Behavioural Economics is basically using your loaf
Rory Sutherland tells a story illustrating how creative Choice Architecture can be.
A European car manufacturer was trying to shift its cars in a sluggish market.
It tried all the conventional solutions.
It cut 1,000 Euros off the price.
It cut 2,000 Euros off the price.
It cut 3,000 Euros off the price.
And it still made very little difference to sales.
It was a tough time to get people to buy new cars.
And the manufacturer began to wonder why that was.
They’d never offered a better deal than this.
Well the answer is always, in one of two places.
It’s in the product.
Or it’s in the consumer.
They’d tried looking at the product.
There was nothing else they could do to improve it.
They had to look at the consumer.
Why wasn’t the public buying new cars?
And they found their massive discounts were part of the problem.
They were slashing the cost of new cars.
This made the consumer think car prices were on the slide.
And if that was happening before they bought it, how much further would it slide while they owned it?
How could they ever sell it?
After all, most car purchases are people buying a replacement car.
They need to sell the one they’ve got in order to buy a new one.
So the big worry for most people is how to sell their existing car.
In fact that’s a bigger worry than the new car.
Suddenly a light bulb went on for the car manufacturer.
Maybe the object wasn’t to try to push a new car onto the consumer.
Maybe the object was to help the consumer get the best deal on their existing car.
Looked at that way, everything changes 180 degrees.
The manufacturer doesn’t have to offer any money off their car at all.
Instead they can offer 3,000 Euros on the trade-in value of your current car.
Think of that.
You’re worried about what you’ll get for your existing car.
Well, don’t worry.
Even if it’s a bit of a wreck, we’ll pay you 3,000 Euros more than the book value.
Suddenly the whole situation is turned around.
Previously you had two problems.
Paying for your new car, and selling your old one.
Well we’ve taken one problem away.
We’ll give you a fantastic price for your old car, and you get a spanking new car into the bargain.
Isn’t that a load off your mind?
So, how well did it work?
Well, while the promotion ran they had record sales.
The only car manufacturer that did.
Of course, we can plainly see the net cost was exactly the same.
The point is, 3,000 Euros has a different value in different situations.
It can be a manufacturer offering you money-off because they’re in trouble.
Or it can be a fantastic deal on your old car that you’ll never get again.
Rationally, it’s exactly the same thing.
Emotionally, it’s totally different.
Many years ago, I was a junior at BMP.
Chris Powell said to me “Think of what we do as an advocate in a court case. Depending on whether we appear for the prosecution or the defence, that’s the side of the case we put. How well we put our side of the case depends on how good we are at our job.”
I think the car manufacturer did a very good job.
Once they decided which side of the case they were putting.