As some of my readers may be aware, I recently relocated from Australia to Singapore for work. While not the main reason for my relocation, a big benefit of my new home is its proximity to the rest of Southeast Asia and (relatively speaking) the rest of the world. This proximity opens up a whole host of new and exciting travel opportunities to help me capitalise on my weekends and holidays – a fact which is only bolstered by the availability of cheap airfares through budget carriers in the region.
On one recent weekend, I had to take a trip back to Australia for a friend’s wedding. Not wanting to spend a fortune on flights, I managed to find a bargain with Scoot, one of the main budget carriers servicing Southeast Asia. At the time of purchasing my flights I was absolutely motivated by finding the lowest possible price. By the time my flight came around a month or two later, however, my initial spend on the flight cost was a long forgotten memory.
It was with interest, then, that I received an email from Scoot a week out from my flight, which offered me two interesting opportunities:
- Bid 4 Biz: This concept allows passengers to place a bid to secure an unsold SctootBiz (business class) seat. If the bid is successful (i.e. higher than that provided by other bidders), then the passenger wins an upgrade, ostensibly at a big discount to the full price
- MaxYourSpace: Allows passengers to purchase up to 3 spare empty seats in a row, starting at $19 per seat. If successful this gives passengers the freedom to stretch out, again at a fraction of the original cost per seat.
I’ll admit, it took a fair degree of willpower for me to turn this offer down – after all, what’s another $100 in the scheme of things, especially compared to the cost of the original purchase? This got me thinking about consumer behaviour, and wondering how the principals of behavioural economics might come into play in evaluating these seemingly very attractive offers from Scoot.
According to Oxford Dictionaries, Behavioural Economics can be defined as:
A method of economic analysis that applies psychological insights into human behaviour to explain economic decision-making
The basic premise of behavioural economics is that, rather than being the rational decision-makers expected by traditional theories of economics, consumers are routinely non-rational in decision making, systematically succumbing to biases, heuristics, and other irrational tendencies in evaluating and selecting options.
Far from an isolated phenomenon, biased decision making is in fact ingrained in human behaviour to the extent that it is quite predictable. Frederiks and colleagues, for example, highlight a number of pervasive and irrational (but predictable) tendencies that influence consumer decision making and behaviour including:
- Inertia or change resistance: People revert to the default or status quo when faced with increased information or complexity. As consumers, this means people will often ‘go with what they know’ even if more rewarding alternatives exist
- Satisficing: Rather than optimise decisions (i.e. select an option with the most utility), people tend to settle for ‘good enough.’ This means they will often select the first option that satisfies their minimum requirements, rather than evaluate all available information to reach an optimal selection
- Loss aversion: People tend to over-emphasise losses relative to equivalent gains, particularly as stakes get higher. Put another way, people feel (or imagine) the pain of losses much more strongly than the pleasure of gaining, focusing on the costs (e.g. time, money, risk) more than the benefits when it comes to decision making
- Sunk cost effect: People become attached to things they have already invested time, effort or money in, and persist with further investment even if it is unlikely to yield additional benefit, or will actually draw more risk. Rather than ‘waste’ an initial investment, people will continue a behaviour to ‘get their money’s worth’ and treat the initial and additional costs entirely separately in their mental evaluations
- Temporal discounting / recency: People prefer an immediate reward to a long-term pay-off, even if the latter is more valuable
- Availability bias: People make judgements about an outcome based on the information that immediately springs to mind – typically that which is recent, salient or vivid. People give extra weight to available information when estimating likelihoods, which makes those estimations biased.
The Scoot Case Study
Looking at the Scoot upgrade offers in light of the above really highlights the genius of the idea, and how the company effectively employs the principals of behavioural economics to drive consumer spend. Here’s how:
- Loss aversion: By employing an auction system, Scoot is minimising the salience of additional costs relating to the upgrade, as well as the perceived risks of investment. By bidding, flyers are giving their own value to the upgrade which feels relatively risk-free since they pay only what they are willing to (or nothing at all)
- Sunk costs: Bidders have already sunk the cost on their original flight by the time an offer is made to update. By making the offer some time after a consumer has purchased their ticket, Scoot minimises the salience of the original ticket outlay and thus reduces consumer attachment to that initial decision (and its motivations)
- Temporal discounting: Through making the offers available in the week before the flight, the ‘reward’ of an upgrade is a more immediate one, conceivably making it more valuable to a consumer than a more expensive fare booked far in advance
How Organisations can Benefit
As we have seen from the behavioural economics research summarised here, there is a big difference between what people value and believe, and their actual behaviour. It is becoming increasingly evident that to a large extent, consumer choice and preference is driven by predictable cognitive biases. Companies can capitalise on this predictable irrationality by developing strategies that ‘short-circuit the short-cuts’ consumers make when evaluating options and making selections. Some possible strategies include:
- Make it easy for people to shift the status quo e.g. through no-risk trial offers
- Use clear, simple messaging that facilitates fast consumption (and won’t be glossed over when people go for the bare minimum)
- Emphasise losses from inaction rather than just the gains from a purchase
- Minimise the risks of making a decision e.g. through ‘name your price’ pricing, or try before you buy (see number 1)
- Offer purchase, adoption or upgrade incentives to minimise focus on any earlier sunk costs
- Provide immediate rewards to offset the discounting people give to long-term benefits
- Give prompts and reminders to keep relevant information front of mind
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