New Insights in Marketing from Behavioral and Causal Economics

Marketing professionals are constantly on the lookout for new insights that can help them identify, engage, convert, retain and grow clients. Behavioral economics has recently become of priority interest to marketers because it helps explain the ‘irrational’ biases potential buyers exhibit. Buyer behavior has always been central to marketing, but behavioral economics puts some disciplined structure on how marketers can analyze it.

The consumer psychology associated with behavioral economics can help marketers better manage the buyer journey with interactions that help move prospects along the conversion cycle. But behavioral economics in its mainstream form is loose and difficult to consistently apply. That’s because it essentially mashes together a structural analytical framework—cumulative prospect theory—with a separate laundry list of psychological biases. In applying the insights of behavioral economics, marketers generally find themselves applying one-off biases, with no underlying glue to hold them together. Cumulative prospect theory is built on short-term ‘lottery’ type outcomes, which doesn’t even closely represent a buyer’s journey. Sales cycles can take a long time, especially for big-ticket, complex purchases and when maximizing lifetime customer value.

That’s why there’s growing interest among marketers in a particular new stream of behavioral economics, known as causal economics. Causal economics provides a consistent way of thinking about buyer behavior across the entire funnel, identifying choke points and associated opportunities to get conversion back on track. Causal economics is constructed exactly the way the buyer journey is—deliberate upfront investment/effort is required by prospects and marketers—in anticipation of expected future returns from continued engagement. In causal economics this is formally known as the principle of causal coupling. Significant decisions in life always follow this structure over time—there are no free lunches in the inevitable long-term.

People often think of purchases as transactional one-offs. But even the most trivial decisions we make are generally carried out within the context of bigger decisions we’ve made and reinforced for years—those which define our existing beliefs—about family, health, money etc. These beliefs are usually both rational and irrational. Research in neuroscience demonstrates that 95% of our decisions are actually driven by unconscious emotion. The psychological principle of cognitive dissonance also makes clear that we can hold one view consciously that is at odds with our subconscious behaviors. Marketers will be successful when they address the underlying core belief decision of the potential buyer and the biases they’ll exhibit on the journey.

Positioning Value

Some of the most relevant and highly utilized psychological drivers employed in marketing are the principles of framing and anchoring. Framing is what marketers have always done—positioning their communications to emphasize certain elements that define the context of the decision maker. When framing is based on specific numbers, words, symbols etc., it’s known as anchoring. Marketers have traditionally been used to positioning only the benefits of their solutions—when is the last time you saw a brochure talk about implementation challenges? Causal economics teaches us that this blatant lack of honesty creates a barrier for potential buyers, because they now have to go out on their own to find out from others what costs truly exist. They lose trust and it introduces research friction into your sales cycle. Marketers that understand causal economics and causal coupling are more forthright in their communications, which builds trust, loyalty and lifetime customer value.

Sales and marketing teams often focus on relationships as the driver of business. Relationships are vital since people want to do business with others they like—individuals and/or brands. But it’s critical to make sure you also position actual tangible benefits, which may involve a numerical business case. Don’t make buyers do the work. B2B marketers often invest effort in helping their buyers ‘sell internally’ to their stakeholders. This is a great differentiator, increasing the sales and marketing team’s work, but reducing that of the client. It’s not without the risk of time spent on the wrong opportunities. But in the long-term, as long as prospects are well targeted, this is a strategic way to increase the psychological change in Benefit/change in Cost ratio your buyer faces.

The best B2B marketers follow the challenger approach in their positioning. The challenger approach was introduced by the Corporate Executive Board in 2011, and it’s just what it sounds like—your team adds unprecedented value by challenging buyer assumptions and educating them on issues they didn’t even know they had—issues competitors certainly wouldn’t know about. Challenger selling and marketing can actually add psychological cost and effort to buyers up front, for greater rewards at the end. That’s why it isn’t easy and takes the right kind of sales and marketing teams to drive it. Challenger sales and marketing thinking is very aligned to the thinking of causal coupling.

Market Research

Causal economics defines buyer decisions to include intent and action. If there’s no action, people are just dreaming and it isn’t going to translate into business. Marketers that understand causal economics stay away from research surveys and polls. These can only measure buyer intent. Marketers need to spend time with customers, directly observing and hearing about pain points they are trying to pay to solve but can’t find viable solutions for. Too often market research involves surveys sent to possible buyers to test smart ideas that came from inside the seller organization—they just seem awesome! This is 100% backward because the concepts don’t bubble up in real time from customer problems and because the survey only measures intent.

Motivating Change

It’s hard to kick-start potential buyers into action. That’s because so many psychological factors reinforce the current situation, such as cognitive dissonance, status quo bias, recency and selective perception, to name a few. Cognitive dissonance occurs when people face new information that is inconsistent with their beliefs and the discomfort has them try to reconcile with existing beliefs. This is clearly a potential barrier to change. The principle of recency reminds us that people remember and give priority to what they have most recently experienced. Marketers know that timing is everything in the competitive mind space of the buyer—and of the need to spring into action when they buyer is in the right mindset. If the marketer isn’t influencing a prospect’s ‘recency’, then what is recent will just be the status quo. Status quo bias is pretty self-explanatory; people associate discomfort and higher costs with change relative to the current situation. With this in mind, selective perception also results in people hand-picking new information to align to their beliefs, including the belief that the status quo is easier than change.

As a marketer, you’ve got to help potential buyers manage through these irrationalities in order to move them through your funnel toward purchase and repurchase. With all of these biases holding buyers back from helping themselves, what can a marketer do? Purchasing your solution requires change—plain and simple—so you have to get your buyer to a point where their perceived cost of doing nothing is sufficiently higher than their perceived benefit of doing something—trying your solution. You have to put this change ratio in your favour versus competing alternatives—based on honest and upfront positioning.

Risk Aversion

One of the most famous insights that behavioral economics brought to the forefront is the explicit difference in perceptions we have of risk versus gain. Behavioral economics shows us that decision makers usually weight losses twice as much as gains. We are more focused on avoiding loss than we are in obtaining gain. We also tend to pay too much attention to low probability outcomes and too little to high probability ones.

Cost Aversion

Risk aversion gets all the attention, but just as important are known, upfront and deliberate costs. This insight is added to behavioral economics through causal economics. Based on an endowment effect perspective, cost aversion can result in people avoiding necessary upfront costs, as a result foregoing the potential long-term benefit they are truly after. Endowment effects are the bias that people don’t want to part with anything if they don’t have to.

Free Trials

A very popular method of moving people along the buyer’s journey is offering a free trial. Free trials allow potential buyers to experience the solution, reducing some fear and apprehension costs and making potential gains seem more possible. Free trials are a great tool for increasing the change in benefit/change in cost ratio of potential buyers and encouraging conversion to the next stage of the cycle. Free samples have been taken to an extreme through the economics of Free, introduced by Chris Anderson in the book of the same name.

Social Proof

Marketers can offer some solutions for free or via trial, but it isn’t always possible when solutions are fully customizable, big ticket, complex and costly to produce. In those cases, case studies and testimonials from similar customers are the next best option to increase comfort around unknowns, improving the buyer’s change in benefit/change in cost ratio. Potential buyers should logically do their own thorough research for best results, but in practice they simplify their research massively by relying on this type of ‘social proof’, including references from trusted friends, but even anonymous online posts. This helps save massive time.

Timing

Buyers very often place more emphasis on the present relative to the future than would be suggested by fully rational behavior. In psychology this is known as hyperbolic discounting. This bias makes it challenging to keep potential buyers focused on the short-term and long-term relationship, but being aware of it helps the marketer try to significantly improve the change in benefit/change in cost ratio for the longer term.

Nudging

Behavioral economics has made famous the concept of nudging, a principle advanced by Nobel Laureate Economist Richard Thaler. To ‘nudge’ the marketer applies positive reinforcement and indirect suggestions to influence behavior. This goes beyond just educating with information. It’s action-based. An example of nudging would be placing high margin, impulse purchases near the cash register. Your reaction to this might be like that of famous marketer—Philip Kotler—that this is marketing. In the end this is what marketers do. So keep on nudging, and be explicit about it.

Are You Helping Buyers Buy or Selling?

Marketers that understand causal economics and causal coupling have a very unique insight—a massive competitive edge. Traditional sales and marketing usually comes down to a buyer going through their own search, cutting through marketing messages that are all ‘benefits’ to find the truth about costs. At the same time sellers and marketers are generally feeding more and more repetitive ‘all benefits’ messages on their own aggressive, interruption timelines. Messages are so often also based on product features before a prospect is even clear on what their problems really are and what potential solution approaches may look like.

A clear example of this disconnect and how ridiculous it is, is the reach out to the cold prospect. Salespeople and marketers often interrupt a prospect with a cold connect and proceed to ‘qualify them’. The prospect gets no value and in fact endures cost from going through the one-sided process. The incremental benefit/incremental cost is usually <1 in these cases—no wonder such an approach has such low conversion.

So how to do it right? Sales and marketers need to spend time providing insight in communities, like LinkedIn Groups, blogs etc. becoming a source of realistic and transparent value. Not networking groups of a bunch of other exclusively sales people. You need to be in groups driven by member issues and strategic discussions. Content is critical, but most content is crappy generic, pitching advice—all cost to the buyer and no benefit. Content is not king. Action is. Information is everywhere and even when insightful it just describes possibilities. Talk is cheap, so when sales and marketing professionals take action and deliver value up-front they stand out from the crowd by improving the incremental benefit/incremental cost faced by potential buyers. That’s the only way to move an opportunity forward.

Next Steps

As a marketer, reinforcing the central concept of causal coupling keeps your team focused on constantly breaking down psychological cost barriers and amping up psychological benefits. It’s vital to stay abreast of the latest relevant thinking in a constantly changing world. Behavioral economics and causal economics definitely fit into that category. Prospective buyers in your funnel can be lost for many reasons. Don’t let it be the result of a fundamental misunderstanding of the nature of decisions, including bias behaviors that your team could better manage through education and attention.

For more insights on causal economics, visit www.causaleconomics.com.