How Companies Exploit Consumer Psychology

By Param Vastani

Economics is based on the assumption that people are completely rational and only take the decisions that yield the best results for them after carefully considering every outcome. However, real people aren’t like this. We often don’t think too deeply about everyday decisions and prefer the easiest option. This aspect of humans is often exploited by companies to get people to spend more, without them even realising. In this article, I will cover how companies exploit our emotions, behaviour and laziness to get more out of buyers.

Let’s talk about how they get people to spend more unnecessarily. We often look at values of items relative to each other and anchor to a particular price. For example, a movie theatre may sell a small serving of popcorn for $10, and a large serving for $11. The large serving seems like a great deal in comparison, but it isn’t on its own. Our mind anchors to the high price of the small size, making us overvalue the product. Similarly, a service may come with a basic plan and a premium plan, with the difference between the prices not being that huge, but the services received are significantly better on the premium plan. The consumer thinks that they might as well get the premium plan by spending a little more. Anchoring, combined with artificial scarcity is also used to make many products “luxury”, by creating a perceived exclusivity.

Consumer emotions are also used by companies, be it nostalgia for classic products or flavours, or the fear of missing out. Making highly demanded items a limited time deal creates FOMO and urgency for the consumer, making their want for the product increase. Bringing out highly demanded or classic items for a limited time also creates a buzz, and thus free advertising.

Companies often exploit consumers’ attention, or lack thereof. There may be advertisements claiming a product is healthy or has low calories, only for the fine print to mention the actual serving size, which is often unrealistically small as compared to actual consumption. Companies may also sell a base product at a very cheap price, but make the items that complement it very expensive. An example of this includes printer ink, or a restaurant making a basic pizza cheap but charging a lot for each topping.

The Prospect Theory in behavioural economics says that humans value losses and gains differently, that is, a loss of $10 is more significant to us than a gain of $10. Companies use this tool in phrasing. For example, a discount on an item from $40 to $20  phrased as “save $20” instead of “get for $20” is more effective, as we value a reduction in “losses” more. Similarly, “Get 3 for the price of 2” works better than saying “33% off on each item”.

The Nudge Theory, given by Richard Thaler and Cass Sunstein, is another tool used by them. The theory says that the environment around us or the way the choice is presented also affects our decision making. The theory can have several positive impacts, from helping workers save more, increasing organ donation, or making people eat healthy. The key lies behind making good decisions simply to make, or require effort to opt out from. Companies can use it for their own gain as well. Many decisions that consumers make, they don’t really care if they don’t have a significant impact on their lives, and thus prefer to take the simplest way out.

Subscriptions are a great example of how companies exploit our laziness. Free trials of services often auto renew after a month if the user doesn’t cancel them. Some subscriptions are so difficult to cancel that the customer never gets around to cancelling them, at least for some time. This may include cases where you may have to call customer support to cancel the subscription, or the process of cancellation is too long or complicated. Another example is how supermarkets may often place more expensive items in easier to reach places and cheaper alternatives out of direct sight, making a person actively search  for them.

The environment in which the decision is made also matters. For example, products such as chocolates and other cheap, easy to carry items may be placed near the exit in a supermarket, such that the consumer doesn’t think much of it and makes an impulse purchase. Streaming services make it very easy to move on to the next episode at the end of one, making the viewer spend more time on the platform.

The branch of Economics called Behavioural Economics deals with how people behave in the real world and interact with their environment. It’s used in our everyday life more than we realise. By just being aware of these practices and the influence our surroundings have on us, we can make one less bad choice.

This article doesn’t even scratch the surface of the numerous practices used to get more out of consumers, but shows us we can be more mindful as consumers while making decisions. Anchoring, relative pricing, evading losses, preference to easy decisions are just a few commonly seen tools. Awareness about theories such as the Prospect Theory and the Nudge Theory in behavioural economics  can help us make better and more rational decisions. We may think that we do not fall for such practices and are better than others, but that’s not the case. Such theories tell us how we often make obvious mistakes or wrong decisions just by not thinking hard enough. Thus, by being aware of these practices, we can establish control over our cognitive biases and make better decisions.

References:

“Nudge” by Richard H. Thaler and Cass R. Sunstein

“Thinking, Fast and Slow” by Daniel Kahneman

“Predictably Irrational” by Dan Ariely

“The Undercover Economist” by  Tim Hardford