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In almost every purchasing decision, consumers have the option to do nothing: they can always save their money for another day.
That’s why the marketer’s task is not just to beat competitors but also to persuade shoppers to part with their money in the first place. According to economic principle, the pain of payment should be identical for every dollar we spend. In marketing practice, however, many factors influence the way consumers value a dollar and how much pain they feel upon spending it. A way to minimize the pain of payment is to understand the ways “mental accounting” affects decision-making. Consumers use different mental accounts for money they obtain from different sources rather than treating every dollar they own equally, as economists believe they do, or should. Commonly observed mental accounts include windfall gains, pocket money, income, and savings. Windfall gains and pocket money are usually the easiest for consumers to spend. Income is less easy to relinquish, and savings the most difficult of all.
Consumers often behave irrationally when thinking about future consequences. Marketers have long been aware that irrationality helps shape consumer behavior. The scientific study of this irrationality is now has a name, it is called Behavioral Economics. Understanding exactly how small changes to the details of an offer can influence the way people react to it is crucial to unlocking significant value—often at very low cost. Yet despite marketing’s inadvertent leadership in using principles of behavioral economics, few companies use them in a systematic way.
The following reading list will help everyone to became a behavioral economist: