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Behavioral Economics And E-Commerce

January 12, 2022

Does Human Irrationality Increase Your E-Commerce Website Conversions?

Instead of the homo-economicus assumption that a logical person acts in their best interests of herself, behavioral economics shows that people often act irrationally.

This article will focus on applying behavioral economics to digital user experiences in order to find new approaches to boost e-commerce conversions.

What Is Behavioral Economics?

People are not rational in their decision-making processes, according to behavioral economics, and are impacted by social, psychological, and emotional factors.

It investigates how people can act differently even when the ideal path is obvious, and also what reasons underlie their behaviors.

With his book Thinking Fast and Slow, Kahneman won the Nobel Prize in Economics in 2002, while Thaler won the Nobel Prize in Economics in 2017 with his book Nudge.

Many economic operations, such as marketing, sales, design, and media, employ behavioral economic principles. Behavioral psychology, sociology, and other social sciences are the roots of these principles. In the process of experience design, businesses consider behavioral economic considerations. These might be useful for e-commerce websites when choosing website elements and other features.

It was no coincidence that two works on behavioral economics and the irrationality of human behavior have won the Nobel Prize in Economics in the last 20 years; increasingly popular digital technologies have triggered a new debate about how people think when making a decision and how open to the direction they are. The assumption of the Enlightenment’s man who “encourages to know,” which has been carried on for centuries, has given place to irrational humans.

What Does It All Mean For Your E-commerce Site?

Many small and big elements play a direct or indirect role in the success of e-commerce website conversion rates. These elements are mostly based on the basic principles of behavioral sciences, tests, and feedback.

When determining elements that need to be decided at every level, from defining the visual identity to creating the brand tone, behavioral economic concepts should be considered. Behavioral economics, which is based on the idea that human economic behavior isn’t always rational, is one of the concepts that anyone considering an e-commerce site should be aware of.

Keep reading to learn about the following issues and how they should be applied to your e-commerce website.

  1. Nudge Theory
  2. Anchoring Bias
  3. Scarcity Principle
  4. Hyperbolic Discounting
  5. Social Proof
  6. E-commerce Implements

Nudge

The nudge theory is about understanding how people think and make decisions in the modern world. According to the nudge theory, even if people know that an option is actually the most rational and best option for them, they need a nudge to act on it.

The Nobel Prize-winning book Nudge by Richard Thaler and Cass Sunstein, which popularized the nudge theory, shows how conscious decision-making environments are constructed using the nudge theory.

In user interface design, the planning of elements in a way that affects the decision-making processes of users is called digital nudge. User interfaces can be thought of as digitally created cognitive decision-making environments.

You may create a nudge effect on your consumers while changing any components of your e-commerce channels.

On a retail e-commerce site, the digital nudge can be used in a variety of ways.

Some of these include call-to-action buttons and texts, design components, and notifications. Sending your users an email about a product left in their cart can give them the nudge they need to complete their purchase.

Anchoring Bias

A behavioral psychology experiment was conducted by Kahneman and Tversky in 1974.

They asked participants to guess whether the figure on the wheel was greater or less than the ratio of African countries that are UN members after spinning a wheel that would stop at 10 or 65.

They then asked about what the ratio actually could be. The number on the wheel had a direct impact on the participants’ answers, despite the fact that there was no logical correlation. When the wheels stopped at 10, they guessed around 25%, when it stopped at 65, they estimated around 45%. 

In the experiment of Dan Ariely, another academic in behavioral economics and psychology, participants had to think about the last two digits of their social security number. Then, a selected object was shown to the subjects and they were asked to price the object. Participants with the higher last two digits of their social security number give a higher value to the object. 

The reason for this principle can be simply expressed as the tendency of people not to waste time and effort when making a decision.

The anchoring effect, which says that people believe what they see first, especially when it comes to numbers, will be one of the first behavioral economics principles you will see when you look around a little carefully. According to the anchoring effect, people’s natural tendency is anchored in the first number they see and perceives the next number in relation to it. 

When the price of a product is determined as 19.99, we assume that it is close to 19. For the same reason, when a product with a value of 19.99 appears on your product page as reduced from 24.99 to 19.99, your customers tend to evaluate the second price relatively and perceive it low. Or, when a business operating with a subscription income model first shows the monthly subscription as 9.99, which is the first of the two subscription packages it offers to its customers, and then offers the annual subscription package for 12 X 9, the second option is more preferred. 

Price anchoring is a tool that has been proven over the years by different businesses. You should immediately start implementing it on your e-commerce website if you are not already using it. All you have to do is give users on your website a reference that will direct them to the conversion event you want. 

Scarcity 

In an experiment they conducted in 1975, Worchel, Lee, and Adewole divided the participants into two groups and gave one group a jar with 10 cookies, and the other group a jar with 2 cookies. When asked to evaluate the quality of the cookies, the group that bought the jar with 2 cookies, due to the scarcity principle, found the cookies more delicious. 

Then, adding another factor, they gave a group a jar with 10 cookies, but then they took 8 cookies and left 2 cookies. When the participants in this group were asked to evaluate the cookie, they gave better evaluations than the other two groups. The assumption of the scarcity principle is: If the quantity of a product is not sufficient, the value of that product is high. Naturally, the demands are unlimited in the face of limited resources.

An example of the application of the scarcity principle in e-commerce can be found in listing out-of-stock items. Or imagine a situation where the number of remaining stocks is shown on the product page, it is natural in many ways that having 3 left of a product accelerates the purchase decision.

First, not enough of the product makes it more valuable. Second, the fact that there will always be no left triggers rushing. Third, less of the product means that the product is highly preferred and creates direct social proof. The consumer, who thinks that he will not be able to obtain the product in the future, tends to buy the product as soon as possible, making a purchase that he did not think about, or willing to pay more than he thought. 

Hyperbolic Discounting

You probably know the marshmallow experiment, in other words, the test of delaying gratification, performed by Mischel and Ebbesen at Stanford University in 1970; A group of children is given a marshmallow and is told that if they do not eat it for 15 minutes, they will win another marshmallow and the child leaves it alone in the room. When the lives of children who wait and do not expect an award in the following years are monitored, it is seen that children who wait for an award are more successful in many aspects.

Consider this famous social psychology experiment: If I tell you that I will give you 1000 TL in 10 months or 1100 TL in 11 months, you would prefer to receive 1100 TL in 11 months. But if I were to give you 1000 TL immediately or 1100 TL in 1 month, most people would prefer to receive 1000 TL immediately. 

This situation, which corresponds to the principle of hyperbolic reduction in behavioral economics, is used in many points of e-commerce websites to direct users to conversion. The hyperbolic reduction basically says: Postpone the punishment, get the reward as early as possible. 

The most direct example of this is the “pay later” system, where customers buy now and pay later. Another example is people preferring to buy high-value products in installments, instead of buying them with money they have saved and delaying the financial burden by obtaining the reward as soon as possible.

Similarly, loyalty programs, discount coupons that provide an immediate drop in the basket, and campaigns work because customers tend to get the reward as soon as possible.

In the design, we can see the hyperbolic reduction principle in the placement of the unsubscribe button at the bottom of the email. Or when the delete button is big and in the top right, people tend to delay reporting the email as spam and just delete it for now.

Social Proofs 

Social proof is another way to increase your conversions. This method, which is applied not only by e-commerce websites but also by every business, says that you can gain the trust of your potential customers by simply referencing your satisfied customers who use your product or service. There are dozens of ways to provide social proof to your customers on your e-commerce site. You can include the comments of your current customers about you on your website, you can also show the rating of the products on your product pages, you can encourage your users to comment on the products, or you can use the images provided by the real people who use them after the product images are. It is possible to determine which of these ways is ideal for your situation, again with tests and monitoring. 

How to Apply Your Behavioral Economics Principles to Your E-commerce Website

By testing! By developing, then testing again. By performing and testing the development you will spend the least time and cost each time. To apply one of the behavioral economics principles, the only way you can measure the outcome of the changes you make is to test.

There are dozens of ways to collect data on the performance of your e-commerce website, but A/B testing can be the easiest and most cost-effective method at the beginning. For every change you make in this method, you start by keeping all the other factors that affect your goal conversion as constant as possible. You can check our blog for more detailed information about A/B testing. 

Let’s say you sell ice cream and you want to measure whether you can increase conversions with stock shortages. Although showing your remaining stocks on your product page is a common e-commerce practice for your customers to take action faster, you cannot know if it is a method that suits your unique brand identity, target audience, and products. The appropriate moment to decide to apply this method may be a moment when you observe that your customers postpone the action during the purchasing phase after viewing the product page or even adding it to their cart. In such a case, time and stock pressure can increase the conversion of your e-commerce website.
In its simplest form, let’s implement an A/B test that will require the least amount of development. Let’s start by choosing 2 flavors of ice cream with similar sales volume, packaging, and product photography. While the product names, descriptions, and images are almost equal on the strawberry and cocoa ice cream pages we have chosen, we add a small phrase to the product page of the strawberry ice cream; 2 left. We start tracking by waiting for product pages to get enough visits and conversions. Once both products have been viewed sufficiently (to say enough, it might make sense to reach the average weekly views of your ice cream product page) by audiences that are similar in volume and behavior, we review the conversions and pick the winner. We test again by selecting 2 other products before making a larger development. 

You should always test your actions that require effort, time, and investment starting from the smallest, and you should also test your intention to increase your conversions by applying behavioral economics principles. After doing the necessary tests, there is no reason why you can’t find the most suitable actions for you. 

Get support from tio

Beyond providing the necessary technical infrastructure for your e-commerce website, Tio establishes a digital partnership that will give you the support you need to increase your conversions with its performance-oriented multidisciplinary approach.

You can have a free meeting with an experienced and expert team who will work with you at every stage of your business that touches technology, on increasing the conversions of your e-commerce website by clicking here. 

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