People, Preferences & Prices: Sequencing the Economic Genome of the Consumer Mind

So, how do we go about exploring notions of psychological economics? How are we to set up studies to learn about the nature of the psychology in ‘our heads’, about how we respond to the economics of goods and services? How are we to measure happiness? We are going to do two types of experiments (one independent variable at a time, as well as a questionnaire). We’ll look at happiness and pleasure using those experiments. We may stray a bit from conventional happiness to the joy of sensation, but in the end, you’ll understand the bases of the experimental method applied to the problem.

People differ from each other in how they perceive their current finances, the state of their financial futures, and their attitudes toward money. We show in this chapter that one can easily measure these attitudes using broad surveys. We also show, however, that we need to go deeper than just measuring attitudes. Knowing a lot about the person tells us a lot about the person, but does not predict attitudes. We do not learn about what makes a person’s mind ‘tick’, what is the algebra of the mind. For that we need experiments, and it is to the world of experimentation we will next turn to make our discoveries.

People can and will, when sufficiently motivated, act as measuring instruments to tell you how happy they are if you give them something. People know how they feel when they get something, or at least they seem to act as if they know. They feel natural. There may be one or two questions, but you don’t get a sense that they are feeling strained. Of course, it is important to make the ‘something’ meaningful. We couch the something in ‘dollar’s, but there’s no reason why we couldn’t couch this something in terms of other goods and services. When it comes to taking something away from people, you have to be a bit more creative. People know what it is to give away something.

Setting a fair price requires that we know something about consumer expectations. We introduced the economic notion of ‘too expensive’ versus ‘too cheap’, basing our ideas on the pioneering work of the Dutch economist, Peter van Westendorp, and then extended it to look at the influence of one’s mind (‘Am I price sensitive or price insensitive?’). Econometric models with psychometric curves look at equilibrium points, where the ‘too cheap’ and ‘too expensive curves’ cross. Psychophysics looks for relations among variables. Psychophysics goes one step further, and shows the nature of responses to price as a function of how a person profiles himself on a price sensitivity scale.

In this chapter we are experimenting with new-to-the-world devices. Our data suggest two interesting ‘patterns’ that are worth exploring for their generality. First, when a new feature is ‘interesting’, i.e., leads to expected purchase, people are willing to pay more for it. Second, even when people are not interested in buying something, they still recognize incremental value. They will not buy it, but they will know that it is worth more.

In this chapter we introduce the interplay of product and price. It is becoming clear that there are no hard and fast rules about how important price is to purchase versus how important product or product quality is to purchase. It appears to be a function of the particular product, and the nature of the person doing the evaluation. Yet, it is clear that homo economicus still reigns. Purchase intent does increase with product acceptance, so all other factors being equal; it’s good to taste better. Yet, it is equally clear that the price to pay for such quality increases is important to consider. It’s not better quality at any cost, not indeed. Depending upon the particular product being developed or improved, it may be better to concentrate on lower cost of the current product rather than increasing its quality.

We know there are many attributes like price, brand, appearance, quality, etc. that have an effect on the decision process of people purchasing certain products. In order to analyze what aspects of buying situation drive a person to buy the product, we asked thousands of shoppers across a variety of products what their key factors are when purchasing an item. Our results show that Homo economicus exists, but it’s not about price mainly – although price is very important. Price is extremely important for a number of items, and then almost irrelevant for a lot of other items. The significance of price was not related to either the product type or to high vs. low price items. Consumers are less price sensitive when purchasing more indulgent products. And when customers are affluent relative to the price of emotional attraction like appearance or taste becomes more important in their buying decision.

It is clear that homo economicus is not omnipresent, omniscient, and omnipotent. We learn from online shopping data that only some of the respondents are truly sensitive to the economic values of goods or services. Quite a number of them want the experience, not necessarily the price. When we move over to the acquisition of credit cards, we find that the economics is also not as important as we might have thought. It’s again the experience. Yes, some economic considerations are important, but it is not money – rather it’s what money buys. Our data about credit card applications suggest that no matter what the message, it’s important to get it into the customer’s head. Don’t make the offer too long. Short is better, but not too short. Have a convincing offer, but try to write it in fewer than 20 words so that customers don’t simply ignore the message completely because of the daunting length and their lack of patience.

Experimental psychologists, consumer researchers, sensory specialists and a host of statistical mavens, gurus use paired comparisons, a form of choice, as the fundamental way to measure consumer response to stimuli. The origin of those approaches is, of course, the (incorrect) belief that the person cannot really act as a measuring instrument, and therefore the next best thing is to have people choose among alternatives. Our approach is far different. We certainly believe that people can act as measuring instruments. We show the elements of offers ‘head to head’. Rather than measuring the contributory effect of each stimulus element to one response, we measure the simultaneous contributory effects of all stimulus elements to all responses. We use the choice modeling to determine how the elements interact with each other, how they drive positive and negative responses.

Price, although powerful, is not necessarily powerful to all people. Beyond the division of people into price sensitives versus insensitives is the fact that these two groups show radically different dynamics. Price sensitives do not see as many differences among product messages as do price insensitives. Price sensitives seem to live in a flatter world, one with fewer nuances. To price sensitives, changing the brand or even the price of an item does not change the response to messages about the product. To price insensitives, in contrast, changing the brand or the price changes the response to the product messages. Simply said, price insensitives seem to be more awake, and smell more of the ‘roses’ than do the price sensitives. The world of the price insensitives is filled with more gradations, and perhaps more refined perceptions.

In this chapter we will look how to understand the mind of the donor in the same way that we understand other economic aspects. The principles are the same. The most exciting thing, however, is that we now have a tool to better understand the donor’s mind, in terms of exactly what to say, and how much that statement is likely to be worth.

Looking at our happiness experiment we can summarize what we earned in three points: It’s clear that we can investigate happiness by putting together vignettes and having people respond. People clearly differentiate the different vignettes. There are certainly differences among the elements. The big players are job loss and salary. Happiness versus salary is fairly flat. Happiness/unhappiness versus job loss is fairly steep. Money may not lead to happiness, but job stability probably does.

What do people earn? Our first lesson from this chapter is that people can guess other people’s salary from the information about how they live. Of course, in this particular study we never told anyone the salary, so there is no ‘right or wrong’. And, when we balance the respondents in terms of ages, we see similar results from men and women. Where we see differences is when we break out the respondents by how they describe their salaries versus the salaries of their friends. Those with lower salaries impute others as having lower salaries. Salaries as happiness: There seems to be a link between the perceived happiness of people (based on the vignette) and the salary that they are presumed to have. The relation is clearer for women than it is for men. With women, there is a far more linear relation between perceived happiness of people in the vignette and the salary earned.

In this chapter we look at the inside of the consumer’s mind, not for the pleasant factors of mental economics, but at the downside. When a person loses his job, loses his assets, we see that it’s possible to identify the different factors that drive both ability to cope and, in contrast anxiety. Whereas losing one’s job and one’s assets both provoke equal frequency of anxiety. Losing one’s house provokes the highest level of anxiety. In all cases thinking about the government and external forms of support, such as insurance, does not ameliorate anxiety. But there are things that do reduce anxiety. Belief in a personal God is a strong anxiety reducer for both situations, and is also important for other anxiety provoking situations. Some anxiety reducers are recognition of one’s friends and family, and the realization that other people are ‘in the same boat’, and one is not really alone.

In many situations a person naturally gives time to follow something of interest to him, to buy an item, to read, to participate in sport, even to travel. When we deal with a survey, however, we are asking the person to take on a job, albeit a job for a limited time, with very little recompense, no benefits, and simply the joy of doing something for someone else. From our study we see that there are three distinct mind-sets; those who want ‘stuff/money’ in return, those who want to be ‘experts’ (money helps here as well, however), and those who want to have an easy survey and seem willing to donate their time without any recompense. The nature of the reward changes with the topic of the survey, even though the surveys are all equally long. Interesting topics need less reward than boring topics.

We see that through proper messaging it is possible to change the distance that one will travel for a service. This distance comes from the ‘scoping’ exercise. Typically the distance is quite small. Doctors and lawyers show the longest distances, but they are simply a few tenths of a mile longer than auto repair shops, restaurants, etc. Fascinating is that despite the differences among the six topics being scoped, the basic relation is the same between interest level and miles of traveling means the same increase in interest generates a more or less specific increase in miles. The only exception is the plumber, because the plumber comes to the customer and not the other way around. When the professional comes to the customer a little change in interest goes a much longer way than when the same change in interest occurs for doctors, lawyers, and other individuals to whom the customer travels.

The key take-away from this chapter is that social issues, such as housing and the nature of city life, can be addressed by the same experiments as we addressed actual products. Social policy, therefore, and the nature of what people want and what they will sacrifice, becomes, at least in terms of experimentation, one more example of how research methods apply to a variety of different economic and social topics. That is, understanding the public sector is probably no more difficult than understanding the private sector. Nor is it difficult to export the research method to other countries, other cultures. With simply sensitivity to the local problems of the population the tool which provides knowledge about how to sell products to people also now provides knowledge about how to sell public policy to waiting citizens.

In this chapter we explore the nature of what makes a pleasant experience, looking at the initial visit to the veterinarians. We found clear and meaningful information about what clients want, and what interests them. However, just because a client finds something interesting does not mean that the client will pay for it.

In this chapter we explore the dollar value of sensory experience. In order to add reality to the exploration we position the task as the premium one would pay or not pay for a specific set of sensory experiences to be offered by a specific hotel. The data suggest that there are certain experiences that are simply worth more. It appeared that sound and touch are the most likely experiences to justify higher prices. Instead of looking for general segments, we use a more targeted approach with a systematic exploration, trying to understand which sensory experiences hotel customers prefer in terms of interest and their willingness to pay.

Attracting young people to attend an exhibition is not an easy task as one has to deal with their existing preferences and try to find a right combination of messages to increase the probability to attend an exhibition and hopefully their propensity to pay more for the admission. In Europe, many students enjoy advantages of free or deeply discounted admission to exhibitions. Americans might learn from this. It may turn out that the future of museums must be in free admission. For museums to survive and thrive they may have to go back to a world where exhibitions are paid for by advertisers, rather than by the consuming public or funded by a subscription model, paid up front, rather than on an ‘as you go’ basis. Our data certainly suggest that this subscription model is better; there is very little of a specific nature to create a burning passion in the young museum visitor.

What is the learning that a card issuer can take away from this chapter? 1. Instead of blasting out offers to individuals who may or may not care, look for prospects who are somehow affiliated with the credit card issuer. 2. Homo economicus reigns supreme. It’s not about emotions. It’s about money and stuff. Significant reductions in what one expects to pay for a product or an experience. 3. There are segments, but for the most part the segments focus on different aspects of the offers. The segmentation does not reveal a group of individuals who respond to the emotion statements. Hopes that one can increase profitability by finding segments that are ‘emotion-sensitive’ and who can be swayed by emotion statements are probably not realistic. It is again a case of WiiFM (what’s in it for me), but with the segments there is a greater homogeneity in what appeals

A simple experimental design that varies the different features of a loan can teach us a great deal, especially when we move out from simply rating the respondent’s interest in the loan to an estimate of how many points in dollars the respondent is willing to pay to get the loan. The results can surprise. 1. No matter what the repayment time, lower interest rates are clearly more attractive than high interest rates. 2. Some messages increase interest in the loan, others decrease interest. 3. To maximize the points, increase the size of the loan (no surprise here), increase the waiting time for repayment to begin, but avoid charging points for low FICO scores. 4. Men and women differ in how they respond to the terms of the offer. 5. Having a mortgage changes one’s response to the loan offer. 6. The nature of one’s risk profile affects what’s important.

In this chapter we’re dealing with the psychology of messaging, not the psychology of the dollar value. All companies look for messages which appeal to people. It is just about which messages appeal more (but positively), and which messages appeal less (but also positively). The big idea is performance. The emphasis on performance appears to work when we deal with stock purchasing as a service on-line. People are not interested in warm fuzzies, or in being part of a group, or in being patronizingly rewarded for knowing what to do. It’s their money; they know the value of what they have. The bottom line is good service, low prices, and convenience.

When it comes to financial services a couple of rules emerge that are worth keeping in mind. 1. Customers aren’t interested in what the company really has to offer. Most people don’t feel a need to buy. You must convince them with the correct messaging. 2. For one of the few times we see differences by education, perhaps because those with high school education or less feel uncomfortable with heavy-duty business terms. Especially when talking about a topic that is so emotionally laden as is retirement. Retirement brings feelings of death. The planner has to be sensitive. 3. It is possible to predict membership in the risk averse vs. balanced groups by knowing certain types of external information about a person. 4. A better approach to understanding the customer comes from mind-set segmentation. We see three quite different groups emerging; the planner, the truster and the student.

The methods we used so far to study individual responses to economic aspects of daily life, products, services, and so forth, are equally applicable to public policy. One needs, of course, to modify some of the instructions, to call attention to the fact that the concepts deal with public policy, not one’s own life. Properly done, however, we begin to see the potential of experimentation in public policy. And so we now open yet a new chapter, this time in the psychological economics of public policy. The key: We combine the experimental method (conjoint analysis), with two key questions, one of interest and one of economics (taxes willing to pay). The combination provides an interesting tool by which to assess key aspects of public policy, in our case education.

The notion of addressable minds produces a different type of database about a person. Rather than knowing who a person is, knowing what the person does, addressable minds work in the so-called ‘here and now’, at the micro-level. Today’s advertising is often one-way, even though the trend is to go from mass advertising on television and radio to more micro-targeted advertising on the Internet. Search-based advertising is growing rapidly. When a person searches for something, it’s likely that he is interested in that product, and may even be in a buying mode. What about knowing the person’s membership in a mind-set segment for the particular product being searched? Such information, gathered either early on in the creation of these large databases, or even obtained at the time of search, allows the marketer to better understand the needs of the prospective customer, and provide a targeted offer.

In this chapter we extend the idea of segmentation and typing individuals to a bigger picture. Rather than creating one specific study dealing with a single topic, we create parallel studies for many different, but related topics. We believe that such an approach is not only possible but feasible, and in the age of the Internet, absolutely straightforward. In this chapter we demonstrated how data from experiments on the shopping experience can be converted to segments, and those segments transformed into mental genotypes.

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