Finance

The Psychology Of Customer Manipulation: Behavioral Economics 101

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As humans, we fall prey to mental shortcuts that lead us down the wrong path in terms of decision making. These cognitive biases work like optical illusions – they cause us to misinterpret reality. We then act on this false reality and make choices that are not in our best interests.

Corporations and retailers are well aware of our cognitive weaknesses and will not hesitate to exploit them for profits.

Here, the methods used to influence us come from the expanding field of behavioral economics. This is why it is so important to understand the general field of persuasion. Our failure to do so will only allow merchants to continue to take advantage of us.

Amazon, Target, and your local grocery store are now employing the best behavioral economists to find new ways to get us to spend more and buy things we don’t need.

Here are some of those psychological methods they employ and what you can do to fight back.

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Discounts And Price Anchoring

The use of discounted prices is mostly a mechanism of price anchoring. You are first exposed to the original (imaginary) price and are then made to believe that the price has been lowered. The initial price serves as a mental anchor for us and we compare the discounted price to it rather than assessing the actual value of the item.

Almost every item on Amazon has its original price crossed out with a discounted one that is highlighted in red to get our attention. In a place where everything is on sale it is safe to assume that the “original prices” are made up.

Online travel sites anchor us by first displaying the highest airfare, followed by lower prices scrolling through our screen. Compared to the initial anchor, the lower fares appears cheaper. Thus, we subconsciously evaluate the price as acceptable more on its contrast to the anchor, than on the absolute value of the final fare offered.

Unfortunately, anchoring is so powerful, there is not much you can do to prevent it having an influence on you.

Overloaded Shopping Carts: Product Placements And The Scarcity Principle

In a physical store and also on a website, retailers have learned the best places to display products they would like us to buy. Staples such as milk and bread are always kept at the back of the store. To get to them, you are forced to walk through other parts of the store where signs and deals will lure you to add unplanned items to your cart. With online merchants like Amazon, you may see suggestions such as – Customers who bought product X also ended up buying product Y – which works in a similar way.

A more stealthy approach is one with tricks us into a sense of scarcity and loss aversion. Stores will often do this by signing items as limit 12 only, or some other amount. Studies have shown that people tend to buy close to this arbitrary limit when they are falsely made to think that supplies are in short supply (scarcity).

Shopping online you will often see a statement like – only 6 items left in stock. Again, getting your subconscious to unnecessarily feel pressured to buy so as to avoid future (fake) short supplies.

The best way to combat this is to habitually remove 10-20% of the items of your cart at time of checkout. Ask yourself which products you hadn’t really planned to buy and ditch them from your cart or reduce the quantities.

Coupons And Free Shipping

Using coupons (mostly) ends up costing more in the long run. They are just a tool that retailers use to get us to focus on the “savings” rather than the price. The influence principle of reciprocity is also at play here. Since the retailer gave us a coupon, we feel obligated to return the favor with a purchase. Our subconscious misinterprets the good feeling of the discount to feeling good about the product.

Free shipping works in a similar way. Your mind cannot ignore the fact that you are getting something for free. Again, this only has the effect of drawing your attention away from the prices and quantities of the items you are purchasing. You end up buying more than intended because of this plus the reciprocity effect.

If you get coupons and catalogs in the mail, it is best to send them straight to your recycle bin. The same would be true for emails with coupons and discounts.

Gym And Health Club Memberships

Other manipulators, though not really retailers, are our local health clubs. They know most people eventually pass thorough the initial stages of exercise and weight loss, leading to only occasional use of the facility. So when you are signing up, they tailor the choices so that the option with a monthly charge that is automatically deducted from your credit card is the most appealing.

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A study done by graduate students from Harvard in the Boston area found that 80% of members would have paid much less had they chosen the pay-per-visit plan since they would eventually go less often. Total losses for these individuals averaged close to $600 per year [1].

Essentially, after a few weeks, most people were making what could only be called charitable payments to the gyms every month because they were not using the place! To add insult to injury, some gyms make you have to go through hoops to cancel your membership. Some even require a notarized letter for cancellation.

Buy a few simple fitness items of your own and turn your home into your gym. Your neighborhood could be your treadmill for walks and runs.

Lastly, if you want to improve your persuasion skills so you can recognize the manipulation of others, this reading list will help you do exactly that:

Best books to improve your influencing and persuasion skills

References

  1. DellaVigna, S.; Malmendier, U.;. “Paying Not To Go To The Gym” American Economic Review, 2006, 96 (3), 694-719.

Shaun Mendonsa, PhD is an influencing expert and pharmaceutical development leader. He writes on the topics of influence and persuasion, and develops next generation drugs in human pharma by advising international pharmaceutical CROs and CMOs.


KEYWORDS

Influence, Persuasion, Behavioral Economics, Social Psychology, Retail Manipulation

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