If you want your customers to both buy quickly AND feel less regret after they buy, give them fewer rather than more choices.

Eating out may be a distant memory for many of us in current times, but cast your mind back to the last time you went to an upmarket restaurant. More than likely the restaurant had a reasonably small menu with only a few (signature) dishes to choose from. And you probably found it was quick for you to decide on what to order…

Contrast this to a time when you saw a really long menu with lots of options in a restaurant that you visited for the very first time. You might have asked for recommendations from the waiters or your dining companions, or maybe even looked at an online restaurant review app for recommended dishes. Chances are that choosing a dish in this scenario was a more time consuming, and potentially less satisfying exercise.

While companies often feel that more choice is better for their customers, human beings are generally easily overwhelmed when we are offered too many product options or choices. This is the same whether we are talking about restaurant menus, investment fund options or even the cereal aisle in your local supermarket.

The culprit here is choice overload.

What is choice overload?

When the number of relative choices increases, we get what’s called decision fatigue. It all starts seeming too hard. The risk of making a bad choice increases and humans have what’s called a “loss aversion” – we fear loss much more than we worry about gains. The more options there are, the greater the likelihood of loss and therefore regret.

When faced with too much choice, we are more likely to do one of four things:

1. Procrastinate on making a decision
2. Don’t act or buy at all – we stick our head in the sand!
3. Go with the default or recommended option
4. Go to a competitor with fewer options

We’re also more likely to feel regret after a decision if there was too much choice offered in the decision making process.

The infamous jam Jar experiment on choice overload

The most famous study around choice overload is Columbia University’s “jam jar” experiment, run by academics Sheena Iyengar and Ross Lepper in 2000. They ran several experiments in a supermarket where they set up tasting tables for jams. One day they had only 6 flavours of jam; another day they had 24 flavours. While the table with 24 jam flavours attracted a lot more people to stop for a taste test, it was the table with 6 jam flavours that had 10 times more sales (from 3 to 30% of people who sampled)

So – more options means more interest; but more importantly it means fewer sales.

What can you do to avoid choice overload?

There are a number of things you can do to reduce choice overload and ensure your customers actually make a choice AND have lower levels of regret.

1. Reduce the number of options in each category – think about removing less popular options (though make sure you test this first as sometimes the less popular options serve an important role as a “decoy”).
   
2. Categorise the options – if you’ve got more than 5 or so products, it’s time to categorise them into logical groupings. A great example is the classic Asian take-out menu where you may have 100s of permutations but generally you choose by meal type and then customise the meat etc.
   
3. Help customers make the choice – for example, get customers to work through an online wizard that helps them narrow the range of options, or use phone or web agents to guide customers, or simply make it obvious what’s the recommended or default option for them.

Choice overload or not, here’s hoping you get that trip to the restaurant soon!

The post The paradox of choice appeared first on Nudge By Design.

As we’ve become more cashless this year than ever before, we’ve inadvertently reduced our overall “pain of paying”. This is great news for companies selling products or services. But it has consequences for keeping our spending in check. Plus cash versus card is only one of many factors that influence the pain of paying.

What is the “pain of paying”?

The pain of paying refers to the generally negative emotions that humans experience when they pay for a good or service. We are a loss averse species and handing over money can feel like losing money. Of course as always there’s a spectrum, with some of us more sensitive to this pain than others. Some behavioural economists call it the difference between ‘tightwads’ and ‘spendthrifts’. My husband calls it my travel addiction ;-)!

As a business your interest is likely to be to decrease the pain of paying for your customers so that they feel better about their purchase and so are more likely to buy again, or to recommend your business to others. But as a consumer you may wish to increase that pain of paying so that you have stronger willpower and control over your spending habits and can step away from the online shopping basket!

Test your own pain of paying

Imagine the following scenarios and think about how painful, or not, it would be for you personally to pay in each instance.

• You’ve enjoyed a week away at a five star resort and participated in lots of activities, meals etc that you charged to your room. Then you receive the total bill on checkout.
• You’re eating at a sushi train restaurant and every time you pick a plate off the conveyer belt, your table bill, which is displayed on a screen at your table, makes a beeping noise and immediately increases with the cost of the plate you’ve just taken off the conveyer belt.
• You go to the casino and use your debit card to buy some casino chips. You then spend the evening winning and losing the chips. You end up with fewer chips than you started with by the end of the evening when you cash out.
• Your wife buys you the beautiful, expensive wristwatch you admired a few weeks ago and decided you really couldn’t justify buying – using your joint credit card.

If you felt the pain of paying in these scenarios would be 1) higher, 2) higher, 3) lower, 4) lower, you are on the money (pardon the pun).

Cheat Sheet for the Pain of Paying

There are a range of factors that influence the pain of paying, including:

• Whether you pay by cash, credit, or some other format (like casino chips)
• Whether you pay before, during or after an experience
• If and when you’re reminded about the payment
• Whether you pay, or someone else pays on your behalf (even though you may be using the same source of money)
• The reference point or anchor that you’re comparing the amount of the payment to also plays a role
• Whether or not the payment has an element of doing good for others attached to it

Here’s a quick guide to get you started (you can download the PDF version below too):

So here you have plenty of ways to either increase or decrease the pain of paying based on behavioural science principles and research!

The post The “Pain of Paying” Cheat Sheet appeared first on Nudge By Design.

Siting (or endowing) the House Plan

My husband and I have been looking at building a new house and our weekends have been swallowed up trawling through display home after display home across our city. What has become very obvious to me from these weekend marathons is that the display home sales teams are the ultimate Jedi Masters of Endowment.

The endowment effect is a powerful bias whereby people value things they feel ownership over much more than the same item or offering if they don’t own it.

And don’t these guys know how to use it!

Their primary objective is to visually place the beautiful house you’ve just walked through onto your own block of land as quickly as humanly possible. In fact, some sales people will look up your block of land on publicly available websites to start the process off before they’ve even asked for your name, and mere moments after you’ve met. And they’ll also kindly prod you to think about designating rooms to each of your children, and working out where you can have that little morning coffee nook in the sunshine. Can you feel that gorgeous morning sun from your East facing deck on your face yet?

These Jedi Masters know that the more they can get you to connect or feel ownership (or a sense of endowment) over this new home, the more you are likely to be willing to pay for it.

Of course they want this to happen BEFORE any more firm discussions on pricing. That’s because they know that you’ll be prepared to pay more if you feel that sense of ownership or ‘endowment’. That’s just as well because usually the beautiful house you walked through has all the ‘premium’ inclusions that end up doubling what they call the ‘base price’ – and that’s before adding the cost of anything outside the four walls. Who needs a driveway or a letterbox anyway?

Try or play before you buy are other examples of endowment effect methods.

Aside from display homes, there are a myriad of examples of companies leveraging the endowment effect. For example, some car companies allow people to take their cars for weekend test drives; and some mattress companies let you take the mattress home for 100 days to try them out. Apple stores let you play for as long as you want with their products in the Apple stores. That’s right – they want you to feel some sort of ownership over their product or service – so that you will pay more for it. That’s the ultimate goal of these endowment effect techniques.

The endowment effect happens because we are programmed to avoid loss.

One key explanation behind the endowment effect is our natural bias towards loss aversion. We are twice as likely to avoid a loss than to work for the same gain. This is because in our early days it was much more important to avoid being caught by a predator, than to be preparing for a period of famine that may or may not happen in the future. So we react much more strongly to the potential of losing something; in this case ownership over something (even just psychological ownership), and therefore give it higher value.

Once you own a mug it becomes twice as valuable.

The most famous example of the Endowment Effect is the coffee mug experiment by three economists called Richard Thaler, Daniel Kahneman and Jack Knetsch – three economists at Cornell back in the 1990s. In the experiment they gave a group of students a coffee mug and another group nothing at all. They then asked each person to set a price on the coffee mugs.

Those that “owned” a mug set an average sales price of $5.25; those that didn’t own a mug set buy prices of between $2.25 and $2.75. The mere act of owning the mugs led the “owners” to more than double the price.

This experiment was a great example of how it is much harder to give up something we own (avoid loss) than to buy something new (gain).

“Freemium” products are designed around the Endowment Effect.

Another common use of the endowment effect is by software providers such as Thinkific, an online learning platform that we at Nudge By Design use for our online courses. Thinkific, like many providers, gives you access to what’s called a Freemium product – a basic version of the software that you can use for free to set up basic online courses. Once you start customising your learning site however, some of the features that you end up wanting to use are not available on the free package and you’re encouraged to upgrade to a paid version. This also is linked to the behavioural science principle of the sunk cost fallacy: people are more likely to plough ahead with a project or purchase when they’ve previously invested resources like time, money or effort – they’ve already sunk effort into it, so it’s harder to walk away. The sunk cost fallacy is related to the Endowment Effect.

How to apply the endowment effect to your product or service

One way to leverage the endowment effect is to give your prospective customers a sense of ownership by giving them something they can own or feel they own right away.

Some ideas:

• A product test drive – in store, or let them take it home for a period
• A free coupon or free balance or trial period to start using your services
• Allow customers to personalise products or services – for example choose a name, or picture or colour
• Provide checkout basket reminders – it’s almost yours
• Offer a bidding system like ebay or auction
• Low entry cost into a category where the customers need ongoing supplies e.g. coffee machine with capsules, printer and ink
• Help visualise the product or service experience e.g. virtual walkthroughs, virtual change rooms

As your customers start to feel a sense of ownership over your giveaway – usually more than it actually deserves – they’re more likely to convert into paying customers.

In our case, despite being armed with deep knowledge about the endowment effect, my husband and I are finding it harder to walk away once we’ve seen a beautiful house plan on our block of land and can imagine the outlook from the bright, open plan kitchen into the perfectly manicured side yard.

The plan is really just a piece of paper, but feels more like a Jedi Mind Trick!

The post The Jedi Masters of Endowment appeared first on Nudge By Design.

Beware of the power of the anchor if you’re negotiating, whether it’s your salary, or the price of a product or service.

An anchor is a reference point that your mind will use to make decisions and is often the first ‘offer’ that’s voiced or read. It’s called an anchor because it will weigh you down. It will tether you to a particular reference point, like a boat is tethered to a spot in the ocean. Even if you rationally know that the offer is way out of the range it should be, it will still subconsciously have influence over you.

Car salesmen are the masters of the anchor

Car salesmen are well known for using anchors to start negotiations. They usually start with asking for a higher price, so that when they eventually reduce the price during negotiations, you’ll feel like you are getting a better deal. The original, higher price is the anchor and subconsciously you will set your expectations around that initial price point.

We have this anchoring bias to help us make decisions more quickly, but it can unfortunately also lead to poor decisions.

How to overcome (or use) the anchoring bias

One way to overcome the anchoring bias is to make the first offer yourself – you set the anchor, rather than your negotiating partner. If you’re afraid of pricing yourself or your product out of the market, you can always go with a broader range rather than a single figure.

If you don’t get in first, it’s really important to recognise the anchor and defuse it! This means you let the other party know that the offer is unacceptable to you – be firm about this – and then you need to very quickly make a counter proposal. Try not to repeat the anchor at all as this can unfortunately help it stick further in your mind.

You can of course also leverage the power of the anchor to get a better price for your own product or service. Get in first with the offer, or set a higher initial price to help anchor your prospects. But be wary of overusing this technique. If your customers get used to always getting a discount on the advertised price, the effect will lose its shine pretty quickly and can box you into a continual discounting cycle – so use it sparingly!

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