behavioral economics – The Business of Social Games and Casino

Ways to improve your game (or product) using neuroscience

Earlier this year, I wrote a post that highlighted ways behavioral economics could be applied to gaming, and I recently read a book that provided additional opportunities by layering on neuromarketing. I read Brainfluence: 100 Ways to Persuade and Convince Customers with Neuromarketing by Roger Dooley and while not the perfect book (it was more a collection of articles and many were not truly neuromarketing) it did provide some strong tidbits that you can use to optimize your product.

Neuromarketing is the science of studying the brain to predict consumer behavior and decision making in different situations. Neuromarketing includes the direct use of brain imaging, scanning, or other brain activity measurement technology to measure a subject’s response to specific products, packaging, advertising, or other marketing elements. Researchers use these tools to measure changes in activity in parts of the brain and to learn why consumers make decisions.

Based on this science, Dooley shows multiple applications not only for marketing but product design.

Neuroscience can help with your pricing strategy

Neuromarketing is particularly powerful in driving pricing strategy. Successful pricing strategy minimizes the pain caused in your customer’s brain while amplifying the pleasure. There are many areas of pricing where you should apply a strategy that minimizes this pain:

Dooley shows that absolute cost (a high price) is not the only variable that causes pain. Instead, it is the perceived fairness or unfairness of the deal that creates the reaction. Noble Prize winning behavioral economist, Richard Thaler, showed that thirsty beachgoers would pay nearly twice as much for a beer from a resort hotel than for the same beer from a rundown grocery store.Thus, the price you charge must be perceived as fair. If it is more expensive than competitors, explain why it is a premium product.
People do not weigh the current gratification versus future gratifications. Instead, they experience an immediate pang of pain when they think about the cost of an item (whether virtual or real). Dooley asks, “[w]hy do people love to prepay for things or pay a flat rate for things? Again, it mutes the pang of pain.”Thus, to minimize this pain you do not want to constantly be asking your customers to make purchases. According to Dooley, [t]he worst-case alternative is when you pay for sushi and you’re paying per piece. Or watching the taxi meter; you know how much every inch of the way is costing you….Selling products in a way that the consumer sees the price increase with every bit of consumption causes the most pain…. Avoid “drip-drip-drip” pricing structures that punish the buyer every time she does something.”
Another way to reduce the pain caused by a purchase decision is moving the cost to the future and breaking it into smaller bits. A credit card reduces the pain level by transferring the cost to a future period where it can be paid in small increments. Dooley writes, “not only does a credit card enable a consumer to buy something without actually having the cash, but it also tips the scale as one’s brain weighs the pain versus the benefit of the purchase.”
Bundling is another strategy to lower the pain that purchases cause for consumers. Cost is relative, it is not simply the cash value but it is the context around the deal. People can spend hundreds of dollars on accessories when buying a car with little pain, but a vending machine that takes 75 cents and produces nothing is very aggravating.Auto luxury bundles minimize negative activation because their price tag covers multiple items. The consumer cannot relate a specific price to each component in the bundle (cruise control, power steering, metallic paint, etc.) and thus the customer’s equation will change in determining if it is a fair deal or whether each item is worth the price to them.
According to Dooley, “if you find yourself in a situation where, for cost or other reasons, the price of a product is likely to produce an “ouch!” reaction from your customers, see if some kind of a bundle with complementary items will dull the pain.”
Another area of pricing strategy relevant to gaming is priming. Priming occurs whenever exposure to one thing can subsequently alter behavior or thoughts. Research conducted by my favorite behavioral economist, Dan Ariely, showed that by getting subjects to think of a random number, in this study it was the last two digits of their Social Security number, the price they were willing to pay was impacted by that random number. A higher random number led to higher prices. Thus associating the price of an item with a high number would make the virtual good or item you are selling appear cheaper.
Another application of neuromarketing to pricing is by offering huge potential reward for a purchase. According to Dooley, a “Stanford University study shows that big potential rewards produce big responses, even if they are unlikely outcomes. In other words, our brain is very responsive to the size of the reward and far less sensitive to the probability of actually receiving that reward.The clear message is that it’s the magnitude of the grand prize that is the most important factor in a giveaway. When choosing a topline prize, think big—even if the odds are lower, people will respond better if there are more zeros at the end of the number. Here are a few ways to maximize the prize value: Concentrate the prize budget on one prize. Use a play-off system or other approach to permit a huge prize with tightly controlled probability of awarding it.”
Pricing not only impacts monetization but customer satisfaction. A higher price frequently assists customers in percieving a product as being higher quality. According to Dooley, studies found that “wine thought to be more expensive really does taste better at the most fundamental level of perception. The important aspect of these findings is that people aren’t fibbing on a survey; that is, they aren’t reporting that a wine tastes better because they know it’s more expensive and they don’t want to look dumb. Rather, they are actually experiencing a tastier wine.”

Creating trust

In many businesses, including iGaming, building trust is critical. Neuroscience points to several techniques that can help create this bond with your customers.

The first is reciprocity. Dooley writes, “[w]ant your customers to trust you? Show that you trust them! The concept revolves around that seemingly magical neurochemical oxytocin, which is a key factor in forming trust relationships.”

You also need to stress that you are trustful. According to Dooley, “[r]esearchers found that placing the following statement at the end of an ad for an auto service firm caused their trust scores to jump as much as 33 percent! — ‘You can trust us to do the job for you.’”

Neuroscience research also showed listening to customers directly increased their perceived trust. The customer needs to believe his or her concerns are being heard, and you can accomplish this not only face to face (which is impractical for customers of most games or apps) but with phone calls or web chats.

Building this trust also insulates your business. Almost every customer relationship is tested some time. For customers and players to not only work through the issue but still promote your company, you must invest the time in cultivating the relationship before that relationship is put to the test.

Asking your customers what they want is counter-productive

Dooley begins by showing how neuroscience confirms the challenges with market research. I have written about The Risks of Market Research and better research options, and Dooley explains that neuroscience investigation has shown that 95 percent of our thoughts, emotions, and learning occur without our conscious awareness. Given that customers do not know why they make choices 95 percent of the time, research efforts asking them questions are doomed. Dooley writes, “although there are conscious and rational parts in most decisions, marketers need to focus first on appealing to the buyer’s emotions and unconscious needs.”

Neuromarketing to build a loyalty program

I have always been a big advocate of loyalty programs, having started two at game companies that both vastly exceeded expectations, and Dooley shows how neuromarketing can also help improve the performance of these programs. Dooley points to several factors needed for an effective program:

The underlying product or service must be at least comparable to the competition
Neuroscience also points to the need to show people progress. The mere illusion of progress caused people to buy coffee more frequently. In one study, the group that started with apparent progress on their card bought coffee more frequently than the empty-card group. When building your program, you should not only allow players to progress to better tiers but also give them a head start on their first goal.
The rewards offered must be attractive to the consumer.
Brand preferences and other factors may undermine loyalty programs. “Switching costs” may increase loyalty to the current brand and reduce the impact of competing loyalty programs.
Purchase frequency must be high enough to keep customers engaged.

Neuromarketing research shows that even when the value of loyalty points is less than the value of a real-money price difference, the consumers are often persuaded by the loyalty points (this fact is reflected in airline frequent flier programs valued at more than the underlying airlines).

Brands Matter

Another key learning from neuromarketing is that brands matter. As marketing, especially in the gaming industry, focuses on performance marketing (advertising where you pay based on a customer’s specific action, such as downloading your game), opportunities with brand marketing are often neglected. Dooley, however, presents data that branding does have a strong impact on customer’s perception of your game. If your customer believes a product is better, it will be better.

He shows that a lack of action or even attention does not mean an ad has no impact. The presence of familiar things, even if the customer (or potential customer) is unaware of the exposure, makes them feel better when they see or play the product. Dooley writes, “the key point for marketers is to keep your brand visible even when people don’t seem to be paying attention.”

Additionally, branding increases the social value of your product, both generating more usage and more referrals. According to Dooley, “[i]n neuromarketing terms, our brains are hardwired to want to be in one or more groups. Brands that can be positioned to put their customers into a group will find that their efforts will be enhanced by their customers’ own need to belong…. [Neuroscience experiments] led to the theory of social identity, which states that people have an inherent tendency to categorize themselves into groups.”

Branding that drives social identity then drives passion. Passion brands are those with which consumers form an emotional attachment and recommend enthusiastically to their friends. Your customers can sense the passion of your people, even if they don’t process it consciously.

Neuroscience also shows that branding should not be confined to one sense, ie. the written word, but should appeal to as many senses as possible. Research cited shows that brands that appeal to multiple senses will be more successful than brands that focus on only one or two. While it is hard for a gaming product (or any app) to appeal to all five senses, by thinking in multiple sense you can create stronger branding. For example, you may want to associate songs or sounds with your product. Dooley writes, “consistency is the key in building the sensory aspects of your brand. Consistent use is the key to effective audio branding. Constant repetition breeds familiarity, whether it is a cell phone chirp or a variation on Rhapsody in Blue.”

Use neuromarketing to improve your advertising creative

Branding is not the only area neuroscience helps marketing. Neuromarketing provides multiple ways to create more effective copy.

Use a familiar feeling visual. If you present a viewer with a familiar image or situation, that person’s brain will automatically predict what will happen next. This will allow your customer to fill in the story.
Do not use a familiar feeling visual. Conversely, if you insert an unexpected image, word, or event, it will grab the audience’s attention to a much greater degree than had the predictable occurred.
Use a word or phrase in a new way.Just as you can jolt someone’s attention by using an image in an unexpected way, you can do the same with copy. Take a word that people know, and use it in an unexpected way.
Create a savings message. A study found that exposing consumers to a “savings” message caused them to spend more than when they saw a “luxury” message.
Numbers over percentages. The brain reacts stronger to real numbers, not percentages. Rather than 25 percent off of a $100 item, say $25 off.
Use the word Free. According to Dooley, “FREE! is more powerful than any rational economic analysis would suggest. If you want to sell more of something, use that power. I often see department store offers such as, “Buy one pair of slacks at regular price, get a second pair for only one penny!” That may sound clever — ’ Wow, pants for just a penny!’ — but I think free will outperform the penny offer. Want to spark sales of a product? Try offering something free with it. Want to get the widest possible sampling of a new product? Use a free sample.”
Use the word New. Neuroscience has shown that the appeal of NEW! is hardwired into our brains. Novelty activates our brain’s reward center.
Create personal stories. To engage potential customers, write a vivid story involving your product or brand. Include action, motion, dialogue, and other aspects that will activate different parts of your customers’ brains. Turning a testimonial into a personal anecdote will greatly increase its impact. Adding a name, a face, and a story will play to the way our brains evolved and be more convincing and more memorable.
Strategically decide between simplicity and complexity. Asking customers to make simple decisions work out best if you are selling a complex product like an automobile, give the customer a simple reason to buy your product.

Fonts are critical

Another area where neuromarketing helps is in appearance. The way people perceive information can be affected intensely by how simple or complex the font is. In one experiment, readers of a promotion in a simple font were more likely to make a commitment than if the font was complex. In a similar experiment involving a sushi recipe, subjects who saw the instructions in a simple font believed that preparation would take 5.6 minutes, while those who read the directions in a more complicated font, expected it to take 9.3 minutes.”

Font can then drive your conversion rates. As Dooley writes, if “you need to convince a customer, client, or donor to perform some kind of task, you should describe that task in a simple, easy-to-read font…. Since the perception of lower effort is related to the concept of cognitive fluency, you should also make the type size easy to read and use simpler words and sentence structure.”

Simpler is not always better, though. If you are selling a costly product, describing it using a hard-to-read font will suggest to the viewer that more effort went into creating that product. Further neuroscience research shows that the additional effort required to read complex fonts leads to deeper processing, and ultimately better recall.

The important point is that the font you choose should support what you are trying to achieve. It may not be obvious if a simple or complex font is best, so test both, and understand what drives the desired behavior.

Use images of people

Neuromarketing also reinforces the value of incorporating images of faces in your product and marketing. According to Dooley, a “face in your ad will attract attention, but be sure the face is looking at what you want the viewer to see — your headline, a product image, or whatever is key. Viewers will examine the face, and then subconsciously be drawn to what the eyes appear to be looking at.” Images are another area where testing makes a huge impact, different images, different looks will have varying impact; it is worth the effort to test various images and angles to optimize influence.

Tactics for optimizing your landing page or website

Neuroscience can help you design your website or landing pages. Dooley writes, “[r]esearchers … were stunned to find that showing users an image of a website for a mere 50 milliseconds — that’s just a twentieth of a second — was sufficient for them to decide how appealing a website was. 1. The 50-millisecond rating for visual appeal correlated highly with ratings given after much longer exposures. 2. The visual appeal rating was found to correlate highly with other ratings—whether a site was boring or interesting, clear or confusing, and so on.”

Part of the impact on getting the website correct is confirmation bias. Confirmation bias amplifies the power of the first impression. Once your minds forms an opinion, you easily accept new information that agrees with that opinion but reject contradictory information.

Reciprocity also impacts effectiveness of websites. Requiring a user to give up contact data before viewing good content is a reward strategy. Most users, however, will not complete a form even for a reward. Instead, a reciprocity strategy can work better; give people something they want prior to asking for their information.

Neuromarketing shows where not to put important items. Dooley writes, “what’s the worst place to put your logo, and where do advertisers most often put their logo in print ads, TV spots, and direct-mail pieces? The answer is the same: the lower right corner, an area dubbed the corner of death.” Thus, it is critical to understand what parts of your site customers are likely to notice and which ones they will ignore.

Finally neuroscience shows that your website or landing page design should incorporate the age of your customers. According to Dooley, using “fMRI scans to examine younger and older adult brains during memory tasks, … both young and old brains were able to activate their brains effectively for building memories but the older brains were far worse at suppressing irrelevant information…. [F]or marketers hoping to appeal to baby boomers and seniors: Keep the message obvious. Use an uncluttered layout for copy and images. Include some white space around the message. Avoid distractions like running screens, sounds, and animations.”

Key takeaways

Neuromarketing, using brain imaging, scanning, or other brain activity measurement technology to measure a subject’s response, shows you can price more effectively by minimizing the customers pain, by not forcing them to make multiple purchase decisions, spreading out the cost or bundling items.
Neuromarketing also shows you can improve customers’ trust by trusting them and specifically telling them you are trustworthy.
It also shows that branding forms an emotional attachment you’re your customer and prompts them to recommend you enthusiastically to their friends

Summer highlights from The Business of Social Games and Casino

Normally, I take the summer off from writing blog posts but 2020 is anything but a normal year. Unfortunately for many, the pandemic meant you had to cancel or postpone your holidays or had more time to add to your knowledge. Thus, I continued to post but at a slightly reduced schedule. If you were lucky enough to get away, below is a summary of my posts over the summer that you may have missed, enjoy.

Lifetime Value Part 29: Increasing Retention

Key Takeaways

Retention is the strongest driver of LTV and data from Google shows the most important retention KPI is the amount of players who return on day 2 after installing your game.
The strongest driver of D2 retention is how many minutes your customers stay/play within the first ten minutes of starting the app.
To improve retention between the first and second days, make the early experience faster and more fun by improving load times (while reducing secondary loading), making your lobby intuitive, and not distracting your player with a bad tutorial or promotions.

Behavioral Economics Tips for Gaming Companies

Key Takeaways

A key lesson of behavioral economics is that less choice often drives better results. When the number of choices increases, our ability to make a decision decreases.
Consumers hate uncertainty. Questions without answers cause fear and kills the experience and sales, it is a customer experience killer.
Use AB and multi-armed bandit tests help you understand how your players will react in the context of your game, market research conversely might provide bad information as people do not know what they want.

How to avoid meetings about the trivial, aka bikeshedding

Key Takeaways

Bikeshedding is the tendency we have to spend excessive time on trivial matters in meetings, often glossing over important ones.
Bikeshedding is damaging because it wastes very valuable time and, more importantly, leads to insufficient discussion of important issues.
To avoid bikeshedding, set a clear purpose for all meetings (and eliminate conversations about other issues), only invite necessary people, appoint a decision maker and have the decision maker set clear parameters for the meeting.

Lifetime Value Part 30: Why clumpiness should be one of the KPIs you focus on

Key Takeaways

We normally focus on analyzing recency, frequency and monetization of the customer but by adding a new KPI, clumpiness, we get a much better understanding of their expected value.
Clumpiness refers to the fact that people buy in bursts and that those customers could be extremely valuable.
Clumpiness can help you better segment players, predict VIPs and target your reactivation efforts and spend.

Why Evo’s $2 billion+ acquisition of NetEnt is more important (to both iGaming and social casino) than you think

Key Takeaways

Evolution Gaming, the largest Live Dealer provider, recently announced a bid to acquire NetEnt, the largest slots provider for $2+ billion.
The deal, in that Evo is the acquirer, shows that Live Dealer is eclipsing slots in the casino ecosystem.
For real money operators, they need to ensure they balance resources around both Live Dealer and slots while social casino companies need to figure out the best way to embrace this opportunity.

Customer analytics tips for gaming companies

Key Takeaways

People who wander around a retail location spend more than ones who immediately find what they are looking for and retailers optimize to create this jiggliness. Online casinos and games can also build in jiggliness so players find new games and offerings rather than simply quickly go to the one they are looking to play.
While satisfaction with customer service positively impacts profitability, the relationship is not linear. Improvements have a strong impact when players are highly dissatisfied (and that is corrected) or when customers with great service make further improvements, companies in the middle often do not see a positive ROI on CS improvements.
A relationship between two variables does not show one is causing the other, to have causation there must be a relationship plus temporal antecedence plus the absence of a third variable driving both factors.

How to get your big initiatives done

Key Takeaways

Many important initiatives, from new products to operational efficiency, bog down and die in the middle phase. They initially have momentum but stall once the initial burst dies down.
To MOVE projects through this middle phase, the Middle element needs a clear and concrete strategy and you need an Organizational structure with capacity to complete the initiative.
The final keys to getting through the middle phase are Valor, making tough decisions and prioritizing the initiative, and getting Everyone involved.

How Operations Analytics can help online gaming companies

Key Takeaways

While Operational Analytics are a focus primarily in retail and traditional businesses, there are many best practices that iGaming and social game companies can leverage.
Forecasting is central to generating and earmarking resources but is often a challenge for game companies, rather than trying to create a point forecast create a range based on moving averages and looking at standard deviation. For new products, create a simulation that will show the distribution of potential outcomes and the risks and rewards possible.
You need one, and only one, distinct goal and then optimize your strategy around that goal; it’s impossible to optimize for multiple goals. Use constraints to incorporate what used to be additional goals.

The risks of market research

Key Takeaways

A sole reliance on customer input and feedback, traditional market research, is built on a model of human decision making that assumes humans are rational, while in practice we are not.
Not only do people provide a response inconsistent with their actions, they often do not understand the underlying causes of their behavior.
Use one or multiple tools that show actual decision making, such as ABn testing or looking at reactions to similar initiatives in adjacent industries, rather than relying on what customers believe is their preference.

Behavioral Economics Tips for Gaming Companies

I recently completed an online course that featured two of my heroes of Behavioral Economics, Oglivy Vice Chairman Rory Sutherland and Duke Professor Dan Ariely, and it included many takeaways that can be applied to gaming companies (social gaming and iGaming). Consumer psychology is changing marketing and product development more than technology so understanding the core principles of behavioral economics is vital to growth, and survival. While I recommend taking the full course (especially the case studies there), below are some of the learnings that would be useful to game companies.

Avoid information or choice overload

A key lesson of behavioral economics is that less choice often drives better results. People can only consciously process a small amount of the information coming in, thus options rich in choice can be too much stimulation. When the number of choices increases, our ability to make a decision decreases.

This issue is clear on a test run in a US grocery store. There was a famous experiment where one group of consumers in a super market had 24 jams available while the other had six. The people exposed to 24 options sampled more but actually bought fewer items. If you are not a big jam eater, another way to visualize the issue is to think of driving into an empty parking lot; with so many choices you have no idea where to park and will probably spend more time driving around than if there were two open spots.

This phenomenon is referred to as choice overload, where the number of choices diminishes sales. For game companies, this issue can translate into how many options to offer in the cashier or how many slot machines to make available when a player first enters your game. The key is more is often not better for your customers or your revenue.

Avoiding choice overload with smart choice architecture

When you are building and optimizing your product, you need to focus on the choice architecture, how you frame and present different options to elicit a desired response. There are several ways to provide the right option for your player while optimizing the choice architecture. One is to consider chunking. In 1956, George Miller found that 7 +/- 2 was the magic number that people could remember. People can recall between 5 and 9 pieces of info in working memory. Thus, rather than giving your customers more than this magic number of choices, create subsets so once they make one decision they can then decide between another seven options. In a game, rather than showing five virtual swords, five virtual arrows, five virtual shields and five virtual loot boxes, offer the customer the choice between swords, arrows, shields or loot boxes. Once they click on one of those, and then show them the five sub-options. Also keep in mind the chunking needs to be meaningful, if you instead sort them by color, people are unlikely to find options they are willing to purchase.

Another technique in optimizing choice architecture is allowing players the freedom to make choice. By affirming someone’s freedom, we can actually make him feel more confident of his decision. To encourage someone to do something, a counter-intuitive response may be to remind them that they are free not to make the purchase.

While there is a magic number, there is no perfect choice architecture for every scenario and product. Hypothesis and testing is critical here. Never stop testing and improving as people will react differently to choices depending on the product, the platform, where they are in the product, etc.

Anchoring is a key driver in perception of cost

Another useful tool for improving performance is anchoring. Anchoring occurs when initial exposure to a number or option serves as a reference point and influences future decisions and purchases. The anchor price, even if a random number, becomes part of a decision set. Once we make a decision about a particular number, that decision stays with us. You then compare other options to the starting point.

Anchoring is used in many situations and businesses. In a restaurant, by having an expensive menu option (i.e. lobster) it makes the other options seem cheap, even though they may be more expensive than you originally were prepared to spend. In the gaming world, if you offer a $1,000 package on your purchase page, while few might buy it, it makes the $50 option look very cheap.

One other element of anchoring is that it is hard to move from free to a cost. We say to ourselves I have been willing to pay zero, I am anchored to zero, so anything above zero does not fit with my historical view of not willing to pay. This is particularly important when we introduce new products to market as it will make it hard to change the price later.

Decoy and middle action

Recently, I wrote about the decoy effect, another pricing strategy based on behavioral psychology. The decoy effect is used when pricing products, adding a third option that drives customers to the most expensive or profitable option. A phenomenon called asymmetric dominance causes customers to change their preference between two options when a third option is presented. The decoy effect is also driven by choice overload, as customers who face many options will adapt by reducing the number of criteria they use for choosing.

What drives the decoy effect is that people derive value not from the intrinsic utility they get from a product but how it compares. Value comes from comparison, if we create comparison, customers will use it, otherwise they will create their own. The simple contrast allows for relativity to show up and point to the option that looks better to something in the set. For example, if you go to Walmart for a TV and there is one option that is $200 and another that is $500, you probably will see if the latter is worth an extra $300. However, if there is also a TV that costs $1,000 but is virtually the same as the $500, you are likely to buy the $500 because it feels like such a bargain, as you are effectively a $1,000 TV. This is a very powerful tool when presenting options to your customers.

Game companies can use the decoy effect when presenting options for in-app purchases. By bundling a high priced virtual good with many other items but not charging for the other items, then putting that bundle next to the virtual good only option, the high priced option appears as a bargain.

We hate uncertainty

Another useful lesson from behavioral economics is that people hate uncertainty. Questions without answers cause fear and kill the user experience and sales, uncertainty is a customer experience killer. Before worrying about motivating your customers, think about the questions and concerns they have and answer them in the first place.

One issues that increases uncertainty (and thus likelihood to lose a sale or customer) is a situation where the customer has missing or incomplete information. Their fears and concerns are not answered. They might not know what happens after they enter their email address or send you their banking information. This uncertainty makes it much more difficult for you to elicit the desired response.

Netflix shows how reducing uncertainty and risk can lead to billions of dollars. The most important message on Netflix’s landing page is not about features, it is the option to cancel anytime. Netflix then sends a reminder email before the free trial ends so the customer can cancel, which answers your uncertainties. This emphasis allows customers to go through the whole process on autopilot rather than full alert. One of the keys to Uber’s success is customers knowing where the car is and expected arrival time, which has proven more important than the car arriving quickly or even price.

Personally, I have found that during the pandemic lockdown, I stopped ordering from local shops that did not provide updates on delivery and kept ordering from the ones who told me when to expect the order. In retrospect, that knowledge (lack of uncertainty) was a much stronger factor than speed of delivery, price or even quality.

Another area of uncertainty that is often neglected is in pricing. Many companies are not very transparent in their pricing, you may not know the cost of a conference or purchase until you click the buy button. What these companies do not realize is that people assume prices are higher than they actually are and may abandon the potential purchase before learning that the price is acceptable.

Other ways game companies can reduce uncertainty include

Your customers must understand how they can do what they want to do.
Map the uncertainties and remove them. Give explanations on why you are asking questions or need information.
Tell people how others have gotten through the process, if others have succeeded customers will experience less uncertainty and feel a reduced risk.

Make it seem easy

As well as reducing uncertainty, you need to minimize perceived effort. Making something easy is different than making it feel easy. Keep in mind that people also equate effort with time, so you should focus on reducing the time people expect to complete a task (purchase, registration, verification, etc) as a proxy for difficulty.

The key is perception. The perceived effort is not about what your customer has to do but how difficult they think it will be to accomplish. To highlight the difference between perception and reality, during the course it was pointed out that if you ask your customers how difficult an action is to undertake, the objective effort only accounts for 1/3 of their answer, 2/3 comes from how your customers feel.

You also not only want to make the desired action easy for your customer, you want them to see it as the easiest option available. There are three ways to make a task seem easy:

Structure. Our mind works in structures, we seek patterns. That’s why and how we understand information. Bring structure into everything you are telling your customers.
Language. Avoid toxic words like have to, must, need, it’s required, which make the customer feel it is difficult. Replace these words with ones like easy, quick and short.
Chunking progress. Seeing the progress is extremely motivating. Chunk the process into small and easy steps and highlight the process.

Reducing friction helps with both ease and uncertainty

Reducing friction is one of the best ways to generate desired behavior. Friction is the blockers that a person needs to go through to complete an action. When making a purchase, it could be entering an email address, credit card number and then setting up an account. The more friction, the more likely the customer will quit before completing the action. Each element of friction increases abandonment rates.

In the course, they use Best Buy (a US retailer) as an example. Best Buy ran a test for its online site to allow people to purchase without setting up an account, what they called Express Checkout. Adding this option increased Best Buy’s revenue $300 million in one year. The cost in lost data was also less than expected, over 60 percent of people still set up accounts (showing that reducing friction early often leads to people completing the same actions later).

The Best Buy example shows that the solution to reducing friction can be eliminating something. Removing a step in the process can be very effective to increase conversion. When designing a process, question what information
is absolutely critical to collect along the process. Part of the design process should be minimizing the subtle cognitive load you placing on your customer.

There are several other ways to reduce friction:

Pre-fill information so your customer does not have to fill out every field (or preferably any fields).
Look at pre-existing behavior (paving the cow path). It is easier to design for behavior that is already occurring and not ask your customers to change what they are doing.
Bundle new behavior with existing actions. Observe existing behavior, possibly things happening at the same time of the year, and bundle it with the desired action.

People need to feel they are treated fairly

Another element of perception important to driving behavior is the perception of fairness. When we evaluate products, we do not just evaluate what we received but evaluate the effort that went into it. If we feel the effort is higher, we are willing to pay a higher price.

People make decisions in context, in large part deciding what is fair. Rather than base a willingness to pay on the value or utility consumers are getting, fairness changes how we evaluate something and how much we are willing to pay. It is why consultants write large reports and why Steve Jobs spent so much time talking about the details on Apple products, letting customers feel it was fair to pay more for Apple products because of all the extra work to build it. We evaluate things based on effort, not on value. It is one of the weaknesses of online companies, especially online gaming companies, where it is difficult to judge the effort the company puts behind the product. If you are doing something magical for people but do not show them, they are less likely to pay a fair price (or monetize at all).

Salaries and compensation are one area where the perception of fairness is obvious. People who receive a high salary but then learn a co-worker is getting more compensation or has gotten a bonus often would look to find a new job or be dissatisfied because they feel they are not being treated fairly, even if their compensation is high. Conversely, employers will often make offers (either higher or lower) to candidates based not on the value the person would deliver or what they expect to pay for the position, but based on what the candidate earned at their current or previous jobs. They feel it is fair to pay candidates based on what they were earning, not on the value they will be delivering.

In terms of selling virtual products, the perception of fairness is often an issue. To many outside the industry, it feels that virtual currency or virtual items are created without any effort, thus it is hard for people to rationalize a purchasing decision. For an online gaming company, one way to mitigate this situation is through your communications. Use social media to take players behind the scenes. Let them see how many people are putting their lives into creating a great game for them.

Do unto others

Reciprocity is another powerful tool often neglected, particularly in marketing. People are much more likely to perform an action if they feel you took the first step. In the course, they discuss a test where they provided customers an unsolicited gift. The test group that received the gift had a much higher conversion rate as customers felt a need to return the favor.

There are several techniques to benefit from reciprocity. To make reciprocity more powerful it should be unexpected, personal and valuable. Order is also very important, you have to say what you are giving first and after that ask for something. It is a technique you should not overuse, you do not want your customers to feel manipulated.

In a social game, you may find that giving your players a free, valuable, gift generates more purchases than a traditional offer. Rather than feeling sold at, they appreciate the gift and are compelled to make a purchase.

The power of loss aversion

One of the strongest drivers of behavior is loss aversion. People are much more sensitive to losses than gains, people are generally 2X to 2.5X more sensitive to losses than gains. That is, the opportunity for gain needs to be more than twice as big as what a player would lose to be a preferred option.

There are several powerful applications of loss aversion:

Tell your customers what they would lose if they do not take desired behavior, the fear of the loss (including the lost opportunity) can be the strongest motivation.
Rather than telling people to do something or make a purchase, position the item you want them to purchase as they already own it and have to claim it. If they don’t activate it, they will lose it.
Reframe message from possibility of gaining to how your player would lose something.
Make your customers picture what it would be like to own the product, have them dream about what it would be like and they will not want to give up the dream.
Highlight progress, so they do not want to lose what they have done .

Social proof is one of your most powerful weapons

Social proof is conveying to your customers that others, particularly their friends, are doing something you want them to do. People have a tendency to be influenced by what others do and how they behave. In situations of uncertainty, telling people how others have acted is a strong indicator of what your customers should do.

There are several ways to optimize the effectiveness of social proof. You do not want to be too obvious or superficial, saying 9 out of 10 did something is likely to backfire as it feels like an old commercial. Instead, try to say what the majority does. Also personalize the social proof, make it as close as possible to the person you are communicating with. People are more influenced by others similar to you.

I recently experienced the power of social proof. A friend published a blog post reviewing four World War 2 books and I ordered one as a present for my son. I realized how powerful social proof was after my order as I did not read expert reviews or even see which ones had the best rating on Amazon, I made a purchasing decision based on one person’s non-expert opinion because he was a friend.

Also, avoid social proof in some situation. Do not say how many people are not doing something. It will make your customers questions that maybe they should also abstain. In a social game, you would not want to say 90 percent of players missed the opportunity to win this jackpot, do not be one of those losers. What the player will think is that if 90 percent did not take up the offer, why should they opt for it.

Grab attention with personalization

It is critical that you focus on grabbing your players attention, making things salient. We love the sound of our name; our brain activates differently when we hear our name. Personalization cuts through the clutter and makes communications relevant to us. If you can use someone’s name or make something unique and authentic for them, it will more likely succeed or cause conversion.

Building further on salience and personalization is the concept of idiosyncratic fit, as we see the world relatively, not absolutely. Idiosyncratic fit is the feeling that you enjoy a unique advantage in achieving a goal or completing a task. Consider what your players have already invested, how can you use this information to make them feel they have a benefit to others. In a game, you can give certain rewards to people for having played a certain amount of days or reached a level, ensuring they know they are getting this unique benefit because of things they have already done. This advantage will motivate them to keep purchasing or otherwise engaging.

Create defaults

Defaults are powerful as they help people avoid thinking. If people can avoid thinking, they will. Once you set up the desired action as a default or expected option, they are more likely to perform the activity. Restaurants make wine the default over cocktails (they make more on it) by providing a wine list instead of cocktail list and putting wine glasses on table, thus ordering wine is the default.

In a game, when asking players if they want to receive offers as part of the registration option, pre-check that field. When giving purchase options, test pre-checking the package you are hoping they purchase.

Free is one of your most powerful, and dangerous, tools

Free is much more than another price point. Free is not $0.05 less than $0.05, but is an incredibly powerful motivator. Free makes us think there is no risk (playing to the uncertainty principle) for a given choice. It is very attractive. If yu want people to test a new subscription option, give them a free week or month or year, it will be hard to say no.

The downside of free is that you anchor your customers at that price point.
Moving to free is very tempting, moving away from free is very difficult.
If you sell it for free, people might assume the quality justifies the price.

Test everything and early

One of the most important underlying principles of behavioral economics is that people do not know, and thus cannot tell you, what their preferences are. They do not know what they want until they experience it. Henry Ford said people would have asked for a faster horse. Steve Jobs never used market research on products like the iPod or iPad. Taking what customers say at face value can lead to disastrously wrong choices or limit your creative options. Instead, put your resources into testing.

While many, particularly Product Managers in San Francisco, believe AB testing is a recent phenomenon, it has been used by marketing companies for over 80 years. One of the reasons it has lasted and grown is that it provides clear and actionable results. In contrast, market research is very risky, as it does not show how people will react. People are not intentionally dishonest but are largely strangers to themselves and do not realize what drives their behavior. AB testing (and multi-armed bandit tests) allows you to see how people will react in practice, not theory.

It is both easier and more effective to apply principles of behavioral economics early in the product’s lifecycle. Rather than force your game out, test how people will react when you apply different principles of behavioral economics. Do not build your game based on assumptions how people will respond but instead test it.

If you test something and it works, then test the opposite. You might find that actually works as well or even better as people do not act predictably or linearly. Never stop testing, always look for something better.

Key takeaways

A key lesson of behavioral economics is that less choice often drives better results. When the number of choices increases, our ability to make a decision decreases.
Consumers hate uncertainty. Questions without answers cause fear and kills the experience and sales, it is a customer experience killer.
Use AB and multi-armed bandit tests help you understand how your players will react in the context of your game, market research conversely might provide bad information as people do not know what they want.

Understanding the decoy effect

Mastering consumer behavior, and your own decision making progress, is an invaluable skill and the decoy effect has an important impact on both consumer behavior and your own decisions. A post, The decoy effect: How you are influenced to choose without really knowing it on the Conversation blog, written by Gary Mortimer, deconstructs the decoy effect into its key elements. The decoy effect is primarily used in product pricing, with companies using it to drive users to a more expensive or profitable alternative.

A restaurant example helps illustrate the decoy effect. The restaurant may offer two dishes. One is a hamburger, side and drink for $5. The second is a double burger, two sides and large drink for $10. You would mentally make some calculation of their relative value but it is not clear that the more expensive option is a better value. You would decide if doubling everything worth it?

Using the decoy effect, the restaurant might offer those two options but add a third one, a double burger, one side and a regular drink for $9. For $4 more than the $5 option, you are getting a bigger burger. But for just one dollar more, you get the bigger burger plus an extra side and a larger drink. Thus the $10 option looks like an incredible bargain. In reality, it is no better a bargain than the $5 meal when you had two options, but now because of the decoy effect most people would select the $10 meal.

Asymmetric dominance effect

Customers change their preference between two options when a third option is presented, a phenomenon called asymmetric dominance. This effect suggests a decoy is priced to make one of the other options much more attractive. The decoy option is dominated in terms of perceived value (quantity, quality, extra features and so on). Companies do not price the decoy to generate sales but to nudge customers towards the target selection.

In the blog post, the author discusses the first time academics identified and showed through experimentation the decoy effect. “These findings were, in marketing terms, revolutionary. They challenged established doctrines – known as the “similarity heuristic” and the “regularity condition” – that a new product will take away market share from an existing product and cannot increase the probability of a customer choosing the original product.”

Choice overload

The decoy effect is enabled by another phenomenon, choice overload. As customers face many options, the further options increase anxiety and hinder decision-making. Customers then adapt by reducing the number of criteria they use for choosing, maybe using price and volume to decide on the best value. Mortimer writes, “through manipulating these key choice attributes, a decoy steers you in a particular direction while giving you the feeling you are making a rational, informed choice.”

Using the decoy effect for good

While the decoy effect can be abused to drive consumers to over-priced options, it can also be used to highlight the value of an option that is in both the provider’s and customer’s best interest. Mortimer quotes research by Dan Ariely that looked at three subscription offers from the Economist, which he replicated for the Australian newspaper:

In this scenario, customers could receive either a digital version of the newspaper, a digital version plus the weekend edition or digital plus the printed version. The cost of digital only was the same as digital plus weekend. In this case, the decoy effect highlights the value of the mid-price option rather than driving customers to the most expensive option.

Conclusion

The decoy effect is a powerful tool in driving consumer decisions. When you are deciding between options, rather than look at the relative value of each option directly compared with the others, understand the value to you and make the optimal choice for yourself. When creating options for your customers, consider using the decoy effect to highlight the benefits of options that your customers are more likely to prefer rather than tricking them into the wrong purchase.

Key takeaways

The decoy effect is used when pricing products, adding a third option that drives customers to the most expensive or profitable option
A phenomenon called asymmetric dominance causes customers to change their preference between two options when a third option is presented.
The decoy effect is enabled by another phenomenon, choice overload, as customers who face many options will adapt by reducing the number of criteria they use for choosing.

Alchemy: When psychology outmaneuvers rationality

I am a huge fan of behavioral economics — Dan Ariely is my favorite author — and find it very useful in helping with business issues. Behavioral economics blends ideas from psychology and economics, and it can provide valuable insight that individuals are sometimes not behaving in their own best interests. Behavioral economics provides a framework to understand when and how people make errors. Systematic errors or biases recur predictably in particular circumstances. A colleague recently recommended a book, Alchemy by Ogilvy Vice Chairman and marketing guru Rory Sutherland, that provides many real life applications and insights leveraging behavioral economics.

To use Sutherland’s words, “ there is an ostensible, rational, self-declared reason why we do things, and there is also a cryptic or hidden purpose. Learning how to disentangle the literal from the lateral meaning is essential to solving cryptic crosswords, and it is also essential to understanding human behavior.”

Logic can prompt you to miss great opportunities

Sutherland’s first recommendation is that the first or obvious “logical” answer may not be right or optimal. He explains that the opposite of a good idea can also be a good idea. Even if one course of action makes sense, there may be a better approach.

Logic does not necessarily lead to great, in many ways it drives you to average. If you are being logical, you can assume your competitors are also following a logical course of thinking. By following a logical path, you will end up in a red ocean at a level comparable to your competitors.

Logic can prevent you from creating great. If Steve Jobs and Jony Ive had pursued logic when designing a PC or phone for Apple, at best they would have built a better Dell or Nokia, instead of the most valuable company in the world. As Sutherland writes, “the problem with logic is that it kills off magic.” To quote Jobs, “stay hungry, stay foolish.” If great ideas initially made sense, somebody else would have already discovered them.

Another problem with logic that Sutherlands points out is that it is often used to justify bad decisions. People will use logic to either justify a bad course of action or provide protection from bad decisions, rather than seeking the best decision. Good debaters are great at using logic to justify any position rather than finding the best course of action. Sutherland writes, “business people and politicians do not quite understand this and tend to evaluate decisions by the rigor of the process that produces them, rather than by the rigor with which you evaluate their consequences….To them, the use of reason ‘looks scientific’, even if it is being used in the wrong place.”

This misuse of logic often prompts people to proceed with apparently reasonable things quickly while treating counterintuitive ideas with suspicion. It is easy to defend the reasonable thing if it fails, but people run more risk if they try the counterintuitive idea and it fails. The latter, however, provides the opportunity to separate your business from the competition.

Sutherland offers several examples of counter-intuitive ideas that generated billion dollar businesses. One would be to imagine you are in the boardroom trying to come up with a strategy to compete with Coca-Cola. The conventional answer would be to create a drink that tastes better or is less expensive. What if someone, however, suggested, a worse tasting drink packaged in a smaller container at the same or higher price. The latter is what Red Bull did and created a brand that Forbes estimates is worth almost $10 billion.

Sutherland’s point is that conventional logic is hopeless in marketing, you end up in the same place as your competitors. Even if we cannot explain eloquently why something will work (like a bad tasting expensive soft drink), we should not be blind to the fact that it does.

People are not rational

Not only is the logical and rational path not necessarily optimal, it is also not the one our customers might be pursuing. Another example that Sutherland explains is a marketing test he ran. He showed two advertisements, one a contest where a player could win free energy for a year (worth about $1,500) and another where you could win a cute penguin nightlight (worth about $20). If people react rationally, you would expect an order of magnitude more entries into the contest giving away the energy. Almost the inverse happened, 67,000 people entered to win the energy and 360,000 entered to win the cute animal nightlight. The takeaway here is not only do people not always act logically but also that cute animals are a very effective marketing technique (and you cannot use logic to determine what will be a powerful marketing message).

There are many other examples of how people do not always behave in a way that would be considered rational. The best selling wine at restaurants is usually the second least expensive. That is not because restaurants put their best value there, they will often put a less expensive bottle cost wise in that position. P assume, however, the least expensive wine is lowest quality or are embarrassed to order it for fear of looking cheap, they are not making the wisest (or rational) decision. Restaurants have also found that by offering people still or sparkling bottled water, they increase sales because many people do not ask for tap water. These examples reinforce that consumer behavior is not simply based on people making rational decisions to optimize their happiness.

Data can be misleading

One area that Sutherland focuses on that is particularly dear to me is how data is often misused. Sutherland writes that “we constantly rewrite the past to form a narrative that cuts out the non-critical points–and which replaces luck and random experimentation with conscious intent…. It is important to remember that big data all comes from the same place–the past…. A single change in context can change human behavior significantly. For instance, all the behavioral data in 1993 would have predicted a great future for the fax machine.”

Not only can data be used to criticize a good decision or justify a bad one, it is possible to construct a plausible reason for any course of action, by cherry-picking the data you choose to include in your model and ignoring inconvenient facts. I have written before about confirmation bias, and more data makes it easier to find support for some spurious, self-serving narrative. Effectively, you can find more pieces to confirm whatever you are arguing. Sutherland argues, “the profusion of data in future will not settle arguments: it will make them worse.”

Related, Sutherland points out, “people who are not skilled at mathematics tend to view the output of second-rate mathematicians with an high level of credulity, and attach almost mystical significance to their findings. Bad maths is the palmistry of the twenty-first century. Yet bad maths can lead to collective insanity, and it is far easier to be massively wrong mathematically than most people realise–a single dud data point or false assumption can lead to results that are wrong by many orders of magnitude….To put it crudely, when you multiply bullshit with bullshit, you don’t get a bit more bullshit–you get bullshit squared.”

Market research is often as unreliable as other data. As well as not always acting rationally, people often do not know what they prefer. Sutherland writes, “the trouble with market research is that people don’t think what they feel, they don’t say what they think, and they don’t do what they say. People simply do not have introspective access to their motivations….It is perfectly possible that conventional market research has, over the past fifty years, killed more good ideas than it has spawned, by obsessing with a false idea of representativeness.”

Market research also can miss what is driving a person’s decision, such as avoiding disaster rather than getting the best outcome. Someone choosing Product A over Product B would say that they thought Product A is ‘better’, even if really they meant something quite different. They may unconsciously be deciding that they prefer Product A because the odds of its being disastrously bad are only 1 percent, whereas the risk with Product B might be 2.8 percent. This distinction matters a great deal, and it is borne out in many fields of decision science. People will pay a disproportionately high premium for the elimination of a small degree of uncertainty.

Once you understand the limitations of data, you can create great outcomes. Following conventional wisdom leads you do what your competitors are doings and metrics prompt you to design for average. Averages (and medians) encourage you to focus on the middle of a market, but innovation happens at the extremes. You are more likely to come up with a good idea focusing on one outlier than on ten average players.

Perception over reality

The other issue with relying on historic data is that it assumes people’s decisions are logical, given they are often not rational that reliance can be a mistake. Sutherland aptly says, “in maths it is a rule that 2 + 2 = 4. In psychology, 2 + 2 can equal more or less than 4. It’s up to you.” At its heart, people do not value things, they value the meaning attached to these things. While the objects properties are determined by physics, what they mean is determined by psychology.

There are multiple examples of how perception forms our reality. Wine tastes better when poured from a heavier bottle or has a French label. Painkillers are more effective when people believe they are expensive. Almost everything becomes more desirable when people believe it is in scarce supply, and possessions become more enjoyable when they have a famous brand name attached.

A great example of the power of psychology is Uber’s success. Uber’s map does not reduce the waiting time for a taxi but simply makes waiting much less frustrating. Travis Kalanick, Uber’s founder, realized people are bothered more by the uncertainty of waiting than by the duration of a wait.

Another example are claims on products, as people often think packaging that implies a product is healthy or good for them (or an app), is less tasty. It does not matter what something tastes like in blind tastings, if you put low in fat or any other health indicators on the packaging, Sutherland shows that you will make the contents taste worse.

Another area where perception is more important to a customer’s satisfaction is price. Why do people love sales, rather than spending the time to find the everyday low price. Sutherland explains “a low price, unlike a discount, does not allow people any scope to write a more cheerful narrative about a purchase after the event–‘I saved £33’, rather than ‘I spent £45’.” Marketing can have a strong impact here, not only justifying a high price but also detoxifying a low one.

The importance of optimizing for perception creates many opportunities to improve your business. I have written several times about customer experience and service, and focusing on perception allows you to create a superior experience. Some ways you can impact the experience, based on Sutherland’s ideas:

Small acts of discretionary generosity, such as waiving a charge when a customer ordered a dish they did not like or a complimentary chocolate at the end of a meal are regarded by customers as reassuring indicators of trustworthiness; we correspondingly see the absence of such signals as being a cause for concern.
Offering more customer service touch points or opportunities for live contacts. One of the reasons why customer service is such a strong indicator of how we judge a company is because we are aware that it costs money and time to provide.
Provide collateral outside of email. Sutherland writes, “bits deliver information, but costliness carries meaning. We do not invite people to our weddings by sending out an email. We put the information (all of which would fit on an email–or even a text message) on a gilt embossed card, which costs a fortune….We notice and attach significance and meaning to those things that deviate from narrow, economic common sense, precisely because they deviate from it. The result of this is that the pursuit of narrow economic rationalism will produce a world rich in goods, but deficient in meaning.”

It is also important to stress that it is not immoral to build a product or service to appeal to customer’s perceptions rather than logic. The Greeks did it first. There is barely a straight line in the Parthenon, the floor curves upwards in the middle, the sides bow out and the columns swell in the middle. This shape is because it is not designed to be perfect, instead it is designed to look perfect to a human standing about a hundred yards away.

Effectively, we want to make people happier and feel better. This can be achieved by improving their perception of their situation. It’s similar to a doctor who can help cure a patient either by giving a placebo or actual medicine. If the placebo serves the same purpose, it is in the patient’s interest to get the placebo (as it potentially has less side effects). As Sutherland says, “we should be researching this rather than decrying it.”

Social context is critical

Another key insight in Alchemy is the importance of social context. Sutherland explains that the context in which someone experiences something is the key to how they perceive it. According to Sutherland, “our very perception of the world is affected by context, which is why the rational attempt to contrive universal, context-free laws for human behavior may be largely doomed.”

There are many examples of where context determines how something is perceived. A hospital might have brilliant doctors, but if the reception area has old magazines we are likely to complain. If you go to a restaurant, your perception will be driven less by the food, the real value lies in social connection, and status. If you see a movie star at the table across from you and a line of Bentleys outside, you will probably end up telling your friends about an incredible dining experience. Sutherland points out, “we make far more positive comments about a dish’s appeal and taste when it is garlanded with an evocative description: ‘A label directs a person’s attention towards a feature in a dish, and hence helps bring out certain flavors and textures.’ Never forget this: the nature of our attention affects the nature of our experience.”

Less is more

I have written before how making a product simpler and less functional is one of the key ways you can build a superior product – from Uber to Monzo
to hypercasual games– and Sutherland reinforces this hypothesis. With new products or games, you can always add, but while this makes the new offering more versatile, it also reduces the clarity of its affordance, making it less pleasurable to use and quite possibly more difficult to justify buying. Sutherland explains, “the jack-of-all-trades-heuristic, whereby we naturally assume that something that only does one thing is better than something that claims to do many things.”

Sutherland pointed to the success of the Sony Walkman. Sony, by removing the recording function from Walkmans, created a product that had less functionality, but a far greater potential to a change behavior. By reducing the possible applications of the device to a single use, it clarified how people could use the device. As Sutherland says, “it is surprisingly common for significant innovations to emerge from the removal of features rather than the addition.”

How to make it work

Given that logic or date or research cannot predict much behavior, you need to find an alternative to benefit from Sutherland’s findings. It comes down to testing different approaches and trying creative ideas. Sutherland suggests, “the only way you can discover what people really want (their ‘revealed preferences’, in economic parlance) is through seeing what they actually pay for under a variety of different conditions, in a variety of contexts. This requires trial and error–which requires competitive markets and marketing.”

In addition to testing, think creatively. Sutherland suggests we spend “20 per cent of conversational time … for the consideration of alternative explanations, acknowledging the possibility that the real ‘why’ differs from the official ‘why’, and that our evolved rationality is very different from the economic idea of rationality. If we could resist the urge to be logical just some of the time, and devote that time instead to the pursuit of alchemy, what might we discover? Quite a lot of lead, I suspect. But a surprising amount of gold.”

Key takeaways

People often do not action logically so you should not base decisions on expecting your customers to act logically
The key is someone’s perception, not the reality. While in math 2+2 = 4, in psychology it could equal 5 (or 6 or 3), so we need to anticipate how the context will drive the perception.
The best way to create innovative solutions is by testing different options and thinking creatively.

What the Nobel Prize in Economics means for social gaming

In 2017, Richard Thaler won the Nobel Prize in Economic Science, and it validated one of the areas that could benefit social game companies highly. Thaler is one of the leaders in Behavioral Economics, where Daniel Kahneman previously won a Nobel Prize and the field Dan Ariely popularized in books including Predictably Irrational. The underlying idea in Behavioral Economics is that people do not always act rationally but their irrationally is consistent and can be modeled.

In traditional economics, economists make simplifying assumptions, with one of the most common being that people are perfectly rational. This simplification allows economists to build powerful models to analyze a multitude of different economic issues and markets. Nevertheless, economists and psychologists have documented systematic deviations from the rational behavior assumed in standard economics. By incorporating new insights from human psychology into economic analysis, Thaler provided a valuable set of analytical and experimental tools for understanding and predicting human behavior.

Many of the concepts and findings that Thaler identified are particularly relevant for game companies, particularly free-to-play gaming, and the broader technology space. By reviewing his primary findings, you can make your products more appealing and successful.

Endowment effect

The endowment effect is how people value items they own more than they would if they objectively viewed the item. Somebody might not accept $10,000 for their used car, but if a car dealer offered the same car to them they would not pay $8,000 for it. This leads to sub-optimal solutions but is also a tool for keeping people engaged with your product, potentially by giving them something they may lose if they do not remain active.

Thaler also showed that the endowment effect implies a difference between out-of-pocket costs and opportunity costs. People tend to view out-of-pocket costs as losses, weighted more heavily, while opportunity costs are considered foregone gains, weighted less heavily.

Mental accounting

Mental accounting is a psychological theory of how limited cognition affects spending, saving, and other household behavior. One motivation driven by mental accounting is that people group their expenditures into different categories (housing, food, clothes, etc.), with each category corresponding to a separate mental account. Thaler found that mental accounts are used more generally as a way for rational individuals to simplify their financial decision-making. Each account has its own budget and its own separate reference point, which results in restricted movement between the accounts.

In addition, advance purchases (e.g., buying a billion chips) are typically thought of as investments rather than purchases. At the same time, consumption of a good purchased earlier and used as planned (using the chips you bought last week for a new virtual item when it is released) is often coded as “free,” or even as savings. Decoupling spending and consumption in this way reduces the pain of buying.

Mental accounting is potentially important in three ways to social game companies. First, players might group their purchases by different areas, they may be willing to spend X for chips and Y for new content. Second, customers may have a total budget for social gaming and your priority is getting a larger share of the pie rather than increasing the pie. Finally, by getting people to purchase a large amount at once and then use it over time, they are less likely to feel pain from their consumption.

Diminishing sensitivity

Thaler’s theory of diminishing sensitivity predicts that compound outcomes will be added together or separated before being evaluated. If customers try to edit outcomes to maximize their pleasure, they will try to segregate gains and integrate losses, to cancel small losses against larger gains, and (under some conditions) to segregate small gains (“silver linings”) from large losses. This is particularly relevant when structuring the pay-outs and volatility of social casino offierings.

Planner-doer model

In the planner-doer model, an individual is assumed to be both a narrow-minded doer, who evaluates options just for their current value, and a farsighted planner, who is concerned with lifetime utility. By appealing to both the planner and the doer, you can increase long term engagement of customers.

Social preferences

Perceived fairness is a strong determinant of behavior. People are more likely to accept a price increase if they feel the company needs to in order to remain profitable or to keep employees. People, however, feel it is unfair to increase prices due to rising demand. People who think they are being treated unfairly are likely to look for alternative products. This is particularly a problem in the digital world, where customers face different prices and AB tests and often consider it unfair that other players are getting a better value.

Key takeaways

Richard Thaler won the Nobel Prize for Economics last year, by showing that people do not always act rationally but their irrationally is consistent and can be modeled
One of the key theories Thaler drove was the Endowment Effect, where people value goods they own more than the same good objectively.
His insights into mental accounting are also quite useful, as Thaler demonstrates that people bucket goods into different categories and have budgets for each category. Related, they treat advance purchases differently, looking at consumption as consumption of a free good rather than spending money.

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Neuroscience can help with your pricing strategy

Creating trust

Asking your customers what they want is counter-productive

Neuromarketing to build a loyalty program

Brands Matter

Use neuromarketing to improve your advertising creative

Fonts are critical

Use images of people

Tactics for optimizing your landing page or website

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Avoid information or choice overload

Avoiding choice overload with smart choice architecture

Anchoring is a key driver in perception of cost

Decoy and middle action

We hate uncertainty

Make it seem easy

Reducing friction helps with both ease and uncertainty

People need to feel they are treated fairly

Do unto others

The power of loss aversion

Social proof is one of your most powerful weapons

Grab attention with personalization

Create defaults

Free is one of your most powerful, and dangerous, tools

Test everything and early

Key takeaways

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Asymmetric dominance effect

Choice overload

Using the decoy effect for good

Conclusion

Key takeaways

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Logic can prompt you to miss great opportunities

People are not rational

Data can be misleading

Perception over reality

Social context is critical

Less is more

How to make it work

Key takeaways

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Endowment effect

Mental accounting

Diminishing sensitivity

Planner-doer model

Social preferences

Further reading required

Key takeaways

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