Last month this page examined Shoptimism: Why The American Consumer Will Keep On Buying No Matter What, by Lee Eisenberg. This month, we turn to Predictably Irrational: The Hidden Forces That Shape Our Decisions, by Dan Ariely. The original version was published in 2008; however, I recommend you read the revised and expanded edition, published late last year.
Ariely is a behavioral economist, a rebel in a field dominated by scholars who believe numbers never lie. Ariely acknowledges that numbers don’t lie, but he doesn’t think they tell the whole story. Economics may be rational, he says, but people aren’t. Further, he argues that market forces won’t always regulate the market for the best, which is why reliance on standard economic theory alone to develop personal, national, or global policies may be not only unwise but also dangerous.
Ariely maintains that most irrational consumer behavior is predictable. (We’re talking about normal quirks, not truly unstable behavior.)
For example, how many times have you visited a store and purchased something you didn’t need because it came with a free add-on? The perfectly rational consumer would purchase only what he or she came to buy and not be swayed by a freebie. Aha, says Ariely—you see? We’re not rational! But this irrationality is predictable: Most consumers will buy something different to get the freebie.
Women are familiar with this ploy. Many major cosmetic companies run “gift with purchase” promotions, consisting of sample-size products packaged in a travel bag, and most women can’t resist. There are two rational approaches to buying cosmetics: Buy only if you need something, or stock up on your usual products during gift time, which many women do.
But what if the gift comes when you don’t need anything? And what if it’s appealing and includes something you’ve wanted to try? Most women will look for other products that they can rationalize purchasing so as to get the gift. They didn’t need a new lipstick or eye shadow, but by buying both they geta bag of goodies and a little tote to put them in. They probably don’t need the bag or four-fifths of the products in it, either. Yet few consumers can resist the lure of something that’s seemingly free.
Most of Ariely’s theorizing is applicable in a retail environment. This is especially true in his chapter about the relativity of pricing. We judge the price of an object by its relativity to other similar objects, which is why consumers often feel that jewelry stores overcharge for the “same” ring they saw online or at a discounter.
In one of his scenarios, he uses real estate. A customer is shown a contemporary house and two colonials. All are fairly close in price, with comparable location attributes. But one of the colonials needs a new roof and the owner has knocked a few thousand off the price to compensate. Unless the buyer is a particular fan of contemporary architecture, Ariely says the colonial without the leaky roof is most likely to sell.
Why? Because the buyer has no frame of reference for the contemporary house, having seen no others of the same size to compare price. The two colonials, however, can be compared, and, unless the buyer doesn’t mind the inconvenience of home repairs (or he’s a roofer), the one with the good roof seems like the better deal.
The lesson is that the product you really want to sell is the one you price in the middle. This probably is no great surprise to jewelers—how often have you shown three or four diamond rings and the customer chooses the middle-price or upper-middle price option? And these days, when customers come armed with loads of prior research, you often feel on the defensive, so you focus on the value of shopping in your store—in essence, already tapping into the power of “free.”
Whether it’s intangible, like ring cleaning and inspection, or tangible, such as a gift certificate to a romantic restaurant for the marriage proposal, that which you consider part of the value of your store really translates to a “freebie” in Ariely’s sense of the word.
The book offers many insights that can help independent retailers, and Ariely’s engaging, humorous style makes this a serious economics book that’s also an easy read.