6 Essential Behavioural Economics Principles in Brand Building

The value of Behavioural Economics lies in a single observation:?Most researches study decisions and decision making, but not humans making them. Behavioural Economics wades into this?murky territory of the mind, which economists had hitherto avoided. Using insights from other social sciences about the nature of human choice. The resulting insights are more?truthful, useful, and fundamentally human.

Behavioural economics has a sweeping implications for businesses of any kind.?Business challenges are human challenges at heart, and when brands view their audiences as purely rational actors, their views are just as incomplete as those of traditional economists. To truly understand and inspire consumers, they’ll need to abandon outmoded concepts and engage the learnings of behavioral economics instead. Here are six fundamental principles of behavioral economics no brand can afford to ignore.

The Overconfidence Effect

Humans don’t exaggerate their ability intentionally to impress. Rather, they earnestly fail to understand their own aptitude, erring on the side of self-regard. This ego-protective cognitive mechanism is called the “Overconfidence Effect.”

This has powerful implications for serving customers.?One recent study?found that roughly 80 percent of businesses felt they provided excellent customer service.?Just eight percent of their customers agreed.?Is your brand dangerously unaware of its own shortcomings?. For employees, asking them to self assess. One would never question their own work!

Temporal Discounting

Humans prefer immediate gratification in many forms - this is most seen in monetary trade-offs - example Amazon Prime Video running an offer - Rs. 999 for a year, and not Rs. 1499 if subscripted now. In clear words, humans respond?far more to immediate rewards?than those that require a wait. This is called "temporal discounting".

For brands attempting to engage and retain customers,?the power of making rewards immediate cannot be overstated. How can you seek to reduce the temporal distance between a would-be customer and the value you deliver?

Example: How many of us would?reconsider our desire for a product?if we learned two-day shipping was unavailable? In part because of the promise of swift purchase gratification, Prime members spend?nearly double?what other Amazon customers do.

Loss Aversion

Tendency to place greater emphasis on the potential absence of something we already have than the acquisition of something we don’t currently possess. This is called "loss aversion"

Given how powerful a driver loss can be, how can your brand reframe your value proposition to really resonate with customers? A airline tested this asking passengers to pay to recline their seat - and result being most wanted to pay a maximum of $12. When asked how much would they take to sell their right to recline the seat - average want was $41.

Anchoring and Framing

Anchoring refers to our habit of?relying too heavily on the first piece of information we receive. In an ongoing string of interactions, this initial impression sets the tone for how subsequent data are interpreted. Example: A car sales person suggest a sky-high initial price, then let the consumer talk them down. The final offer is likely more than the car is worth, but it still feels like a steal in relation to the initial anchor.

Framing describes how?the presentation of choice influences its outcome.?Example: The larger the dish, the more we eat.

For brands in virtually any industry, these principles offer much power and responsibility. How can businesses employ framing and anchoring effectively – to explain rather than exploit?

Social Norms

We’re all obliquely aware of social influence – none of us is completely immune to peer pressure or certain social imperatives, such as expectations about personal hygiene or politeness. But the urge to align ourselves with "social norms" is more powerful than most of us imagine. They are an effective tool for motivating positive behaviours. These motivating influences are called?injunctive norms?(what society hopes you’ll do) as opposed to?descriptive norms?(what society does).

How can you?align your brand’s vision with injunctive norms that matter to your audience? When your business is founded on the promise of shared ideals with customers, you’re far more likely to persuade them.

The Peak-End Rule

Humans when forming impressions, unconsciously rely on?the final and most emotional intense moments of an experience. This is the “Peak-End” rule.

This Peak-End rule is then an essential guide for brands hoping to craft a great customer experience: It defines?the junctures in the consumer journey with the highest stakes?and how they should be ordered. While most businesses can’t deliver joy to their customers at every single moment, they can prioritize the instants that truly matter.?

How can your brand capitalize on the Peak-End phenomenon to build a customer experience that people will recall positively?

Building a Brand on Human Truth

These insights from the world of behavioral economics can transform the way any business approaches its challenges. Brands can begin to adopt strategies that truly speak to customers. That’s the nature of innovation:?Clarity produces opportunity, and solutions to complex problems become possible.