 Behavioral economics is the study and application of human psychology in understanding how people make economic decisions – often in contrast to the viewpoint that human beings always act in a rational, self-interested manner. By analyzing social, cognitive and emotional factors, behavioral economics aims to read the mannerisms of a person (or institution), and then predict and appeal to the customer in getting him or her on-board.
We thought it would be interesting to see how a few people-based behavioral economic principles and techniques can be applied to B2B marketing and sales - and even how you would write sales copy.
People frequently ignore logic and mathematics
In a multitude of situations, humans often rely on emotions, experience and bias rather than logic and mathematics. This includes evaluating the benefits of short-term versus long-term gratification, the value of snap-judgment intuitions over calculations, and the reality of random chance versus fate. Unlike machines, people don’t always make the logical, rational choice; a number of factors are at work in the decision-making process.
This overall principle of heuristics (experience-based problem-solving techniques) suggests that, when making a decision, people often skip logic and turn to their past experiences, educated guesses, intuitions or a “rule-of-thumb” in speeding up the decision-making process. Examples include trial-and-error methodology, anchoring on the most familiar information, springing familiar examples to mind and applying them to the current situation, and “naïve diversification” – when people feel they have to make a spur-of-the-moment choice between multiple things, they tend to diversify their selections.
In fact, an overload of choices or information can have a counterproductive effect. If B2B businesses provide their clients with a laundry list of various options or a lengthy terms-and-conditions agreement in a contract, it can be overwhelming and leave them feeling powerless. Even when they do end up making a decision, with all of those options, they may be dissatisfied at feeling pressured into making the “wrong” choice.
People observe and copy others
What would ___ do? Rather than carrying out a full-scale rational analysis of options, this principle often guides a large part of the decision-making process. Fill in the blanks, whether it’s the client’s closest competitor, their perception of the market or a key authority figure. To use this to their advantage, B2B businesses will often go to some lengths to know their clients well. Particularly in looking at long-term versus short-term gain, this principle addresses issues beyond the on-the-spot discount.
Certain short-term preferences are fixed, but employing social and group-think behavioral principles in appealing to the longer term can be highly beneficial. If your client’s competition has just signed up for a product/service that you have on offer, use this to your advantage when you’re pitching business. Don’t treat this information like the elephant in the room – acknowledge it, raise it to the client’s attention and let them know that they may be losing market share or opportunities if they aren’t signed up as well.
People inherently want to do the right thing
Most people are, at heart, good-natured. They’ve also got a basic moral code of fairness instilled in their beings. For example, in a bargaining situation where one person has a distinctly advantageous position, they will often not act on it, feeling it “unfair” to the other party, and will aim to balance the transaction closer to 50-50. This isn’t always the case, of course. But it points to a larger truth: humans don’t always operate from a cost-benefit analysis perspective. However their moral compass is aligned, most people do have some wiggle room, especially if it appeals to the greater good.
This applies when accentuating the positive in your agreements. It’s the classic glass half-empty, half-full dichotomy. If you were the client, would you be more likely to agree to an option that “20% of clients cancel after two years” or one that “80% of clients renew after two years”? Consider the positive when appealing to the client’s perspective.
People are averse to loss
Generally, people will go out of their ways to avoid losses, but not necessarily do the same for gains. One highly cited study demonstrates that the grief of losing $100 is greater than the joy of unexpectedly receiving $100. It’s the little things that count, too. Taking this one step further, studies have also shown that receiving 10 installments of $10 brings more pleasure than a one-time $100 payout. On the flipside, a one-time $100 loss is easier to stomach than losing $10 on 10 occasions. This principle can be applied to payment structuring. Modern humans are creatures of convenience; convincing someone to pay a one-time, $5,000 fee for 50 sessions with a personal trainer is much easier than getting that same person to pay 50 installments of $100 each.
Some other pricing items unearthed by behavioral economics also bear consideration. First, how much someone is willing to pay for an item/service is often much lower than the price at which they’d be willing to sell that same item/service. This is called the endowment effect.
Second, price can signal value – it’s been shown time and time again that undervaluing products and services can lead to distrust or a lack of interest. If you’re pitching a service that others in your market offer, you need to differentiate by (a) quality, (b) price or (c) both. Do your research on competitor pricing and be assertive – you’re good at what you do. In the bidding process, show the client why and how you outshine the competition, and explain why the client should be inclined to pay a bit more for your services.
People often cling to the past and forget the future
Related to loss aversion, humans are also possessive creatures. If something’s mine, I cling to it. This applies to situations of escalation of commitment (the “sunk cost fallacy”), in which people justify decisions based on their previous investment, even when there is evidence to the contrary that continuing the decision outweighs the expected benefit.
This can be witnessed in auction settings, where two egos clash under the hammer and an item’s price is driven beyond rational levels, as well as in price wars between brands competing for market share. On a more basic level, human pride is at work – people feel that they’re either going to lose out on the opportunity, or be embarrassed when they back down.
Take traditional media’s slow adoption of online media. Numerous newspapers and magazines across the globe have simply gone under in the past decade. Why? They clung to the hardcopy model and weren’t anticipating the internet age. Contrast this with forward-looking media outlets that have thrived on early adoption of the online space. (The next hurdles for these providers are to prepare for new devices and to figure out long-term, stable monetization of the format, whether by monthly pay walls, value-added content for subscribers, or something else.)
In your own agreements, certainly you should ensure your client is looking to the future. But bear in mind that you don’t want to put them in a situation where they feel their back is against the wall. For example, if you’re suggesting drastic changes to the client’s business model, try to downplay and make these changes appear less intimidating, or you could be facing serious pushback and/or outright rejection. A clear, logical breakdown of why a new way forward is needed won’t always be enough to convince them that change is in their best interest.
People don’t want to stand out from the crowd
The status quo bias explains that, even when people are presented with something that may improve their situations, they prefer to remain with the status quo.
For example, let’s say you’ve got an electronics shop selling Desktop Computer A and Desktop Computer B. Computer A is a package deal with all the peripheral accessories, including a basic monitor, mouse, keyboard and set of speakers. Computer B is the same basic computer, but only includes the main desktop tower. The shop sells all other components separately, in-store, and you can upgrade or downgrade these from the default. Buying Computer B could save the customer a little bit of money or allow for a better machine, not to mention the freedom of personalization.
However, most customers will choose Computer A. Why? Certainly this decision is based on convenience (and pricing), but a major part of this decision is based on remaining with the status quo. The “normal” computer comes packaged with these peripherals, and even though none of them require assembly, people feel more comfortable that they’re receiving “everything” in one go. This is where clients generally go for defaults over opt-in situations. Take the computer analogy and apply it to an agreement – make sure the client feels they’re getting the complete package.
Now that you’re familiar with a few of the above techniques and principles of behavioral economics, apply them to your interactions and contracts with clients. You may be surprised at the rate of success you’ll enjoy. |
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