You may not be able to read your customer's mind, but social scientists are starting to gain a strong understanding of the things that drive consumer behaviour.

Dan Ariely is one of those scientists. A professor in behavioural economics at Duke University and author of Predictably Irrational: The Hidden Forces That Shape Our Decisions, Ariely and his colleagues design experiments to better understand the things that drive consumer behaviour.

For those schooled in traditional theories of business and economics the findings are astonishing. As it turns out, we are much less rational than most of us would like to believe.

"As much as we would like to think our decision making is rational, research by behavioral economists it indicating that is just not so," said Ariely.

Ironically, this irrationality also happens to be quite predictable.

"Decisions are much harder than we think. Even small decisions," said Ariely. "And because decisions are so difficult what people do is they resort to simplifying strategies and these simplifying strategies, there are many of them."

Consider these seven drivers of consumer irrationality and the impact they could have on how your sales and marketing efforts.

1. Decoys & the power of relativity

How much is that doggie in the window? As it turns out, it is extremely difficult to determine if the price is reasonable. Money, Ariely explained, is particularly complex.

"Decisions with money turn out to be a very different animal [than apples and oranges]. You can imagine that while you know if you want an apple or an orange it's very hard to figure out if an apple is worth $1.50, $2.50, $1.75 and so on."

The power of relativity is particularly important in the final decision a consumer makes, as it helps us say to ourselves 'ah yes, now that was the best option' as we purchase a product or service, even if our decision was orchestrated by a clever marketer.

Consider this example from Ariely's book.

A travel agent presents you with two possible trips. One is to Paris, the other to Rome. Both include a free breakfast during your stay. How are you to choose?

A travel agent who understands decoys and the power of comparison may make things easier for you by including a third option to Rome that is the same price as the first, but does not have the free breakfast.

The inclusion of the decoy will make the other trip to Rome look more attractive, because its relative value has just gone up. Providing the lesser option influences consumers to purchase its more appealing alternative.

To apply this principle in your business, look at your products and pricing. Can you show them that in comparison to both your own and your competitors' products and services, the ones you want them to buy are similar, but measurably better?

2. Staking the middle ground

Most of us want to get a good deal and feel that we have made smart purchase decisions. We want quality, but few of us are willing to pay for the very best.

Social scientists have uncovered a fascinating tendency for people to want to purchase mid-range products.

For example, let's say a restaurant wants to increase sales of a $26 entrée. They can do this by adding a $34 entrée to the menu. The very presence of the more expensive item on the menu, Ariely noted, will cause many consumers to opt for the 'second best' option.

This principle applies to all goods and services, from televisions to the consultants we hire.

You can increase sales for one product or service by introducing or showcasing similar, but more expensive options.

3. The irrationality of over-emphasis & the concept of free

When were are faced with important, complex decisions, Ariely said, consumers often end up putting too much emphasis on one or two factors at the exclusion of others.

Consider the purchase of a used car. Faced with a complex decision, many consumers will pay too much attention to a particular attribute, such as the odometer reading, at the exclusion of other important factors such as the car's maintenance condition.

Consumers do this all the time, for example choosing the leading brand name even though it costs more and may have no discernable advantages other than its well known brand.

When it comes to over-emphasizing the value of something, the concept of free gets its own special category.

People tend to place much more importance on the value of one product over another if it comes with something free. Ariely tested the importance of idea of free using chocolates.

The first group of participants were invited to purchase a chocolate and were given two choices. They could buy an expensive Lindt chocolate for 15 cents or a Hershey's Kiss for 1 cent.

In the first group the majority chose the Lindt chocolate, recognizing that the truffle was worth much more than the price being charged.

Yet when Ariely dropped the price of each chocolate by 1 cent, a curious thing happened.

Even though the relative value of each chocolate was the same, the majority of participants now chose the free Hershey's Kiss. Free, as it turned out, was too good an offer to pass up.

Identifying the factors that a potential client is over-emphasizing can help you smooth out the sales process. Good listening skills can help you pick up on important clues. You can also use the concept of free strategically to bolster sales.

4. Price anchoring

What is a cell phone or concert ticket worth?

Since there is no absolute value assigned to different products, we have to use relative judgments to decide. Here another aspect of consumer irrationality - the role of price anchoring - emerges.

In an engaging experiment described in his book, Ariely conducted an auction where he first had each participant create an anchor to a specific number: the last two digits of the participant's zip code.

As a result some participants anchored to numbers in the low teens, others to numbers in the high 80s and 90s.

Strangely enough, that anchoring process influenced the maximum bid participants were willing to make on auction items.

Those who imprinted to low zip codes were willing to pay substantially less for wine, tech gadgets and other items. Those with higher zip codes were willing to pay the most.

In other words, even though there was no rational correlation between the zip code and the value of the items being auctioned off, the power of the imprinted number strongly influenced what participants were willing to pay.

What's more, Ariely explained that once we decide on a price anchor, it becomes very difficult to change. As a result, the initial perceived value of your product or service will have a long term affect on what your customers are willing to pay.

Price anchoring is particularly important when launching a new product or service, because the original price you set will create a perception of value in your customers' minds. You can always come down, but if your original pricing is too low you will find it extremely difficult, if not impossible, to go up.

5. Framing

The way a question is framed can strongly influence how someone responds, especially when there is risk involved, for example the purchase of an expensive item.

Amos Tversky and Daniel Kahneman pioneered research in this area and are famous for their Asian flu experiment, where two groups were asked to select a program to combat a fictional flu expected to kill 600 people in the U.S.

Group 1 were presented with a choice between two programs:

• Program A: "200 people will be saved"
• Program B: "there is a one-third probability that 600 people will be saved, and a two-thirds probability that no people will be saved"

72 percent of participants preferred program A.

Group 2 were presented with the choice between:

• Program C: "400 people will die"
• Program D: "there is a one-third probability that nobody will die, and a two-third probability that 600 people will die"

78 percent preferred program D.

Altering the way the two options were phrased did not just change, but actually reversed participant's perception of the two options.

The way that you frame your marketing message can have a powerful impact on its ability to influence your customers, particularly if a decision comes with financial risk.

6. Too many choices

If you have ever felt tired, overwhelmed or burnt out it shouldn't surprise you to learn that consumers today are faced with too many choices.

A jam experiment conducted by Sheena S. Iyengar and Mark R. Lepper demonstrated that more choices might attract more attention, but fewer choices increased sales.

The researchers set up a tasting booth for exotic jams at a high end grocery store and rotated the display so that either 6 or 24 flavours of jam were on display. All consumers could sample as many of the jams as they wanted and everyone who approached the booth was given a coupon.

Ivengar and Lepper found that having a bigger selection of jams attracted more people to the booth: 60 per cent of the customers who passed the booth stopped when 24 varieties were on display, compared to 40 per cent when 6 jams were out.

Yet when it came to sales, the smaller selection won the day. Thirty per cent of people who stopped by the limited selection actually purchased a jar of jam, compared to just 3 per cent for those who stopped by the table when 24 choices were on display.

"This is kind of the conundrum of too much choice," said Ariely. "It attracts to people but then they end up doing nothing."

If you are trying to sell something you have to understand how complexity is working both for and against you. For example, having too many choices on your website may encourage customers to browse, yet deter them from actually buying.
 

Reducing the number of choices can not only increase sales, but it may help you save money as well as you will be focused on a small portfolio of products and services.

7. The influence of me, myself and I

One of the interesting things revealed in Ariely's book was that the very act of doing business with someone and being satisfied by the experience creates our own self-referring preference.

As a result, our preferred vendors may not offer the best food, fastest service or even the best value for money. Yet our experience in dealing with the business causes us to prefer doing business with them again and again.

We form strong habits that enable us to manage the myriad of decisions we face each day. These habits can be particularly comforting when we feel inundated with too many choices.

The challenge to the independent business often lies in fighting against the allure of the safe, large chain alternative and become the preferred habit for your customers.

As a small business you have the flexibility to adapt and fine tune your sales and marketing tactics. By your very nature you are more nimble. You can leverage these advantages to become the habit of choice for your customers.

Sources:

Framing (economics)
http://en.wikipedia.org/wiki/Framing_(economics)

When Choice is Demotivating: Can One Desire Too Much of a Good Thing?
http://www.columbia.edu/~ss957/whenchoice.html

Dan Ariely's website
http://www.predictablyirrational.com/