Thoughts on What I Learned from “Predictably Irrational”
I just finished reading Dan Ariely's book, Predictably Irrational, the other day, and I thought I'd share some thoughts about it.
The full title of the book is "Predictably Irrational: The Hidden Forces That Shape Our Decisions". As the title suggests, it's about how our decisions are often influenced by more than just a rational analysis of the facts. As marketers, we're naturally interested in knowing more about how people make decisions, so that we can tweaks our promotions accordingly.
Of course, any discussion of promotional techniques, particularly one like this that shows how we sometimes short circuit logic, raises ethical questions. Would using the information in this book be manipulative? Or can it be applied ethically? That question isn't always easy to answer. I'll share my thoughts on that as we go.
The book started off with a bang, talking about how people judge things relative to other things. For example, if a product is presented with a low-priced and a high-priced option, a certain percentage of customers will buy each. But if a third option is added that's the same price (or, I'd imagine, just barely less expensive than) the high-priced option, but is clearly of lesser value, a lot of people who would have chosen the low-price option choose the high-priced option instead.
The middle option, in a case like this, is referred to as the "decoy". It gives people something to compare the high-priced option to, which makes it look more attractive.
So, is using a decoy to move people from the low option to the high ethical? I think so. Yes, it influences the behavior of some people. But I'd guess that the people who it influences to buy the high-priced option are probably those who were on the fence in the first place, and would have been happy either way.
Consider this: why would these people have chosen the cheaper option if the decoy weren't there? Perhaps they just picked the cheaper option by default, and didn't give the higher-priced option much of a look. If the decoy simply got them to look at the high-priced option more closely and recognize the value it delivers, then the decoy is just breaking them out of an old pattern and getting them to consider their options more rationally, rather than less.
On the other hand, the research cited in the book suggests that, given something of less value to compare to, people tend to overrate the more attractive option. So could a decoy influence people to buy something they wouldn't have had it been the only available option? I suppose it's not impossible, but I'd guess that the power of decoys generally isn't that strong.
The next chapter talks about how our expectations for how much something should cost are set, and how difficult those expectations are to change once they've been set.
Why do we think gas stations are raking us over the coals when they charge us $3.95 a gallon to fill our tanks? Why are we happy to pay $1.00 for a fast food cheeseburger? Is a cheeseburger really worth 1/4 as much as a gallon of gas?
The practical application of this information for marketers is that, if we want to charge more for our products than people expect to pay, it's easier to reposition our products in a different category (which people expect to pay more for) than to convince them to spend more in the old category. If there's not another category readily available with fixed price expectations, we may need to create a new category for our product.
Is this ethical? It depends.
If you're positioning your battery-powered scooter as a member of the Harley-Davidson motorcycle category (assuming you can convince anyone to accept that idea!), then you'd better be selling one heck of an amazing scooter if you don't want to have an uncomfortable conversation at the pearly gates someday.
If, on the other hand, your product really is worth more than people expect to pay for it (for example, if you're selling software that's similar to a free, open-source program), then how could it be unethical to position it in a way that people would be willing to pay you what it's worth?
Chapter three talks about the power of the word "free", and how much more powerful a free offer is than even a 1¢ offer. For example, Amazon was able to boost sales dramatically by offering free shipping on orders over $25. In fact, they sold much more even than when offering shipping at a nominal cost, like 20¢.
This chapter was where I stared disagreeing with some of the author's conclusions -- or at least feeling there might be something missing from the picture. He did an experiment where he offered people a free $10 gift certificate, or a $20 gift certificate for $7. Lots of people went for the free offer, even though they could get $10 more value by paying only $7.
Was this an irrational decision, unduly influenced by the power of "free"? To a degree, I'm sure it was. But is the $20 gift certificate always the rational choice? No.
What if you don't have $7 to spare? What if you don't really want the products that are available from the store that the gift certificate is for? What if you do want the products, but feel they're twice too expensive? What if you'd rather spend your $7 on something else today, rather than taking home a bigger gift certificate that you might put off spending for a month or two?
In the experiment, when they changed the offer to $1 for the $10 certificate and $8 for the $20, the majority of people paid the $8. So yes, some people were influenced by the free offer. Many people, in fact. It certainly made a difference. But there were still those who took the cheaper offer. For them, that may have been a perfectly rational decision.
As for the ethics of free offers, as long as they're really free, I see no problem. It's when people shout "FREE" while they whisper "plus $29.95 shipping" or "plus $97 a month starting next month, and by the way, we sign you up for that automatically" that using the power of free becomes unethical.
Social Norms vs. Market Norms
Chapter 4 talks about how people think very differently about things they do for fun or social reasons, vs. things they do for financial reasons. This chapter applies perfectly to viral marketing. If we want to motivate people to share a freebie that markets our product for us, we need to be careful not to trigger market thinking, or we may kill our chances at getting a viral spread.
Is it unethical to get people to do things for free that benefit you financially? If they're happy doing it, and it isn't going to harm them in some way they're unaware of, no problem. It's a perfect example of a win-win proposition.
Are we less selfish when things are free?
The next chapter also stirred a little disagreement in me. The author did experiments to see if people would consume more of a scarce resource is they were paying a low price for it vs. getting it free. It turns out they would.
His conclusion was that when something's free, we care more about how our taking it will affect others. While that's likely true, there's another factor that may be involved. People may hold back from taking things that are free because they don't want to look selfish. It's not necessarily that we care more -- perhaps we're just more self-conscious about it, because we think we'll be judged more harshly for taking things we're not paying anything for.
Skipping forward a bit, chapter 7 talked about how we value things more when they're ours. And again, I found myself disagreeing with the author.
In one experiment, they found that people who presumably had equal desire for tickets to a basketball game (read the book if you want the details) were willing to pay far less to get one than they'd be willing to sell one for if they had it. And by far less, I mean that they were willing to pay about $175, but wouldn't sell for less than $3,000.
You might think that proves that we value things more when we own them, but that's not necessarily true. First of all, part of what we "pay" for a product is the effort that was required to get it. Let's say you went to the store and bought a TV. As luck would have it (bad luck), it was priced at exactly the amount you were willing to pay. When you got home, your neighbor saw it, liked it, and offered you $1 more than you paid for it.
Would you jump at the offer, go back to the store, buy another one, and pocket the $1 profit? Not likely. He'd have to pay you a lot more than that for you to be willing to go through the trouble of replacing it.
In the second place, the amount a person is willing to pay for a product isn't a simple matter of how much they value it. If you only have $100 to spend on food this month, are you going to pay $3,000 for a basketball ticket? Not likely. If you had $1,000,000 stuffed in your mattress, would you be willing to pull out $3,000 to see the game? Maybe so. That doesn't mean you value the ticket any more or less. There are just other factors involved in your purchase decision.
If, on the other hand, you had a basketball ticket and $100 to spend on food for the rest of the month, would you sell it for $500? Maybe. Maybe not. If you weren't afraid the $100 wouldn't last, you might hold out for $3,000. But if you were already on the brink of starvation, I'd bet you'd let that ticket go for a lot less than $3,000.
The price we're willing to pay and the price we're willing to sell for are set based on a very different set of factors.
How can this information be applied to marketing? To the degree that people do value things they own more, if you can get a free trial product into the customer's hands, you may have better luck getting them to pay to keep it than you would have had getting them to buy it outright from the beginning.
Is that ethical? As long as you're not charging them to keep it without their knowledge, or making it difficult for them to avoid being charged, sure. If they value the product more once they've tasted it and are happy to pay to keep it, then you must be offering enough value for the price.
The rest of the book talks about things like the effect of expectations, how various factors influence honesty, placebo effects, a culture of distrust of marketing, etc. Some of them are relevant to marketing, but I'll leave it to you to read them. One final comment though -- especially during the several chapters on honesty, the books started feeling a lot more repetitive and less tightly edited (less concise) near the end.
Overall, in spite of how much I've talked about my disagreements with the author here, I think the book is very worthwhile for a marketer to read. I think that the information in it can be applied ethically. In fact, I doubt you'd end up accidentally doing anything unethical if you used the information in your marketing (though an unethical marketer would certainly have no difficulty coming up with ways to use it to cheat people).
Are customers irrational? I think it depends largely on how you define "rational". Do we make decisions based on incomplete analysis of the facts? Sure.
Is that irrational? Sometimes, to some degree. Sometimes we don't have all the facts. Sometimes it would "cost" more to go through a complete analysis than we'd save by using mental shortcuts to make our decisions.
By being aware of the way people make decisions, and marketer can avoid tripping up the purchase process by doing things that cut against the grain, and can break though some of the barriers that customers put up by choosing pathways that tend to be left more open. And as long as there's no deception involved, that can be done ethically.