Understanding why we buy and how to craft marketing strategies to persuade store visitors and turn them into long-term customers is on every marketer's mind. Throughout the history of trade, from ancient Babylonian merchants in the 18th century BC to current DTCs using platforms like Shopify, convincing potential customers to make purchasing decisions has been a crucial element of commerce.
The past century was defined by advancements in decrypting human behavior and understanding what shapes buyer decisions. In this article, we go through behavioral economics and the most common cognitive biases and look at practical examples to include these in your DTCs marketing strategy.
Cognitive biases to consider in your e-commerce marketing strategy: Loss Aversion
Loss aversion is a cognitive bias that refers to the psychological phenomenon in which individuals perceive a potential or actual loss more severe than an equivalent gain. This motivates them to embrace potentially risk-taking behaviors to avoid these perceived losses. The loss aversion bias is one of the most exploited, especially in the past decades, through coupons, limited-time offers, or general fear of missing out on special offers.
By creating a sense of urgency and highlighting the potential loss if not taking action before the offer expires, e-commerces can leverage this psychological phenomenon and persuade potential customers to buy.
In the example below, the cart recovery email appeals to the loss aversion bias by including not just a reminder but also a special discount, which will pile on the already FOMO-inducing lack of inventory that is allegedly approaching in the next future.
If you want to explore reducing cart abandonment rates, this article details more churn-avoiding strategies for DTCs.
Another example of the loss aversion cognitive bias is the reminder below, highlighting the uncertainty of availability; thus, acting now is the right thing to do.
A recent trial by Calpak last summer highlights another very fruitful use of the loss aversion bias: live shopping with exclusive discounts and coupons limited to the live-streaming event only. The results were encouraging as one such event saw nearly $79,000 in sales in 49 minutes for a $250 bundle of luggage valued at $545. The perceived lost value, in this case, is more than $250. Thus, overall conversions hiked from 15% to 18%.
Cognitive biases to consider in your e-commerce marketing strategy: The endowment effect
The endowment effect refers to attributing a higher value to the things individuals directly own. The feeling of possession is potentially evoked in eCommerce as well, by deploying various strategies appealing to end customers and transferring ownership to them. A classic example of ownership is the free trial or freemium model. In the subscription boxes industry, this is a very well-known model where clients get to use a service or are being shipped various merchandise before they are actually charged.
Another example, often in the DTC beauty industry, is when samples are shipped directly to the customers, who only pay shipping fees, at best. This allows the brand to engage with the client, build trust, create the endowment effect, and ultimately gain access to potential customers' data for future marketing actions.
The endowment effect is in close relation with the possession idea, even if it is sometimes imaginary or for a very short period of time. In brick-and-mortar stores, Sephora beauty consultants create professional looks and recommend and sell products to help customers achieve these final outcomes. Demonstrating the looks and feels of certain products and transferring ownership to beauty enthusiasts in stores is another use of the endowment effect cognitive bias.
Return policies that stretch over a long period of time are also successful due to the endowment effect, coupled with the client's inaction to return items. In the case of online fashion retailers, customers usually get 100 days to return unwanted items; thus, clients might postpone the action, knowing they have so much time at their disposal until, in the end, the apparel items are never returned.
Cognitive biases to consider in your e-commerce marketing strategy: The decoy effect
The decoy effect is used to influence buying behavior through pricing strategies, which are presented online or offline, adding options that are either too expensive, too small, or simply irrelevant and guiding the buying decision towards the desired product or service. The decoy effect creates a specific context in which certain offers are assessed, and finally, the decision is influenced through comparison. This leads to choices individuals would probably not make unless presented with similar, less affordable, or desirable options.
Joel Huber, John Payne, and Christopher Puto of Duke University described the decoy effect first in a paper presented in 1981. Empirically, they tested respondents' preference for various types of products ranging from beer to restaurants and cars. Respondents were asked to choose between three options while being introduced to product variants such as quality, price, ride quality, gas mileage, etc. The experiments showed that if a decoy was placed, then individuals preferred the target option, service, or product. This marked a breakthrough in influencing buyers' decisions and consumer choices.
A day-to-day example regards the size of popcorn menus in cinemas. Although most individuals would not need such great amounts of popcorn, they choose the large size just because the price seems to seal a deal.
Another decoy effect example is the pricing plan of The Dollar Shave Club, which is actually similar to most pricing plans around the web these days. Some industry insiders might even argue that the decoy effect is the basis of The Dollar Shave Club’s marketing strategy.
Crafting pricing plans with this in mind will enhance any DTC marketing strategy, as the decoy effect cognitive bias seems to be present even in group decisions, so using this principle will definitely influence sales.
Leverage your customers’ cognitive biases
Applying the cognitive biases mentioned above at once can be difficult, but testing various aspects like pricing, positioning, key messages, and creatives can help with your growth efforts. If you want to find out more about how to improve your marketing strategy by testing multiple variants of copy, creatives, audiences, and much more, check out Admetrics’ Bayesian statistics proprietary testing engine.
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