How behavioural economics helps marketers
The labelling effect, recently discovered by behavioural economists, gives marketers another weapon in their arsenal of influencing techniques. Even small labelled promotions (vouchers to spend on certain items) shift spending patterns disproportionately. Tesco, Sainsbury’s and even the Government have used the labelling effect to alter behaviour. This short piece introduces the labelling effect and also explains how marketers can use this technique to influence customers’ choice of products.
Small promotions do not force customers to change their spending patterns because they can easily rearrange their budget. In reality, however, small promotions do affect which items are purchased. Thus marketers can target small promotions at highly profitable items to encourage customers to spend more on those items.
A promotion is ‘non-distortionary’ if the customer would have spent more than the value of the promotion on the targeted product anyway. The labelling effect occurs when consumers react to these promotions by spending more on the targeted item. For example:
Example 1: Retail
A recent study gave customers at a restaurant an €8 voucher (1). Vouchers could be spent on beverages (the ‘labelled’ voucher) or food or beverages (the ‘unlabelled’ voucher). As customers usually spend at least €8 on beverages the gift is non-distortionary: customers could rearrange their money to spend the same amount of money. However, customers who received the labelled voucher actually spent on average €3.90 more on beverages than those with the unlabelled voucher.
Interestingly, the most common behaviour was to spend the voucher on the targeted good. Additionally, those with lower non-verbal cognitive ability were more likely to respond to the label. Non-verbal cognitive ability involves problem solving skills and mathematical ability as opposed to language skills.
Example 2: FMCG
Supermarkets are also starting to use labelled vouchers to nudge customers towards more profitable goods.
Here Tesco is offering a 20p discount on top range lettuces. Clearly, the label means that customers are more likely to buy one more top range lettuce than if the voucher could be used on any item.
Here Sainsbury’s is using a small promotion to nudge consumers towards bakery items. The labelling effect means that this 40p discount will disproportionately increase spending on bakery items.
Example 3: Government payments
The Government also uses the labelling effect on benefits such as the ‘Winter Fuel Payment’ (WFP). Currently, pensioners spend on average 41% of the WFP on fuel. However, if named ‘The Annual Allowance’ they would only spend 3% of it on fuel (2).
What causes the labelling effect?
There are three potential causes of the labelling effect: narrow bracketing, mental accounting and reciprocity.
This is the process whereby people split one decision into separate parts and then consider each part in turn (3). For example, people may decide to spend their budget on food, beverages or both. If their usual budget decision were totally unaffected by say an 8 Euro voucher then, then all would be spent on the targeted good.
There are four possible causes of narrow bracketing. Firstly, customer’s cognitive limitations. Secondly, cognitive inertia (it simplifies decisions). Thirdly, by applying previous value judgements or ‘rules of thumb’ to spending behaviour, such as ‘always spending at least £10 on a bottle of wine’. This could cause customers to see the wine cost as separate to the rest of the cost of the meal. Fourthly, through deliberate or conscious action to control or check expenditure, perhaps as a New Year health or budget resolution.
This is a form of narrow bracketing whereby people divide their expenditure, wealth and income into different ‘mental accounts’ (4). These mental accounts represent narrow brackets. For example, a restaurant patron may have two separate dining budgets in his or her mind; a food budget and also a beverage budget. The unlabelled voucher could therefore be split between either account, while the labelled voucher may only be added to the beverage budget. Once allocated to an account, money is not easily shifted as the label given to the gift affects spending.
Furthermore, the tighter the customer’s budget, the more strictly mental accounts are enforced. So the labelling effect has greater impact on the less wealthy.
Feelings of reciprocity
These may cause customers to respond in a way they think is helpful to the gift-giver. Customers may see a promotion as a gift and reciprocate by spending more of the gift on the targeted good. Reciprocity does not cause the labelling effect on vouchers, but it may do for Government payments.
Is the labelling effect transparent?
In the context of retail vouchers, most people are aware of the labelling effect per se but fewer are aware of its real impact (5). Awareness of the labelling effect is driven by non-verbal cognitive ability and age. The use of labels is less obvious to younger people with lower cognitive ability. Conversely, those more likely to respond are less likely to know about it.
1. Labels change behaviour so target promotions such as vouchers to increase spend on more profitable goods. Do not assume your customers will rearrange their money, even with small promotions. So if your customer spends £10 on books and £10 on (more profitable) DVDs, a £5 gift can significantly change spending balance. Evidence suggests labelling the voucher for DVDs would cause customers to spend £2.50 more on DVDs than they would with an unlabelled voucher.
2. Nudge your customers into narrow bracketing by creating new product divisions in categories and markets. If some DVDs are more profitable than others, then divide them into groups by age or genre.
3. Use the labelling effect to make the most of loyalty scheme promotions. Perhaps by making reward points worth more on certain products, or by allocating reward points to different ‘accounts’ to spend on different products.
4. Use behavioural economics to uncover new insights and optimise your promotions. Small promotions and labelling or small changes in copy can change spending patterns. Schedule research, such as quali-quant tests or hall tests to understand the causes and effects.
(1) Abeler, J. & F. Marklein (2013), ‘Fungibility, Labels, and Consumption’, Working Paper. First published May 2008 as IZA Discussion Paper No. 3500.
(2) Beatty, T., Blow, L., Crossley, T. & C. O’Dea (2011), ‘Cash by any other name? Evidence on labelling from the UK Winter Fuel Payment’, Institute for Fiscal Studies Discussion Paper.
(3) Read, D., Loewenstein, G. & M. Rabin, (1999) ‘Choice Bracketing’, Journal of Risk and Uncertainty, 19(1–3), p.171–97.
(4) Thaler, R. H. (1999), ‘Mental accounting matters’, Journal of Behavioral Decision Making, 12, p.183-206.
(5) Hogg, T. (2013) ‘Fungibility: Are People Aware of Non-Fungibility?’, MSc Dissertation at The University of Nottingham. Available on request.