a readable introduction to how people make choices. This topic is of interest to anyone who sells goods and services. It's also relevant to educators, nonprofit managers, and others who communicates and works with people. Here are three evidence-based takeaways:
1. How you package your product impacts consumers' perception of its quality
Perhaps the most obvious thing I learned is that people aren't very good judges of quality on its own. Instead, they rely on other clues like price, setting, and descriptions (when those things are available). I used to be a volunteer taste tester at a local university. I would be given several pieces of cheese to taste and rate, but no information about the cheese. The goal of the experiment was to see which cheese actually tasted better, and the researchers knew other information (like the brand, variety, or packaging) might override my taste buds.
In Ariely's research, people rated the same coffee more highly when it was served in a nice cup with fancy condiments rather than in a styrofoam cup. Attachment to a brand can also impact perception. In studies where two colas weren't labeled, people couldn't tell Pepsi or Coke apart, but they preferred Coke when they knew what it is. The Coke brand is strong! In another of Ariely's studies, tasters preferred beer with a local name to the exact same beer with a more generic name.
What does this mean for entrepreneurs? If you're selling a premium product at a premium price, make sure to tell people about what they're paying for, preferably in lush detail! Is it local? Is it grassfed? Is it handmilled? You probably have noticed that the packaging of more expensive grocery items now tells the story of how the food was produced. The Colin the Chicken skit from Portlandia shows this trend taken to a silly extreme, but for well-done examples of companies telling the stories of their premium products take a look at Mountain Rose Herbs or Organic Valley.
Likewise, a restaurant that serves fine food and wine probably puts a great deal of effort into the dining experience, as well. Not only do their patrons expect this, but they will actually enjoy the delicious food and wine more!
2. A "good deal" is relative
Why do companies offer bundles? For example, my cable company may try to convince me to buy their internet + phone + cable package for $300 when I only want internet access for $50. According to Ariely, there's a method to this madness. Consider a band who offers the following options to purchase their new album:
Streaming + CD: $25.00
The last option seems like the best deal, doesn't it? For the cost of just the CD, you can get the CD and streaming! Ariely uses a similar example with a magazine subscription to highlight how the choices we're presented with impact our decisions. If the middle option (just the CD) was removed, the Streaming + CD option wouldn't seem like such a good deal. As Ariely says, "most people don't know what they want unless they see it in context" (p. 3). The CD only option is a decoy--the band doesn't expect anyone to buy it, but it makes the last option look more appealing. In the same way, a restaurant that offers a $100 steak may not have many people buy that steak . . . but it makes the $50 steak look like a steal in comparison.
People are also impacted by the initial price they see a product for--or the price they're used to paying for it. This is called anchoring. I'm used to paying about $1.50 for my favorite soft drink--a fraction of the cost to produce it. Currently, consumers are upset about rising prices. Of course, rising prices mean our dollars don't go as far. But, according to Ariely's research, we may also be upset because we feel like a product is worth what we're used to paying for it, regardless of what it costs to produce.
3. People really do love getting something for free
We've been talking a lot about pricey restaurants, so let's switch gears: what about bargain hunters? Another tried-and-true marketing technique is getting people's attention by offering something for free, and Ariely confirms that free does really does get people's attention. In fact, his study participants chose FREE options rather than low-cost options that would actually save them even more money. Why? Free costs nothing, so you don't even have to think about it! If you're like me, you may have spent valuable time and energy walking through a conference hall picking up swag you probably don't need--but it's FREE! Why do so many companies offer free shipping? Because people are turned off by small fees and turned on by free. The takeaway here is that, if you're going to charge a low price for something anyway, consider making it FREE.
I recommend reading this whole book if you're curious about how researchers study decision-making (including purchasing decisions). Ariely goes into much more detail about how he designed these studies and describes other research on topics from willpower to honesty. The book is a decade old at this point, and many of the studies only included on Ivy League university students. So, take these broad principles with a grain of salt. When marketing your products, you still want to do research on the specific values and motivations of your target audience.