By Elena Bergmann of BJSS
After being thrown into the deep end by Covid-19, retailers are finally coming up for air. Retailers, therefore, need to design adaptive strategies centred around predictable facets of human decision making.
In this article, I’ll explain a few core concepts in behavioural science and neuroscience, illustrate how they apply to retail through real-world examples, and make the case that behavioural insights are no longer a nice-to-have.
Humans aren’t rational – so neither are customers
Economic principles assume that humans are rational. And making assumptions about customer behaviour can be very costly if gotten wrong.
Humans make about 35,000 decisions every day. This can easily lead to cognitive overload, which hinders decision making and often results in irrational behaviour.
To understand this irrationality, we can look to psychologist Daniel Kahneman’s notion of two different thinking systems. System one can be described as intuitive and automatic, while System two requires a sense of deliberation and effort. System one is highly influenced by our environment and other people’s actions, and it is anchored in our experience and habits – it is ‘irrational’ in the true sense of the word.
Even though we think we primarily make decisions deliberately (or rationally), System one accounts for 98% of everything we do. System one is a biological survival mechanism. Since the brain uses about 20% of our overall energy consumption, it makes sense from an evolutionary perspective to automate specific tasks.
Understanding the human brain to understand the customer
Before companies try to influence customer behaviour, it is essential to understand a few more basics of the human brain:
1. If given a choice, the brain will always choose the path of least mental effort
The path of least mental effort often means not doing anything, which is leveraged by default. An impactful example is organ donation: there are countries in which citizens are automatically registered as donors with the option to opt-out and other countries where you must actively opt in to be a donor. The former countries have a significantly higher number of registered organ donors.
2. The above results in the brain being pattern-seeking
The brain seeks patterns because anything that breaks a pattern requires effort and valuable energy, which our bodies strive to preserve. This caters to the pattern-seeking brain and reduces customers’ distress. Low effort levels lead to higher satisfaction and, often enough, to an overall increased basket size.
3. Our brain is rewarded more for anticipating something enjoyable than for doing it
The brain is constantly seeking reward, released in the form of dopamine. Yet dopamine is released in anticipation of pleasure instead of the pleasure itself, which means we are pretty bad at forecasting or predicting one’s future emotional state. In January, customers are excited about their fitness journey and lots of dopamine is released when signing the contract. The exciting, anticipated future becomes the present and dopamine levels drop off.
Pret a Manger: Behavioural science brought to life by a coffee subscription
Last summer, in a bid to reintroduce the coffee break and encourage customers to return to old habits, Pret a Manger launched its coffee subscription service – £20 a month for virtually unlimited Barista-made drinks.
This strategy leveraged multiple behavioural principles:
First, it offers a path of low mental effort.
Secondly, the first month of the subscription is free, which takes advantage of a principle called the power of free. Humans are naturally drawn to free products or services and assign them greater value than they would have otherwise.
And lastly, the subscription auto-renews after the first free month, which plays into people’s inertia bias (our preference for the status quo) and our tendency towards loss aversion (where we place disproportionate value on keeping things rather than gaining them).
An opportunity for retailers’ post-pandemic recovery
As the Pret a Manger example illustrates, retailers can encourage customers to elevate their spending levels by leveraging concepts found in behavioural science. Another phenomenon that businesses could draw upon is present bias. Related to the affective forecasting I mentioned earlier, present bias means humans prefer smaller, immediate rewards over more significant rewards in the future.
Klarna is an excellent example of this. Its slogan – “shop now, pay later” – cleverly frames the immediate reward while the unpleasant part (paying) is postponed.
Retailers should also replace the off-the-shelf communication materials introduced during the pandemic, like the standard pieces of A4 paper demonstrating how to wash hands that appeared over each public sink basically overnight. We have all now seen different versions of signs commanding us to Wear a face mask and keep our distance, and every queue has been guided by lines on the floor. Over many months our brains have built strong associations between these signs and a very challenging, restrictive time. While retailers need to maintain the general messaging, it is worth switching up the communication design, including their own branding, and use colours psychology to turn negative associations and a restricted mindset into safety reassurance.
A way forward for an industry in flux
It will continue to be a challenging time for retail as the industry works out what in-store shopping looks like in the future. And while many underestimate the importance of behavioural economics, I believe the concepts I’ve presented in this article illustrate how behavioural insights can be applied to build customer engagement and form positive associations between consumers and retailers.
