The future of behavioral economics and online retail

Editor’s note: Shamvir Singh is associate director of innovation and analytics at Northstar Research, London.

The number of high street stores in the U.K. is declining. This is largely driven by a switch to more online shopping. Behavioral economics has been a key part of this movement, and marketers and researchers need to better understand how it is being used in this context. More specifically, we need to understand how behavioral economics is used to optimize the online retail experience and what opportunities and barriers this creates for researchers. 

Let’s look at three ways behavioral economics is used to optimize the online retail experience. 

1. Creating a risk-free consumer experience. 

When a store is moved online it removes human interaction from the consumer experience. To compensate for this, online retailers turn to the loss aversion effect, a process where people tend to prefer to avoid losses rather than make gains. This is found in Amazon’s 30-day free trial of Prime and Asda’s 100 day satisfaction guarantee. These offers remove the risk of uncertainty and allow consumers to change their minds later, helping online retail appear as a risk-free environment.

2. Understand the consumer’s mood. 

Purchase preferences are not entirely rational and understanding the consumer’s emotions helps identify the most appealing messaging. However, without human interactions how is one to assess the mood of the consumer? A study conducted by Jeff Jenkins at Brigham Young University found that a person’s jagged and sudden cursor movements could indicate a bad mood. Another study by Keith Wilcox, a professor at Columbia Business School, found consumers are more engaged when the stimulus is reflective with their mood.

Like custom recommendation systems, changing the site’s tone and the products shown based on the consumer’s mood via measuring online behavioral metrics can identify the shoppers in a hurry as well as the heavy browsers. 

3. Offer value while maximizing consumer spend. 

The price that consumers are willing to pay is relative to the prices they are comparing. 

A study conducted by Dan Ariely looked at how fake products influenced consumer choice. 

Ariely looked at subscription pricing options for The Economist magazine. Two studies were conducted. The first study gave three subscription options: print at $59, Web at $125 and print and Web combined at $125. The second study gave two subscription options: print at $59 and print and Web combined at $125. 

Out of 100 MIT students tested in the first study, 84 percent selected the print and Web combined subscription and 16 percent selected the print-only option. No one chose the Web-only subscription option. 

However, in the second study the Web and print combined subscription option decreased from 84 percent to 32 percent and the print-only subscription option increased from 16 percent to 68 percent. While no one selected the Web-only subscription option in the first study, it added a point of reference, aiding consumer choice. 

This example shows how imitation products build context and the belief that value exists. Online stores have unlimited space so they can use as many dummy products as possible to generate as value perceptions.  

Opportunities and barriers 

The use of behavioral economics in this context creates both opportunities and barriers for marketing researchers. First, it provides avenues to a new wave of retail environment research. Long gone are the days of shop-a-longs – the opportunity to better digitize retail environment research exists. Second, behavioral economics is fundamentally an evidence-based policy. This means the ideas generated by behavioral economics will need testing and the value of behavioral nudges will require validation. Researchers will need to become more adept at conducting experiments such as the one outlined by Ariely. 

However, these opportunities don’t come without difficulty. Many of the biases capitalized on by behavioral economics are complex to tackle on a purely rational level. This is largely because consumers are unaware they are being influenced by them. 

Here are three approaches researchers can put into practice to help marketers improve how they leverage behavioral economics in an online environment:

1. Measure the unconscious. Measuring a person’s cursor movements and keyword search terms used may provide valuable insight into a consumer’s mood. Cursor movement or the use of exact or broad keywords can indicate whether the consumer is browsing or looking for a quick purchase. Such details allow online retailers to appropriatly tailor product contexts. 
2. Control the proposition context. Don’t just test prices or products. It is equally vital to test the context in which products are placed: against different competitors, supported by different copy and with alternative promotional messages. Getting the context optimized can easily be the difference between making a sale and missing out. 
3. Test risk and rewards. Classical concept research measures areas such as appeal and purchase intent. The new wave of behavioral economics-based marketing means we need to test loss aversion and guarantee promise. Instead of asking consumers if a product appeals to them, we now need to ask if an offer puts them at risk or adds comfort to a purchase environment.

Online retail is here to stay and behavioral economics is on the ascent. The two seemingly combine to generate success for marketers. As researchers we need to understand how behavioral economics is being applied by our marketing colleagues so we can provide support and understanding.