Behavioral Economics: Understanding Your Shopper and How Price Impacts Behavior

Thinking, Fast and Slow 

In his book, Thinking, Fast and Slow, Daniel Kahneman contends that humans have two types of mental processing: System 1 and System 2.

System 1 thinking is our fast, automatic, intuitive mode (often sub-conscious). If we ask you, "what is 2 + 2?" you are using your System 1 thinking to answer. There is no "processing." You recognize the solution from years of experience.

On the other hand, System 2 thinking is slow, deliberate, analytical... and conscious. If we ask you, "what is 17 X 24?" you can come up with the correct response. But, you need to use System 2 thinking to get there.

Kahneman posits that humans default to System 1 thinking. We don't like to make our brains work!

When people shop, Kahneman's theory helps to explain many dynamics.

Shopping, Fast & Slow 

As marketers, we would like to believe that shoppers are heavily "invested" in our brands. We picture them standing at the aisle, reading all of our compelling copy on the package and thoughtfully processing each of our benefits relative to competitive choices.

But, shoppers don’t want to work that hard. Instead, they look for simple cues that bring associations to their mind. And, often, this is done sub-consciously (via System 1 thinking).

That is why branding and packaging is so important. A brand will bring up sub-conscious associations... hopefully, positive associations driven by either past usage or a TV spot they saw or recognition that this is a product that someone in their life has previously used/enjoyed.

Price As a Cue/Association

Lemonade

Beyond branding and packaging, price plays a key role in offering cues to shoppers. Price promotions work because shoppers want to believe they are getting a deal.

This is often true even when the "deal" price is not the best choice from a value perspective. The fact is shoppers don’t use their System 2 thinking to do the math. Their System 1 thinking associates "promotion" with "bargain," whether the bargain is real or perceived.

There are many examples that support this:

    • Club stores succeed largely based on the premise that shoppers associate "bulk" buying with "bargain" shopping. If they did the math, shoppers would realize that Club prices are often NOT the best deal. The ideas of “treasure hunting” and convenience certainly play a role in Club, but most Club shoppers would likely be surprised to find out the prices they are paying are not always a better value relative to other channels.
    • JC Penney eschewed price promotions for an everyday low price strategy. Shoppers left, very likely because they didn’t feel they were getting "deals." Even if the prices were legitimately lower than competitors, shoppers don’t want to take the time to do that math. They want to recognize, with their System 1 processing, that they are getting a price benefit. A price promotion provides that cue/association.

Trading Shoppers Up

Shoppers want a "deal," and price promotions clearly tell them they are getting a deal without having to do "math." System 1 thinking generally convinces shoppers that the bargain is there.

One of the advantages for manufacturers (and retailers) is that price promoting LARGER sizes is often just as effective (in terms of converting shoppers) as price-promoting smaller sizes. This means more dollar volume for the brand on deal and the category!

Stand

Using Non-Promoted Price as a Cue

Clearly, price promotions work. But, can you reduce trade spend and still use price as a lever to increase sales?

By tying price with SIZE, brands can communicate several positive messages.

For example, brands can reduce size to allow for a lower absolute price point. When brands are not on deal, the lowest absolute price point can incent purchase.

Or, brands can often sustain a price increase when it is tied to a weight up... as long as the benefit of a “now larger size” is clearly communicated. Just like a price promotion signifies a "deal," so does a tangible benefit like a larger size.

For many clients, we are testing multiple variations of pack size and price to identify the combination that maximizes penetration and dollar volume. The key is that these alternatives are tested in a virtual shopping platform that simulates the context of channel and competitive set. This allows us to identify the impact of variations on actual behavior... NOT stated intent that forces respondents to use System 2 thinking (when we know that in real life, they are using System 1 thinking!).

You can read more about our process here or contact us to learn more! leslie@decisioninsight.com.