Traditional, neo-classical economics is built upon the assumption that human beings are rational actors. The standard economic models (which failed to foresee the most recent financial crisis) are based upon a belief that as rational actors, humans will make decisions that maximize their utility. Market forces will find the correct price based upon supply and demand and act as a great leveling factor in commerce.
Applied Behavioral Economics, on the other hand, studies how the actual decision making process influences the decisions that we make. Leading research in the field indicates that in reality, 70% of our economic decision making process is driven by emotions with the remaining 30% rooted in rational thought.
You may be asking the question, “Why should this effect our approach to conscious selling?” Behavioral Economics explains why highly experienced, smart people, with good intentions often make bad decisions. Gaining an understanding into the constructs of Behavioral Economics simply makes good business sense. Especially for the entrepreneur. In fact, a recent Gallup® study of ten companies that applied these concepts outperformed their peers by 85% in sales growth and by more than 25% in gross margin in a single year.
Seeing your prospects through the lens of Applied Behavioral Economics will help you gain insights into how to price, position, communicate, and negotiate with your customers. Here are some fundamental concepts and how they can help you in your sales process:
The Endowment Effect ~ People that own something place a higher value on the item than those who don’t own it. Dr. Dan Ariely demonstrated this effect in his experiment with Duke University students. Those students that had been lucky enough to secure tickets to the school’s upcoming basketball game were asked what price they would accept to sell their ticket. Students that didn’t have a ticket were asked how much they would pay to buy a ticket. The students that owned the ticket stated, on average, that they wanted $2,700 for the ticket. Students that didn’t have a ticket were willing to pay upwards of $280 for the ticket. The emotional attachment the students that owned the tickets had to seeing the game in person had a dramatic effect on their perceived value of the ticket.
How this affects your selling process ~ If you are offering an alternative to an embedded product, technology, or service you’re going to have to build an exceptional value proposition. Research indicates you need to communicate twice the perceived value of the incumbent in order to dislodge its use. Anticipating this will help you understand your sales cycle and potential adoption rates.
Anchors ~ People are effected by how they perceive themselves and their world and are anchored in that perspective. This explains why repeat Mercedes Benz owners pay, on average, $9,000 more for the same vehicle than do first time buyers of the exact same model.
How this affects your selling process ~ This especially comes into play if you’re marketing a disruptive technology; something that unmoors the anchors to dogma. Trying to shift someone’s perspective can be a win-lose situation. You may get them to see things your way, but you will most likely cultivate some resentment along the way. Try to understand each prospect’s perspective, sense of self worth, and self-image. Tailor your approach to the prospect’s particular style (roll with their ego) and listen for what they’re not saying as much as what they are saying.
Reference Dependence ~ People judge the probabilities of future events based on how easy the possible events are to imagine or retrieve from memory. Sales reps that are accustomed to closing deals easily visualize the next close while less successful sales people struggle to break out of the rut.
How this affects your selling process ~ Have you ever walked into an account where a recently adopted new product or service didn’t go well? Then you understand reference dependence! When things are fresh in our mind they seem larger and more likely to happen again. This contributes to the endowment effect as the status quo is easy to predict and introduces fewer perceived risks than making a change. Try to position your solution in reference to a positive outcome they’ve experienced.
Priors ~ People miscalculate the probability of events based upon prior experience. We see this in sports all the time. When a .300 hitter is 0-4 in a game and comes up to bat in the ninth inning we think he’s “due” for a hit. Not necessarily. This also infers the Law of Small Numbers, where we tend to miscalculate probability based upon a small sample size.
How this affects your selling process ~ This is where building a dependable track record of being a resource for your customers pays off over time. If prior experiences with you, your products, and your company are positive for your customer, they expect things to be positive next time. Of course, this cuts both ways. Also, be resilient yourself. Sales is a numbers game. Don’t judge your success or failure on too small a sample size.
Framing ~ Our frame of mind often influences how we interpret information. How often have we been in a bad mood and misinterpreted an email as hostile or overly aggressive?
How this affects your selling process ~ Know when to disengage. Be aware of what’s going on in your prospect’s environment and be sensitive to their circumstances. You’d be amazed how far a little empathy can go with a prospect having a bad day.
Heuristics ~ When people are faced with complex decisions they tend to fall towards “rules of thumb” to make the decision. While these heuristics can be helpful when a quick decision is critical, they can also effect our behavior. Another experiment conducted by Dr. Dan Ariely involved a simple supermarket sampling booth for jams. His team set up two displays in the same store on two separate days. One booth had 24 samples available for tasting, the next one only had 3 samples available. If a customer took the time to sample the jams, they received a coupon that was good for any jam in the store. The booth with 24 samples drew 60% more tasters than the one with only 3 samples. On average, the shoppers faced with 24 choices sampled 1.5 jams while the one’s faced with three samples tried 1.4 jams. Here’s the interesting result: Of the shoppers that had the opportunity to sample 24 jams, only 3% purchased jam that day. Of the shoppers faced with only 3 sample options, 83% purchased jam that day! When we are faced with too many options, we often choose not to choose, even with something as simple as purchasing jam. Imagine the effect on deciding on health insurance, retirement planning, or complex business decisions?
How this affects your selling process ~ Keep your options and message simple. People are bombarded with sales pitches and marketing today. Too much noise and we simply shut down, decide not to decide, or delay our decision. Adding complexity rarely adds value.
Most importantly, look for the secondary, emotional gain a prospect may have attached to their purchasing decision. There’s an old saying, “No one ever got fired for buying an IBM”. There was no risk in deciding to purchase an IBM mainframe to your career path. You want to eventually be that IBM! Understanding what your prospects have to gain or lose, both personally and professionally, by working with you will help you understand how to connect, engage, and motivate their decision process. All without using manipulative or coercive sales methodologies.
Next, we’ll explore how cultivating your emotional intelligence can help accelerate sales and profitable growth.