Three core components of consumer psychology

This article was adapted from Phill’s interview on the Product Marketing Life podcast. Check it out here.

As marketers, we often assume that we understand our consumers – that’s our job after all. However, the statistics suggest otherwise.

For example, a study from eMarketer claims that 25% of the marketing budget is wasted – it gets no ROI. And there’s another alarming stat from Harvard Business Review, whose analysis found that on average, 80% of new consumer product launches fail.

It's clear that something is broken in our approach to marketing, and there’re hundreds of reasons why that could be the case. However, one common theme seems to be that most marketing decisions are based on gut instinct rather than anything concrete.

In fact, Forbes found that over 50% of decisions made by marketers – for instance about which audience to target or what tagline to go with – is based on gut instinct rather than data.

It doesn’t have to be this way. We can base our decisions on data, science, and laws if we look at the world of consumer psychology. We’ve spent hundreds of years working to understand how consumers' brains operate. By applying this understanding to product marketing, we can significantly improve our results.

The power of consumer psychology in marketing

Let’s take the example of social proof, which was explored by Richard Shotton in “The Choice Factory”. He went into a pub in London and asked the barman what the best-selling beer was. The barman pointed it out, and Shotton asked if he could put a sign on that beer pump saying "best-selling".

He wanted to measure if that sign influenced how much that beer was bought – the idea being that we follow the actions of others. As expected, sales of that beer increased 2.5 times in the following week.

Interestingly, not only did the sales of that particular beer increase, but overall beer sales at the pub also grew – just showcasing that more people bought one beer encouraged more people to buy beer in general. That’s the power of social proof.

Another crucial concept for marketers is the endowment effect, which Natalie Nahai discusses in her book. There's a fascinating study where two groups of participants are given loyalty cards.

One loyalty card has seven stamps to collect, while the other has nine stamps but with two of them already stamped. Essentially, the loyalty cards are the same – they both require seven stamps to redeem a free coffee, but one card appears to have already made progress.

The study found that people were 82% more likely to complete a card that already had two stamps on it. This is the endowment effect: if a project has begun, we’re more likely to complete it.

This concept can be easily applied to product marketing. For example, you can create a sense of endowment in an app by telling users they're already 50% through their free trial – Headspace does this especially well.

If you're an e-commerce brand, you can also harness the endowment effect during the checkout process, indicating how close customers are to completion. Implementing these small changes can significantly improve completion rates.

Those are just a few of the ways you can massively improve your marketing by applying some basic principles of consumer psychology, rather than relying on gut instinct. Now let’s take a closer look at three more core principles you can use: distinctiveness, anchoring, and scarcity.

1) Distinctiveness

Distinctiveness is exactly what it sounds like – it’s the idea that things that stand out are more likely to be remembered.

This concept was discovered nearly 100 years ago by a consumer psychologist with a very distinctive name, Hedwig von Restorff. She gave participants long lists of letters and interspersed within these letters were a few numbers.

Unsurprisingly, the numbers were 30 times more likely to be remembered because they were distinct.

The same principle applies to brands. If you show people a dozen automotive brands and include one fast food brand, people are more likely to remember the fast food brand because it stands out. Again, that’s perhaps not very surprising.

What is surprising is how many brands fail to capitalize on distinctiveness. For example, in football, most sponsors are beverage brands like Heineken, Carling, Carlsberg, and Budweiser. In the Premier League, nine out of 20 shirt sponsors are gambling companies, so there's no distinctiveness there – they’re all in the same category.

SaaS has the same problem. Websites of companies like Zendesk, Asana, Airtable, and Buffer all feature similar cartoons and web designs on their homepages, suggesting that they’re following their competitors.

The best example of this was shared by Richard Shotton, who I had the pleasure of interviewing for my podcast. He found that ads for watches are not only identical (they all feature celebrities like Daniel Craig or Leonardo DiCaprio wearing a watch) but the watches are also set to the exact same time – eight minutes past ten – regardless of the brand. In short, there’s a huge amount of copying going on and a lack of distinctiveness in marketing.

When you are distinct with your marketing, you can generate real performance improvements.

For example, the public service responsible for collecting taxes in Australia sent out letters encouraging people to pay their taxes on time and avoid late fees. They added a big red "urgent" stamp to the letter, making it more distinctive. This encouraged more people to open the letter, and they then paid their taxes on time, saving $4 million in late fees.

Copenhagen provides another example. The city wanted to reduce litter on its streets, so it painted its bins neon green and added neon green footprints on the ground leading to the bins. This resulted in 45% more rubbish ending up in bins rather than on the streets.

A company that successfully used distinctiveness in its marketing strategy is Comparethemarket.com, a UK brand that compares utility companies. About 10 years ago, they were in a difficult market where every competitor used the same language to market their products, focusing on benefits, features, and competitive differentiators.

To stand out, they introduced a new ad that didn’t talk about features, benefits, or competitive differentiators. Instead, it told the story of a meerkat who ran the website comparethemeerkat.com and was annoyed because comparethemarket.com was stealing all its traffic.

This ad didn't showcase the product in any special way, but it made the company stand out and become distinct. That ad generated an 83% increase in awareness, propelled them to market leadership within just a couple of months, and allowed them to achieve their 12-month objectives within just nine weeks – an incredible impact.

2) Anchoring

The next principle of consumer marketing I want to explore is anchoring. Anchoring is the idea that we can change our behavior based on the initial piece of information we see.

A fascinating study by Dan Ariely in his book "Predictably Irrational" demonstrates this concept. He wanted to see if he could change the amount people bid on an item based on a random number they saw.

At the time, Ariely was a university lecturer. In one of his classes, he asked everyone to look at their social security cards, which all have a 10-digit number on them. He then asked the class to split itself into two groups based on the last digit of their social security number: those with a number between 0 to 4 on one side of the room, and those with a number between 5 to 9 on the other side. Since social security numbers are random, the groups were split randomly as well.

Next, he asked the students to look at the last digit of their social security number again and memorize it. Then, he asked the students to bid on a variety of items, such as a bottle of Prosecco, a keyboard, a mouse, and a book.

In theory, there should be no statistically significant difference in how these groups bid, as the only difference between them was their randomly assigned social security number.

However, the anchoring effect came into play. Those who saw a higher number (5 to 9) and were asked to remember it bid, on average, three times more for the same items than those who looked at the lower number (0 to 4) first.

For example, the average bid for a keyboard was $16 for the low group and $55 for the high group – an incredible difference when you consider that the only differentiating factor between the groups was the number they had looked at.

There are also interesting examples of anchoring used in sales. Stephen Martin and Joseph Marks, authors of the book "Messengers," conducted an experiment to see if they could improve the efficiency of sales in a real estate agency by applying the principle of anchoring. They wanted to see if changing the initial piece of information that someone receives when they call a real estate agent could affect sales.

What they did was ask the receptionist, when picking up the phone, to add a bit more information about the real estate agent before transferring the call. Instead of simply saying, "I'll pass you over to Peter," they were asked to say something like, "I'll pass you over to Peter; he has over 20 years of experience and would be perfect for you." They weren’t lying, as Peter did have 20 years of experience and was likely the ideal person within the organization.

By making this small tweak, they increased the number of inquiries converted to valuations by 20%, which ultimately increased sales by 20% as well. Just by adding that tiny anchor at the beginning of the buyer’s journey, you can make a massive change in people's behavior – even for huge decisions like buying houses.

3) Scarcity

The final principle we’re going to dig into is scarcity. The scarcity principle essentially states that we’re more likely to desire scarce resources.

For example, when a pub rings the bell for last orders, it showcases scarcity – time’s running out to buy a beer – and that’ll encourage an increase in purchases. Similarly, people scramble to buy Glastonbury tickets because they know they're a scarce resource.

The power of scarcity was truly discovered back in 2000 in a fascinating study that revolved around selling jams.

In this study, researchers set up jam booths in supermarkets across the US over several weekends. There were two types of booths, with only one variation between them. One booth offered a large variety of jams – 24 different kinds – for consumers to choose from, while the other booth only had six varieties. They tested which booth generated more sales.

Conventional product marketing wisdom would suggest that the booth with 24 varieties would generate more sales, as consumers could find the jam they really liked among the many options.

However, consumers don't actually think that way. They were more likely to buy from the booth with only six varieties because of the scarcity effect.

In the study, 30% of consumers went on to make a purchase from the booth with six types of jam, whereas only 3% of consumers bought from the booth with 24 varieties.

That shows that when there are fewer resources, even if it's not claimed to be scarce, even if it's just a lower number of products available, scarcity is perceived and people are more likely to buy.

This holds true in other studies as well. One fascinating study involved cookies. When participants were shown a full jar of cookies and asked how much they would be willing to pay for one, they gave a price.

However, when they were shown the same cookies in a nearly empty jar, they were more likely to pay more for the scarce cookies, even though they were identical.

The same has been found with movie posters. When people are shown movie posters and asked how likely they are to see the film a relatively small proportion say they’re going to attend. But when they’re told the film is ending this weekend, adding a bit of scarcity, it makes people 36% more likely to attend. The same people, and the same movies, but just a bit of scarcity dramatically influences behavior.

My favorite study about scarcity, which reveals how much people are nudged by marketing messages, involves cans of soup in a supermarket.

In this study, researchers set up marketing messages in the supermarket about a special offer on soup. The marketing campaign worked, and people went and bought soup – three cans on average.

Brilliant, right? Marketing works, and everyone can pat themselves on the back knowing that they're doing a good job. Well, let’s see what happened next.

Researchers trialed adding a bit of scarcity to the marketing message. All they did was put an asterisk on their marketing message, and under the asterisk, they wrote, "Sales are limited to 12 cans per person."

Now, this should have had no effect on behavior whatsoever because nobody was buying 12 cans of soup in the original control group. However, this small limitation dramatically changed their behavior.

Instead of buying three cans of soup, when they saw the slightly tweaked message, they bought on average four and a half cans of soup – all because of the perception of scarcity.

How product marketers can apply consumer psychology

Rather than going into more detail about specific studies and nudges you can apply, the main piece of advice I’d like to give is to educate yourself on consumer psychology, rather than relying on your gut.

When we rely on gut feelings, we’re not very efficient and our product launches often end up failing. If we try to understand our consumers and learn the science behind their decision-making processes, we're more likely to generate the behaviors and results we want with our marketing – this applies to both B2B and B2C contexts.

The other important thing to mention is that while a lot of the studies I’ve talked about show game-changing results – 20% more real estate sales for instance – some of these methods will work better than others for your organization. They're always worth trialing to see what works in your industry and for your market.

Recommended consumer psychology books for product marketers

I’ve mentioned a few books and studies already, but let me leave you with a little bit more information about them, plus some other books I recommend for PMMs looking to brush up on their consumer psychology.

"The Choice Factory" by Richard Shotton details the key studies and research on consumers and makes them applicable to modern-day marketers. Our marketing team at Brandwatch read the book, and it led to immediate changes in our tactics and activities. We introduced new goals, principles, and campaigns, and we saw some dramatic improvements by incorporating these insights from consumer psychology.

The godfather of consumer psychology is undoubtedly Robert Cialdini, who wrote "Influence." In fact, "The Choice Factory," is a modern adaptation of Cialdini's work. “Influence” was one of the first books that aimed to help marketers and salespeople understand the world of consumer psychology.

There are a bunch of different books available on the subject, but if you truly want to gain a deep understanding of consumer psychology, I would highly recommend starting with "Influence." Despite being a few decades old, it remains a fascinating read. It provides brilliant insights into how scarcity, social proof, and a bunch of other factors influence buying behaviors. I’d recommend it to anyone looking to better understand consumers.

Steve Martin is another prominent figure in consumer psychology who has written books like "Yes!" and, more recently, "Messengers." Both of these books are excellent for understanding how consumers' brains operate.

For those interested in a more scientific approach, Dan Ariely's "Predictably Irrational" is an intriguing read. There are books on consumer psychology that cater to specific niches as well; for instance, Nathalie Nahai's "Webs of Influence" is a fantastic resource for those interested in applying the principles of consumer psychology to web design.

Tap into Consumer Psychology and benefit from behavioral economics

Consumer psychology, or customer psychology, is the field of understanding why we buy and consume. It includes the choices we make, how we make them, what influences us, whether we purchase something or not, how social dynamics play a role, and much more.

And it doesn’t stop at just purchases. It also helps us understand how customers spend their time, attention, and other resources. Any kind of consumption is covered.

If you work in marketing, your job is to get people to buy more of something or do more of something. Without consumer psychology expertise, a piece of the puzzle will always be missing.

The Consumer Psychology Certified: Masters course delves into the fascinating and intrinsic relationship between consumer psychology and product marketing approaches.

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This course will take you through important topics like what is consumer psychology, why it's important, what affects consumer behavior, and how consumer psychology is used by marketers.