Why Should Small Businesses start using Consumer Psychology?
This article is to nudge small businesses to start using Consumer Psychology which can be applied at almost no cost for great benefits.
What is Consumer Psychology?
Consumer Psychology is the study of the reasons, which are more often than not irrational contrary to the usual assumptions, that affect the consumer’s purchase decisions. The reasons include all the smallest of details you can possibly imagine because even though the conscious brain does not pick those things up, the unconscious does and that’s where all the major decisions occur before being transferred to the conscious and out into the world.
BENEFITS OF CONSUMER PSYCHOLOGY
Over the past 30–40 years there has been tremendous advancement in the field of behavioral economics that showed how flawed the standard economics models are and have huge gaping holes in them, yet businesses still use it as a yardstick to check the successfulness of incentives given by them to their customers to induce them to buy and dictate other thing in business.
For eg- All businesses price their product by building their cost model and calculate a margin of profit on it then end up with the price they will charge their customers. But this model is deeply flawed, it assumes that the customer knows exactly what it costs you to produce the product and then is happy to pay a premium depending upon how much extra effect it requires by the owner to get everything together.
But nothing can be further from the truth, when was the last time you went to buy something and went through this thought process? NEVER! There is no information symmetry nor is there an effort on behalf of the consumer to get to know how much it costs to produce every single product they buy! Yet still you continue to price your own product in this manner.
THE CORRECT PRICING MODEL
A business should price it’s products at the maximum price the consumer is willing to pay for it regardless of its own cost structure. If the maximum price a consumer is willing to pay for your product is less than it costs you to produce the product and you sell the product at cost plus profit margin then the consumer will never buy the product as is and you will waste time producing the product and take a hefty loss as well.
Whereas if the consumer is willing to pay more than your cost plus profit margin and you just charge him cost plus “your predetermined profit margin” you are losing out on money that you could make without reducing the value a consumer derives from your product. Most business owners think that if they charge less than the customer is willing to pay for a product then the customer will be happier but that is simply NOT TRUE!!
Multiple research studies have shown it. When you sell the customer a product for less than what he is willing to pay, the consumer does not realize this. The consumer doesn’t consciously think about how much he is willing to pay for every single product, so they never realize you have given them a product for a discount which should make them happier
The Pricing model used by businesses is just one of the many examples behavioral economics and consumer psychology can affect your profit margins and revenue. Behavioral economics is a vast field that can affect your consumer behavior in a large number of ways.
MYTH: Only for Big Companies
Big companies spend a lot of money on consumer research, millions of dollars literally every year and a lot of small businesses use that as an excuse, that it costs too much. It’s true consumer research costs a lot but applying the research costs almost nothing, that’s right, it doesn’t cost much to apply the things that have already been established. It’s just the matter of spending time and effort in order to learn about those things, that’s all it takes. And the potential return on that invested time and effort is tremendous.
I am not asking small business owners to get into the deep end of consumer psychology and spend days and weeks trying to understand all the details, but business owners now a days do have to be sensitive to the science behind consumer psychology, with the ever increasing pace and informational crunch consumers are spending less and less time consciously thinking about purchases and therefore influencing the unconscious of the consumers is becoming increasingly important.
Why Now?
Over the past year small businesses have really suffered and most are in the process of rebuilding right now, right now businesses are hiring new employees and rethinking business plans and therefore if they can include consumer psychology into their business right now then it will become a part of their business model and they don’t have to change things drastically in the future to include consumer psychology.
A Final Word
Understanding what makes people buy the things they do is much more than a guessing game. Research can now pinpoint what was the trigger that made a certain consumer buy a particular product. No detail is too small because your customer’s unconscious mind notices every single detail and is influenced by all those things before it decides on a particular product.
Small businesses should start taking advantage of the research being done and start applying these things to boat their sales and revenue
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