Tag Archives: behavioral economics

I Want to Break FREE: The Neuroeconomics of Discounts and Business Strategy

FREE

FREE. It's not just another discount.

As workers poured into the lobby of an office building one morning they encountered a candy sale of sorts. On the table were two kinds of chocolates for sale. One of the chocolates offered were Hershey Kisses. The price tag on the Hershey Kiss was $0.01 (one cent). The other chocolates offered were Lindt truffles – a high quality chocolate renowned for its flavor. The Lindt truffle was priced $0.15 (fifteen cents). Overwhelmingly, 75% of people purchased the Lindt truffle recognizing the value in the price for such a high quality chocolate. This chocolate sale was actually the experiment of MIT economist Dan Ariely and he wanted to find out how discounts affect our decisions.

The next time around Ariely decided to lower the price of both chocolates by one cent. This meant the Hershey Kisses were now $0.00 (FREE) and the Lindt truffles were now $0.14 (fourteen cents). So what happened? The preference for chocolate was actually reversed. The Hershey Kiss was now chosen 69% of the time. The price difference was exactly the same between both chocolates, but it seems the word FREE may have had something to do with the dramatic role reversal of chocolate preference.

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The Neuroeconomics of FREE

FREE isn’t just another discount. The word FREE when encountered in purchasing decisions is loaded with emotion, and surprisingly, emotions are responsible for more of our decisions than logic.  Economists have long thought that logic and logic alone is what guided our behaviors and decisions when in the purchasing process. However, Neuroeconomics teaches a more up-to-date approach of how we make our financial decisions, and as it turns out more often than not our emotions are what guide our behaviors. As humans, and as consumers, we make think logically but we act emotionally. So when you’re shopping and you encounter FREE it impacts you in a way that other discounts cannot . We all share the common belief that FREE is good (most of the time), and the added positive emotional boost that you get from FREE just can’t be achieved through any other numerical discount. I’m also willing to guess there is a physiological boost from just seeing FREE.

FREE is the Future of Business

We live in the digital age, and as a result FREE is becoming more and more common. This is possible because the falling costs of digital technology lets companies make as much stuff as they want for devastatingly low costs, and when you can make stuff for low costs that enables you to give it away for FREE. Chris Anderson, author of Free: The Future of Radical Price, made a great point in saying “Give a product away, and it can go viral. Charge even a single cent for it and you’re in an entirely different business…The truth is that zero is one market and any other price is another.”

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Companies can make a lot of money by giving stuff away. Businesses like Google have made large amounts of money by giving away FREE email services, however on the backside they’re increasing their revenue by selling advertising on that space. Amazon was able to boost online sales world wide by offering FREE shipping on orders over a certain amount, and because one item alone wouldn’t typically reach that required amount for FREE shipping consumers ended up adding another item to their shopping carts just to attain the benefits (both financial and emotional) of FREE.

Leveraging FREE in Marketing and Sales

Like anything there is a skill required in utilizing FREE in your business strategy to create success. Amazon leveraged FREE shipping to gain additional sales that otherwise would have not been there. Google used GMail to gain exposure to millions of users so they could sell advertising space to other companies. The strategic use of FREE allowed Google and Amazon to increase their revenue. These are just a few examples of how FREE is used in business everyday.

Apple was able to boost iPod sales initially by giving away the software program iTunes. This FREE program allowed Apple to gain familiarity with consumers and at the same time opened the door for them to easily purchase downloads and hardware to enhance their media experience. Taking it a step further the iTunes Store offers a FREE download each week and all you have to do to get the FREE song is sign up for an iTunes account. Free used properly is brilliant.

FREE can be good for businesses but it can also be bad. YouTube for example has failed to make Google any money thus far. In fact it’s draining money from Google. YouTube lets people upload and download videos as much as they want for FREE, and that is the problem. An estimated 75 billion videos will be served up by YouTube this year. Even though technology costs are almost near zero for YouTube, any fractional number multiplied by 75 billion is going to be a lot. In fact a recent report by Credit Suisse estimates that YouTube’s bandwidth costs in 2009 will be $360,000,000. [Gladwell, New York Times July 2009] YouTube’s continual FREE transactions are costing Google dearly because the user has no restrictions on FREE. For YouTube to turn a profit they need to find a solution that properly leverages FREE in their business plan and strategy.

Purchasing FREE: Buyer Beware

Hopefully after reading this post you will be more attuned to how businesses utilize FREE to influence your purchasing decisions. People love FREE. However, FREE sometimes is not the best option because we can emotionally overreact to FREE leading us to make poor decisions. Dan Ariely talks about purchasing a car a few years back. Because he has two children he thought logically and came to the conclusion that he should buy a minivan. Given his situation it was the most sensible option, but when he got to the dealership he was distracted by this beautiful Audi coupe that advertised FREE oil changes for the first 30,000 miles. Mislead by his heightened emotions to regain his youth and the FREE oil change offer he abandoned his logic and paid more for the Audi. Although the Audi is a nice car, Ariely regrets his decision because he knows the minivan would have been the best choice. In addition to practicality, Dan estimated his FREE oil change expenditures to be near $150 hardly worth his initial response to FREE the first time around.

Some FREE Advice

As I am finishing writing this post I just noticed that I am sipping a calorie FREE can of Diet Squirt. Over my shoulder my television is playing and I just heard a commercial for a fast food chain that is advertising Zero (FREE) Trans Fats in their food. It would appear that FREE is all around us urging us to purchase. Next time you set out to make a major purchase keep FREE in the back of your mind and make sure it’s truly the best decision for you in the long run.

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Neuromarketing: Evolution

marketing and sales from a neuroscience angle

marketing and sales from a neuroscience angle

The Need for Neuromarketing

In the United States 8 out of every 10 new products brought to market fail within one year’s time. If we hop a flight to the other side of the world and stop in Japan we’ll come to find out that 9.7 out of every 10 products fail in the first year. These are pretty dismal numbers. Now I understand there are a lot of factors that play into the success (or lack there of) of any given good or service, but a lot of the emphasis in the launch of a product is placed on marketing.

Billions of dollars are spent each year on focus groups, trials, tests, or whatever tools researchers are using to predict the success of a product, yet 80% of the time they fail. As the market place continues to get more crowded the likelihood of success is diminishing unless we as marketers can better predict what actually appeals to potential consumers.  To achieve this goal we’re going to have to enter a new arena that few marketers dare to go; the human brain.

From the Marketplace to Our Minds

From the second you start your day you are bombarded with an assault of marketing and media: TV commercials, radio ads, banners on your favorite websites, street signs, and this list gets longer every hour. In fact, we are so heavily bombarded with marketing much of it becomes background noise to us after a while.  By the time you are 60 years old you will have seen over 2,000,000 commercial advertisements.  Astonishingly enough a recent survey from ACNielson found that the average person could only remember 2.21 commercials of those they had ever seen, ever, period (Buyology, Lindstrom 2008). This proves a point that you can flood a marketplace with advertising and marketing, but if you never penetrate the mind of a consumer you will fail.

Al Reis and Jack Trout were game changers when they came up with the idea of “positioning”.  They maintained that the only thing that mattered in marketing is not where you were at in the marketplace, but more importantly where you were in the mind of the consumer.  If your brand was present in the mind of the consumer you were exponentially more likely be purchased than someone who wasn’t and this is beyond true. If at this very moment I had you name as many brands of toothpaste as you could you would probably come up with a list of around 7 brands, if that. Those brands you came up with hold a lot of weight in your purchasing decision because they are the brands you’re most likely to purchase. And that brand you named first is probably the brand of toothpaste that is currently sitting in your cabinet at home.

From Our Minds to Our Brains

It would only be a matter of time before science would step up to the plate and start hitting some homeruns (non steroids, of course) in the marketing stadium. Science can literally map our brains through neuroimaging while we go through our purchasing process.  Neuromarketing can effectively map the entire purchasing process from our initial perceptions to our final decisions. The great thing is that we’re in it right now. Researchers are pioneering this process and learning new information every day. For example, in fMRI tests the design of The Mini Cooper triggers a part of the brain associated with faces, more specifically a baby’s face, in participants’ brains. The facial expression of a baby is a strong perception that is almost always positive and not surprisingly more so with women than men.

We are all consumers, and with every purchase we make we’re making a decision. The neuroscience of decision making, in general, is largely dominated by our emotions rather than our logic.  The question that many marketers face is how to properly blend emotional design into our products and marketing campaigns. This challenge looms over companies all over the world, and surprisingly very few have adopted the neuromarketing approach to business because they simply don’t know it even exists.

My Vision:  Neuroecology

Marketing campaigns exist to grab your attention and make you aware that a product exists. That marketing/consumer interaction is very topical and rarely goes any deeper than being present in your conscious for a brief moment in time. However people to people interactions hold a lot more weight in helping us form our perceptions and in making our decisions.  The person to person interaction is the only true way to authentically connect with another person and communicate knowledge. Neuromarketing will get your attention, social neuroscience will then communicate and understand the consumer’s needs and create a sale.

In most corporations today marketing and sales departments are distanced from one another and have little interaction. Marketing people are viewed as the creatives and sales people are often held in a negative light. However if you had your marketing department on the same page as your sales department in a streamlined brain based campaign you could effectively reach more people, and more importantly reach them authentically. Sales can learn a lot from neuroscience. Just like a marketer can tailor a promotional piece to effectively reach a desired audience, a trained sales person can effectively communicate the benefits of a product to the customer by utilizing presentation skills and strategy that are proven to help people make better decisions. I call it Neuroecology because this strategy takes into account everything that goes into a business decision from the selling environment to product perception to marketing to personal interaction and finally to the decision. More importantly Neuroecology is a dynamic process that is highly attuned to emotions, much like human nature.

A highly recomended read that detailes the emergence of neuromarketing and peers into the future of the field.

A highly recomended read that details the emergence of neuromarketing and peers into the future of the field.

Neuromarketing Threats

Some government groups are attacking neuromarketing claiming that it is unethical and want a ban on research. These people simply have a lack of understanding for what neuromarketing can actually accomplish. Images of subliminal advertising come to mind at the mention of brains and marketing, but these images are simply not true and they’re rooted in folklore. There is no magic buy button in the human brain. There are only complex processes that lead to a single decision. Neuromarketing provides us with the opportunity to improve the quality of business by better understanding ourselves and each other in order to better serve our potential consumers. Neuromarketing is scientific, ethical, and it is the future of business.