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The Happy (but Irrational) 2015 Holiday Shopping Season

Using behavioral economics to better execute your customer strategy and improve customer experience

U.S. retail sales saw strong gains during the 2015 holiday season according to MasterCard SpendingPulse, which looks at U.S. retail sales trends across cards, cash, and checks. Retail sales excluding automobile and gasoline increased 7.9% during the traditional Black Friday to Christmas Eve shopping season. The biggest winners this holiday season included digital ecommerce. For certain retailers, digital ecommerce sales were a large holiday present. Digital ecommerce grew roughly 20% compared to last year and 70% of U.S. consumers reported doing more research online than before, according to the recent Omnishopper Guide. However, just because consumers are doing more research and more online research doesn’t mean that they always behave rationally.

Firms are incorrect when they presume that customers always make rational or logical decisions. Behavioral economics provides insights into how customers make purchase decisions by combining psychology, neuroscience, microeconomics, and other disciplines. It is primarily concerned with the “bounds for rationality” and allows for factors where consumers do not always make completely rational or logical decisions, a fundamental assumption of traditional classical economics. 

This additional layer of insight can improve marketers’ ability to influence customer behavior and drive more sales. We have been conditioned to believe that more consumer choices are better; however, research has shown that too many product choices can drive customers away. Take for example a retail apparel website: If 25 clothing colors and styles are shown to a consumer, they may simply move on, but if a more manageable number (e.g., five) is shown, the consumer may be better able to process all options (called option optimization, a type of choice architecture) and will be more much more likely to make a purchase. Research has shown that this “cognitive load” has a magic number … seven (plus or minus two) options.

Behavioral economics for customer strategy incorporates concepts such as option optimization, cognitive biases, consumer choice architecture, positive or negative framing, self-control limitations, and loss aversion. It examines non-rational factors in consumer behavior that affect decision making and, as such, need to be accounted for in customer strategy development. Behavioral economics not only can provide further insight into the oftentimes irrational behavior of customers, it can also help firms better execute against their customer strategy, improve customer experience, incentivize profit-maximizing behavior, and enhance long-term customer lifetime value. Designing an effective customer strategy and delivering successful customer experiences requires companies to keep such imperfections and biases in mind.

For more information on how Merkle can help you leverage behavioral economics to better execute your customer strategy and improve your customer experience, please contact me at [email protected]