How do you make your decisions? How do other people arrive at their decisions? We assume that all decisions are based on logical explanations. But is it really?
Contrary to this belief, decisions doesn’t have to be based on how people expect you to make them. Logical and rational.
Some decisions are made based on irrational behavior, does it sound strange? It may at first, but we promise you it makes sense.
So wait no more, we will discuss this in further detail below.
Let’s say you want to buy a television. Let’s say we’re not taking into consideration your preferred brand.
With this – televisions are very much the same. They have the same function.
Then you walk into a store and check the TV prices. One at a low range, a middle one, and the last – at a higher range. We’ll try to guess what you have chosen.
Probable answer is the one with mid pricing. And yes you guessed it right, what the store is trying to sell is the one priced in the middle.
With choices available, the instinct is to compare. Go for the low range? When it seems not as good as the one priced midway. The one in the middles seems like a better choice.
How about the most expensive one? Not really as well, the midrange functions similarly to the high priced TV but not as expensive.
See how relativity is at play here? At first it’s not really logical, but it does make sense. We approach our problems and decide in relation to what we see – we compare, we look for alternatives.
Let’s talk about first impressions. When we first chance upon something, do these impressions last? Do we base or decision on that? Let’s talk pricing once again.
Let’s say we are launching a new product – a product like no other so the prospective customers have not seen it before. They have no perceived value in mind yet on how the product should cost.
Most likely they will accept the pricing of the product, no matter how randomly it was priced. It’s the first of its kind so they can’t compare its price point.
How is initial pricing important? This pricing will shape how upcoming products similar to it will be priced.
It doesn’t matter if the initial pricing has no basis, it was the first of its kind and people have accepted it as the basis. It will be the basis of comparison.
So price your initial offerings with caution as it will determine future pricing of products in similar nature.
When you see a restaurant with a line outside, what would you immediately assume? You would think the food is great that people would willingly line up for it.
The waiting time must be worth it so you follow suit, adding to the number of people standing outside.
Then another person sees that exact situation, and makes the same assumption. Another person on the line, and it goes on. Herding just happened. We make an assumption based on other people’s actions and we do the same.
And this is what separated Starbucks from the other coffee shops. Its value isn’t about the price point of the coffee, it was rather about the atmosphere where you’re having your coffee in.
They worked on the ambience, they wanted having coffee in Starbucks to be a different experience.
Because it’s different, people lined up to check out what is this experience. More people followed because they want to be part of this group who have been there.
“It’s free”. These words are like magic, they make people stop. Say these words and people will listen.
Its effect is not the same as discounting your product. 25% off? 50% off? Or even 75% off? Some people would pay attention but not the same as when you say it’s free.
Discounts are still purchases even if you’re paying less. You still paid something. To people, no matter what the discount is – it’s still not comparable to getting free items.
Why does “free” things make people happier? Because we are getting something of value without the cost. With free items, there’s no obligations unlike the product you bought.
When you lose the product, or you didn’t like it – you have this feeling of making a bad purchase.
When it’s free, we feel we received something that doesn’t tie us with our fears of loss and discontentment. We don’t have that feeling of being obligated to really like it because we paid for it.
What we can learn from this? Including freebies is a great way to catch the attention of your target market so make it available if you can!
Ownership is quite a strange thing. We associate some moments of our lives with the possession we have or even what object we lost that time. How do we relate ownership and decision making?
For illustration purposes, let’s say you’re selling your childhood home. Even before the sale, this will make you go walk back the memory lane.
The memories you’ve had in the house, the milestones celebrated within, and how it is witness to your highs and lows. You will feel sentimental because it’s a home you grew to love.
The feeling of losing will eventually come to you. It’s not actually a loss as it’s a sale, but you tend to focus on losing your home.
And when the selling happens, you tend to assume that the prospective buyers see the house as you see it. Full of memories, sentiments, and warm feelings.
However, from their point of view it’s a house. They would point out the defects of the old house and you would feel a bit hurt as that is what they see.
What we can learn here? When you are selling something, put yourself in your customer’s shoes. How do they view the situation? In the business, we can’t be clouded on how we see our “creations”.
We may hold it close to our heart if we created the product from passion and hard work but the buyer may not see that. Try to see things through the target market’s perspective.
With a lot of possibilities open to us, we want to have a lot of options. Because why not? The options are there for our taking, why do we seize it?
We buy computers, we take the extra specifications because who knows? We might use those extra features in the future.
We buy new appliances, we not only take the one year warranty but the extra 5 years warranty as add on. We like having more options in what we get.
However, the thing with acquiring more options, we also pay more – are we really saving? Sometimes we just have a computer with extra functions we have no use of. Expensive warranties that we are not mostly likely to avail of.
We like to avail all of the opportunities, even the small ones, until we spread ourselves too much. Sometimes with the multiple choices, we end up with indecisiveness and the opportunity passes.
Similarly with business, do not overload customers with options. It will be harder for them to decide, and the longer they weigh in their decision, the less chance they will reach a decision soon enough. Make it simple.
There you go, here are just some cases that exhibits irrationality in making decisions. It’s different, yes irrational, but it does makes sense. Understanding irrational behavior takes irrational decision making as well.