How Psychology Impacts Buying Decisions & Can Make or Break a Retail Business

Consumers want deals and discounts. More than this, they expect them—and this expectation drives their purchasing decisions year around, not just at holiday time. As a result, shoppers are less likely than ever to pay full price for products. Indeed, some industry experts even think today’s consumer is addicted to promotions.

To address this reality and keep their businesses alive, retailers need to understand consumer psychology and find creative ways to cater to it. They also need to learn from stores like JCPenney and Macy’s and avoid making decisions that clearly go against consumer psychology and end up costing them big.

What Happens When Retailers Eschew the Psychology of retail sales

When JCPenney eliminated store coupons, opting instead to offer shoppers “everyday low prices,” it did away with the exact thing that drove shoppers into JCP stores to begin with: the feelings they’d have of exclusivity, importance and smarts from having gotten great value using their coupons. No coupons meant no reason to shop at JCPenney anymore, and company profits took a serious dive.

But shouldn’t everyday low prices—fair prices that skip the sharp markups which eventually lead to steep discounts many shoppers wait for—be enough to make consumers happy? As JCPenney learned the hard way, the answer is no. Everyday low prices made sense from the business perspective. CEO Ron Johnson’s thinking in eliminating coupons and embracing “simplified pricing” was driven from the logical observation that playing the game of markups and markdowns was cumbersome and costly for the seller, and in the end consumers weren’t actually paying less. Why not, then, make things easier and more straightforward for both the company and consumers?

Macy’s agreed that this approach made sense, and attempted a similar coupon-cutting change that also required a drastic change in consumers’ mindsets and the way they shopped. What both retailers learned the hard way is that “retraining” consumer approaches—especially considering how deeply devoted they are to discounts—is practically impossible.

More than this, while the coupon-free approach might be moral, everyday low prices aren’t fun. Despite what logic might tell consumers about the nature of markdowns and about the value of daily low prices, it turns out that fun is a crucial component of the shopping experience. Had JCPenney or Macy’s focused less on business logic and more on consumer psychology, which reveals the importance of fun, they might’ve saved themselves from the crises they created by eliminating coupons.

Catering To Today’s Consumer Using Behavioral Economics

In many cases, retailers try to cater to shoppers’ need for discounts by regularly offering markdowns or running coupon promotions and special events. While this may help drive sales, it quickly eats away at profits.

To fulfill consumers’ ever growing list of demands while remaining profitable, retailers need to use behavioral economics principles to design personalized, attractive incentives that will increase sales and also draw return customers. Marketers have already found that these principles, when applied correctly, can allow retailers to exploit natural human tendencies in a way that drives their desired results.

For example, retailers can personalize incentives for different shoppers in real-time, presenting visitors to their website with offers that appear to have been designed just for them using information about their browsing and purchase histories and more. Making these incentives fun and tapping into the natural appeal of games, competition and winning is another way retailers can use behavioral economics principles to design offers their customers will value.

There are a number of ways for retailers to deliver incentives based on behavioral economics principles. Some might involve simply testing different ways of phrasing an offer—focusing on how it’s described more than on what the offer is—to see which works best. Others, like embracing dynamic pricing and segmenting customers into small groups based on certain characteristics and offering each group specific, personalized offers—will require more work. A great place for retailers to get started is by embracing a profit optimization solution that factors in behavioral economics while at the same time designing incentives that keep profits high, even on discounted items.

The psychology of retail sales doesn’t always point to the most logical approach. And at the end of the day, retailers must always keep consumers’ desires and unique ways of thinking in mind when they design incentives. Using behavioral economics principles as a guideline is the best way for retailers to address consumers’ changing needs without compromising value or profit.

If you liked this article, you might also enjoy:

Behavioral Economics and Marketing – The perfect combination

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