Through interactive lecture you will find out what influences consumer behaviour and how to forsee their decisions.

1. The Good, the Bad and the Irrational
Understanding the Irrational Consumer
Gerhard Fehr, Karoline Bauer
28 November 2013

2. How to use the Voting Devices
Do not press anything except the number you want to vote for, the answer will be
registered automatically.
In case you see “new channel?” on the screen, follow these steps:
1
Press
«Channel»-Button
3
Finally, press
«OK»
2
Insert the
number «41»
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3. Which table is longer?
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4. Which patch is darker?
Clearly, the upper
patch is brown
and the lower
patch is orange.
When all the rest
is stripped away,
we realize: they
are both the same
color!
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5. The power of perception (I/II)
1
Which of the three women do you find most attractive?
1. A
2. B
3. C
Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 69
0%
1

70% of all male respondents choose
0%
2
3
 Our perceptual system is able to base
option B.

0%
decisions on extremely subtle
The secret lies in the hips/waist ratio:
differences.
0.67 is considered most attractive in a
indo-european culture
 These differences can have a crucial
impact on the success of a product!
Devendra Singh and Robert K. Young (2001). Body Weight, Waist-to-Hip Ratio, "Breasts, and Hips: Role in Judgments of Female
Attractiveness and Desirability for Relationships
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6. The power of perception (II/II)
2
Which of the two bottles holds more?
1. A
2. B
0%
0%
1

Consumers use the height of a product
as the primary signal for larger volume.
2
 Win-win situation for marketers:
This influences their perception of
 More purchases
value-for-money and at the same time

 Faster consumption-rate
increases consumption.
Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 70
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7. Please answer the following question
Griotte Praliné
€ 0.05
Lindt Praliné
€ 0.20
1
Which of the two chocolates would you prefer?
50%
50%
1. Griotte Praliné
2. Lindt Praliné
1.
2.
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8. Please answer the following question
Griotte Praliné
free
Lindt Praliné
€ 0.15
2
Which of the two chocolates would you prefer?
50%
50%
1. Griotte Praliné
2. Lindt Praliné
1.
2.
FehrAdvice & Partners AG, June 13
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9. The power of “0” contributes to the “zero price trap”
 The price of 0 completely changes human decision-making
The power of
FREE!
 Offers that are free lead to an affective/emotional reaction
 People use this affective/emotional reaction as a decision criteria and choose
the free option – even if the other option is of significantly better quality and is
better value for money
In
versus
1
2
Which chocolate would you prefer?
Griotte Praliné
€ 0.05
30%
Lindt Praliné
€ 0.20
70%
Ariely, D. (2009). Predictably Irrational. New York: Harper Collins Publishers
Which chocolate would you prefer?
Griotte Praliné
free
Lindt Praliné
€ 0.15
69%
31%
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10. Please answer the following questions (I/III)
1
A bat and a ball cost €1.10. The bat costs one Euro more than the ball. How much does the ball cost?
1.
2.
3.
4.
5.
€ 1.05
€ 1.00
€ 0.20
€ 0.10
€ 0.05
0%
1
0%
2
0%
3
0%
4
0%
5
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11. Please answer the following questions (II/III)
4
5 machines need 5 minutes to produce 5 units. How long do 100 machines need to produce 100
units?
1.
2.
3.
4.
5.
1 minute
5 minutes
10 minutes
20 minutes
100 minutes
0%
1
0%
2
0%
3
0%
4
0%
5
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12. Please answer the following questions (III/III)
5
A pond is covered in water lilies. Because the water lilies continue to form new leaves, the area
covered by them doubles each day.
If it takes 48 days until the water lilies cover the entire pond, how many days does it take to cover half
the pond?
1.
2.
3.
4.
5.
6 days
12 days
24 days
36 days
47 days
0%
1
0%
2
0%
3
0%
4
0%
5
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13. People think in 2 different systems – on the one hand intuitively and impulsively,
on the other hand rationally and slowly
The previous questions are from Shane Frederick‟s Cognitive Reflection Test.
The right answers are as follows:

The ball costs 5 Cents (intuitively: 10 Rappen)

100 maschines need 5 minutes (intuitively: 100 minutes) to produce 100 products

It takes 47 days (intuitively: 24 days) until the water lilies cover half the pond
People think in two different
systems*:
System 1 is...
...intuitive,
...fast and
...impulsive.
System 1 causes people in certain situations to…

… be impatient

… have low self-control and

… display little stamina.
System 2 however is...
...rational,
...slow and
...lazy.
*Kahneman, D. (2011). Thinking, Fast and Slow.
System 2 can easily solve the previous questions, but it
often is not even involved in the decision.
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14. Even students of Ivy League Universities don’t have control over their system 1

Even the great majority of Ivy League
students don‟t answer these
questions correctly

This shows that not only cognitive skills
are key to this test, but mostly also
non-cognitive skills.

Thinking can be difficult.

Most people try to avoid difficulties if possible and will often make intuitive decisions instead
(system 1).
*Shane, F. (2005). Cognitive Reflection and Decision Making.
FehrAdvice & Partners AG, November 13
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15. The implications of explicit and implicit image for market research
Our product experience is
mostly influenced by implicit
processes, for example
expectations, implicit reference
points, etc.
If those are positive and
reference points are not
violated, brands and products
are more likely to be considered
by the consumer
We can draw one clear conclusion from this:
market research, based on cognitive decisions,
has very limited power.
*Kahneman, D. (2011). Thinking, Fast and Slow
Philip Barden (2013), Decoded – The Science Behind Why We Buy, p. 33
The only thing able to tell us
something reliable about consumer
behavior are close-to-reality
experiments
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16. What is a Brand?
And why does it matter?
Newspaper 1
RAIL TICKET
PRICES TO
DOUBLE NEXT
YEAR
Newspaper 2
RAIL TICKET
PRICES TO
DOUBLE NEXT
YEAR
Evidence shows that
media brands greatly
influence the credibility of
news items – more than
the actual content.
Brands are a type of overall frame for different products
It‟s not a question of „brand or
product‟, „sales or image‟,
„functional or emotional‟ benefit.
Brands provide a background
leading to a product‟s higher
perceived value.
FehrAdvice & Partners AG, November 2013
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17. Lessons learned: Consumers behave pretty irrational
 Latest behavioral economic research provides empirical insights about systematic human skills and abilities
 These human skills and abilities need to be taken into account when analyzing behavior of employees and managers
People can only assess a limited
amount of information, systematically
overweigh losses compared to equal
gains and tend to be overconfident. For
instance, they cannot always assess
risks and often act according to
stereotypes. Thus, they often act in a way
that does not seem fully rational.
People‟s behavior is influenced by social
preferences. Emotional skills like
empathy influence how these social
preferences are put in action.
People
Human behavior is influenced by limited
willpower and limited self-control,
presence-biased time preferences as
well as heterogeneous levels of
motivation.
People have different social identities
(job, leisure, family) with different social
norms. The sense of belonging to a
social identity can overwrite social
preferences.
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18. The good and the bad consumer (I/III)
1
How ethically appropriate / inappropriate do you think the other people
in this room will judge…
… buying clothes at Abercrombie & Fitch?
1. Very inappropriate
2. Inappropriate
3. Neither nor
4. Appropriate
5. Very appropriate
0%
1
0%
2
0%
3
0%
4
0%
5
FehrAdvice & Partners AG, November 13
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19. The good and the bad consumer (II/III)
2
How ethically appropriate / inappropriate do you think the other people in this room will judge…
… concealing the actual content amount of a product through extensive packaging?
1. Very inappropriate
2. Inappropriate
3. Neither nor
4. Appropriate
5. Very appropriate
0%
1
0%
2
0%
3
0%
4
0%
5
FehrAdvice & Partners AG, November 13
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20. The good and the bad consumer (III/III)
3
How ethically appropriate / inappropriate do you think the other people in this room will judge…
…marketing sugary yoghurts as healthy snacks for kids?
1. Very inappropriate
2. Inappropriate
3. Neither nor
4. Appropriate
5. Very appropriate
0%
1
0%
2
0%
3
0%
4
0%
5
FehrAdvice & Partners AG, November 13
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21. No homogeneous values regarding ethical behavior can be observed
Some people might argue that…
1
… Abercrombie & Fitch
supports sexism and
superficiality by employing
tan, half-naked men with six
packs.
2
3
… concealing the product‟s
actual amount through
packaging is equal to lying to
the customer.
… marketing sugary yoghurt
as healthy for children is
contributing to the obesity
epidemic.
But homogeneous values about ethical behavior do rarely exist.
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22. Your ethics compared to others in the audience
3
How ethical do you judge your own behavior compared to that of the other people in this room?
1.
2.
3.
4.
5.
Very unethical
Unethical
Neither nor
Ethical
Very ethical
0%
1
0%
2
0%
3
0%
4
0%
5
FehrAdvice & Partners AG, November 13
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23. Overconfidence is a widespread phenomenon
People are systematically overconfident, which has tremendous impact on the decisions we make.
Overconfidence regarding own skills and capabilities:
 As the questions demands a relative
consideration of the present audience, the
shares above and below average should be
equally big
 Assumptions: a roughly normal distribution
 A variety of empirical studies shows that
people systematically overestimate their skills
and performance
 Men are more overconfident than women
(which can already be observed in childhood)
 Wherever overconfidence applies, it is more
difficult to change behavior
++
+
Ø
-
--
Siehe Niederle, M. and Vesterlund, L. (2007). Do Women Shy Away From Competition? Do Men Compete Too
Much?
FehrAdvice & Partners AG, November 13
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24. Lessons learned
The good consumer
The bad consumer
1.
Our self-image
Reality (sometimes)
Irrational consumption
behavior
People think they are “good consumers”, however, sometimes “makes” bad decisions
2.
Marketers can design products in a way that consumers are “nudged”
into good decision making
FehrAdvice & Partners AG, November 13
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25. Non-binding Defaults and “green” consumer behavior – Example from the Energy Sector
Conversion Rate =
8.8%
Conversion Rate =
8.0%
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26. Choice Architecture plays a major role in the pricing policy (II/II)
The effect of Choice Architecture can be illustrated with the aid of the following example:
 In a field experiment* participants were able to choose between different subscription offers for “The Economist”
 When the choice was between web subscription only and print & web subscription, most participants chose web subscription only
 With an additional, clearly inferior, choice that nobody chose, the previous preferences were changed completely
Subscriptions
Subscriptions
Pick the type of subscription you want to buy or
renew
Pick the type of subscription you want to buy or
renew
1. Web subscription
1. Web subscription
$59.00
2. Print subscription
$125.00
3. Print & web subscription
$125.00
2. Print & web subscription
$59.00
$125.00
68%
32%
16%
0%
84%
Because we find it difficult to assess the absolute value of different options, we rank them
relative to the available choices
*The experiment was conducted by Dan Ariely
FehrAdvice & Partners AG, November 13
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27. A
2.
How to change consumer behavior in an undesirable way: Introduction of a quarterly fee
does increase churn-rates considerably and decreases customer satisfaction
The annual fee will be replaced by a
quarterly fee and increased by 20% p.a.
...which increased the churn rate and decreased customer satisfaction
Resultate
Vorgehensweise
8%
+20%
%Churn
Customer Satisfaction
7%
120
6%
100
5%
4x
4%
+7 %Punkte
3%
2%
1%
Annual Fee
0%
Jahr 1
Framing to the customer:
The quarterly invoice of the fee increases
the flexibility of the customers, because
contract durations will be shorter
Control group
Kontrollgruppe*
Jahr 2
10
9
8
7
6
5
4
3
2
1
0
Quarterly fee
Quartalsgebühr
Explanation
 The effects can be explained in the following way:
 Consumer prefer one-off payments over multiple installment payments, because oneoff payments only „hurt“ once (loss-aversion, prospect theory).
 The Framing of the increase is very important. The „hidden increase of the annual fee
via a split of the annual fee will, on average, be considered as unfair. Unfairness very
often triggers a „negative reciprocate behavior“, i.e. customers are willing to incur
own cost by harming the company (negative referral, churn ,etc. ). Additionally,
additional flexibility is „very seldom“ a sufficient argument for price increases.
-7%
Kontrollgruppe*
Control group
Quarterly fee
Conclusion
 Loss-Aversion is the
main trigger for
customers in the case of
splitting annual
payments into multiple
installments.
This approach in order to
increase prices will not
be accepted by
customers.
FehrAdvice & Partners AG, Mai 13
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28. „Status loving“ Gold costumers have a willingness to pay a premium in
order to increase their privileges
A new status is introduced: „Gold Premium“ –
three months later the prices is increased
...which will be accepted by predominantly male consumers with high
income
Result of the choice architecture
Approach
Gold
Premium
Status
Annual
Fee
300 CHF
Income beyond 125„000 CHF
Contact
customer service
Männer
6.5%
91%
9%
7%
93.5%
93%
9%
Time


In a second step (after 3 months) the annual fee will be
increased – but only, if the customer will keep the new
level of status.
Income below 125„000 CHF
In a first step, a «Gold Premium Status» will be
introduced, which all Gold Costumers will receive

11%
Annahme
Opt-out
Frauen
16%
84%
89%
The increase of the annual fee will be introduced by an
opt-out structure
Explanation
 The „Gold-Premium Status“ was given to all customers. The idea was to
create an „endowment-effect“. Consumers do not want to lose the status
and suffer „loss-aversion“. Due to this effect, overwhelming part of the
customers accept the price increase due to the fact, that they do not want
to lose the new privileges
 This effect is considerably higher by male consumers with high income.
 The opt-out (old status, old price) option was used in a modest frequency.
Conclusion
 Status matters and has its price
 Choice Architecture matters and has
low impact on customer
dissatisfaction.
FehrAdvice & Partners AG, Mai 13
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29. Putting the pieces together – lessons learned
•
Irrational consumer behavior is systematic and can be observed in different
cultures, markets or customer segments
•
Traditional market research asks the “pilot” and produces feedbacks that do not
reflect real consumer behavior in the real world
•
Overwhelming part of consumers believe, that their consumption behavior reflects
ethical standards, however, in the moment of truth, they regularly act against their
beliefs
•
Good and bad consumption behavior does mainly reflect choice architecture and
framing of campaigns and products
•
Marketing Managers can often design their products & campaigns in a way, that
consumers are “nudged” into better behavior, without harming business goals
FehrAdvice & Partners AG, Mai 13
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30. The management team of FehrAdvice consists of experts from science and practice
Univ. Prof. Ernst Fehr
Chairman of the Board
Harald P. Stoehr
Managing Partner
Gerhard Fehr
CEO and Managing Partner
Bergstrasse 114
8032 Zürich
Bergstrasse 114
8032 Zürich
Bergstrasse 114
8032 Zürich
Tel: +41 44 256 79 00
Tel: +41 44 256 79 00
Tel: +41 44 256 79 00
ernst.fehr@fehradvice.com
harald.stoehr@fehradvice.com
gerhard.fehr@fehradvice.com
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31. Contact
FehrAdvice & Partners AG
Bergstrasse 114
8032 Zürich
info@fehradvice.com
www.fehradvice.com
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