What Traditional Economics Missed

Consumer psychology has made many changes to our understanding of consumerism. We can no longer rely on, at least not entirely, neoliberal descriptions of purchasing behaviour. Things like whether our friends will judge us negatively or not, as we now know, can impact our choice to purchase, irrespective of any demand we have for the product. For example, if my best friend dislikes products made with animals, then I might decide to avoid buying products made with animals; if my friends like when I buy products from local manufacturers, then I might buy a locally manufactured product over an imported product, only so I can win the approval of my friend. Those sorts of psychological variables have an impact on our consumer behaviour, yet those sorts of variables would be given a minimal role, if any, in the classic neoliberal explanation of items sold and bought. No economist of the past would say of a product’s demand curve that a large portion of said demand comes from the fact that a product is placed in a particular way, in a particular area, under particular lighting inside a store. That is an insight derived from consumer psychology, not traditional economics.

In order to understand this a bit more clearly, let’s explain a traditional view on supply, demand, and purchasing behaviour.

The Classic Views

One classic view relates to ordinary supply and demand. For starters, when something is in short supply, the price will rise to account for the overwhelming demand. We would assume, in other words, that as the supply of something increases and decreases, the demand remains constant. Sometimes we will have a supply of 10 bananas, and at other times we will have a supply of 5 bananas; however, there are always 6 people who want bananas. So, in such a world, the explanation of purchasing behaviour is as follows: those who cannot afford the higher price will be removed from the line of customers, and those who remain to buy the bananas can not only afford them but also want them. The primary characteristic to explain purchasing behaviour, then, is whether someone can afford something or not. The secondary characteristic, obviously, pertains to whether someone has a want for the product or not.

So affordability and want are the two characteristics which drive purchasing behaviours in the above classic view; which is typical in classic views, because many classic models fail to consider either social factors or attention and persuasion as variables which drive purchases. Instead, external features related to the product, price, and utility are most often considered.

For further examples, consider utility and value gained. In classic views, utility drives purchasing behavior for single purchases, and value gained drives purchasing behavior for purchases of more than one unit. That is, when someone finds utility in a product, they will buy it because they find a reasonable trade between price and utility gained. Whereas, comparatively, we might buy two laptops not because we gain utility from a second laptop, but because we gain enough value for the price of a second laptop. So, utility gained and value gained are other classic factors that drive purchasing behaviour.

We can likewise explain classic models by appealing to opportunity costs; that is, when the opportunity cost of a product becomes too great, then people stop buying the product. For example, suppose in January that one apple can be traded for five bananas; in such a case, people will opt for the five bananas instead of the single apple, since the opportunity cost of one apple is too high: that being five bananas. But now suppose, in September, one apple can only be traded for two bananas.  If so, then we would expect more people to consume apples, since the opportunity cost of an apple is far lower: from five bananas to just two. In other words, opportunity costs can influence, to some degree, the purchasing behaviour of consumers.

In general, classic views tend to focus on supply and demand variables, and then infer some abstraction about human psychology, like whether a want, desire, or need exists, and then leave it at that. Their reasoning is similar to a conceptual black box, they consider only the inputs and outputs, yet never reason about the nature of the box’s contents. That is a direction not travelled by modern consumer psychology.

Modern consumer psychology considers factors like attention, memory, and social status, and relies on disciplines like cognitive, social, and personality psychology to inform their models of consumer behavior. Not only does consumer psychology incorporate less obvious factors like environments in which products are sold, but they delve into the black box which gives rise to the outputs of economic behaviour. Let’s consider these more in-depth.

Modern Factors of Consumer Behaviour

Consumer behavior can be broken down further than we have already done. Rather than consider consumer behavior and the factors which influence it, we will consider consumer behavior at a given point of time; more specifically, we will consider consumer behaviour not only before a purchase is made, but also during and after the purchase.

Of course, that is not to insinuate that these variables are all isolated and only have influence at one stage of the process, because they don’t. No doubt can be found in my mind, what influences the initial phase of a purchase can assuredly influence the final stage of a repurchase, or something of such sort. But by analyzing consumer variables in the context of time, presumably a context of time where each respective variable is most prominent, we are able to better understand the relationships between a consumer’s behaviour and a purchase. Such is similar to a painting and a painter. We better understand a painting, or a painter, if we watch a time-lapse from beginning to end of some particular painting. Of course, the elements in the beginning have influence on the elements at the end, but we better understand that relationship by watching them unfold linearly through time. To better understand a consumer, we must consider them to be a painting which unfolds through time, and we must make note of each detail after the next.

Such is our intention herein, so let us begin.

Before The Purchase

When we walk toward a store entrance, most of us give little thought to the process. We are either lost in thought, thinking of something entirely unrelated to our quickly approaching shopping event, or we are focused entirely on the shopping task to come: what we need, what we want, and what we are intending to buy. Yet the act of walking toward the entrance of a store plays a major role in consumer behavior.

The walking in the parking lot is usually a bit quicker than usual, because there are certainly dangers lurking when busy drivers are coming; or, perhaps the weather is off-putting and miserable. Whatever the reason, many people will walk a bit quicker to and from the store. As a result, their heart rates increase and they become more physiologically aroused.

Now as we know, those who are more aroused tend to ignore minor details and information. Someone who is enduring a panic attack fails to pick up background details of their surroundings; someone who is overly excited about an idea might fail to consider small details related to the idea, and as a result, get ahead of themselves; and those who are in a rush to get out-the-door have a tendency to forget their belongings. So, those who enter a store with an increased heart rate often miss smaller details.

In addition to entering a store with an increased heart rate, those who enter from the parking lot must adjust their eyes to the new lighting environment. Eyes require time to adjust to the level of lighting in the environment, especially if we go from extremely bright natural light to dimmer indoor lighting.

What we can grasp from these two insights is how the entrance of a store can impact the sales of a product. If we place items directly at the front door of a store, without physically slowing down customers and giving them a chance to adjust their eyes and arousal, then those items will sell poorly. Because their eyes are not yet adjusted they might have blindspots and thus be unable to see important signs; and because they are still aroused from quickly walking through the parking lot, their ability to pay attention to small details is diminished. They might even walk quickly past the products, as the phase wherein which they slow down could last for 15 to 20 steps into the store. So how the entrance of the store is designed absolutely has an impact on sales of a product.

Which transitions us to another before-purchase-factor that influences consumers: product placement. Not only does the front of the store matter, but also the sides of the stores which items are placed on and the shelves which items are placed on matter. Consumers do not randomly walk through stores, nor are customers random in their shelf scanning processes, despite the seemingly chaotic behaviour of Wal-Mart customers.

When we enter a store, we all have a tendency to take the first right available to us, and we all have the tendency to continuously walk rightwardly; we also have a tendency to look to the right when entering a store; however, in countries other than America and Canada, that is less true. In countries where people drive on the opposite side of the road, the opposite is true; they walk to the left, look to the left, and have a tendency to float leftwardly when entering a store. The habits of driving, in other words, carry over into how we navigate a store, which means how well a product sells can be influenced by driving habits.

If we are in America and put all our must-sell items on the left side of the store, odds are they will sell poorly; whereas when we put must-sell items on the right side of the store, odds are they will sell much better than if they were placed elsewhere. And as much holds true for countries like the UK.

As for items being placed on the shelf, this too follows general principles of human behaviour. We often see and interact with objects that are directly in front of us, and we less often see and interact with objects which are either below or above us. For example, we tend to eat more food when the food is within eyesight as opposed to being stored away somewhere; and we tend to drink more water, on average, if the water is placed beside us. Objects within reach, within sight, or readily available are far more likely to be used or consumed.

How that applies to product placement is shelf location. Stores have many items to store, and so require rather large shelves. But as a result of the large shelving, some products are placed near the top, and some are placed near the bottom, two locations which are entirely out of sight and difficult to reach. On the one hand, for items at the top, we can hardly read them and reaching them can be quite the task; we risk dropping things on our heads and we are forced to stand in a compromising position. On the other hand, for items at the bottom, we have to bend over or squat to grab the items, both of which require some effort. Why bother with either the top or bottom product when a different brand of the exact same product can be found right before our eyes and is also within reach? Well, we don’t bother with those products.

Most consumers buy products which are closer to the centre of the shelf than any other product; middle shelf placement is hot real-estate for companies. Consumers are habitual middle shelf buyers because it is easier to see and reach products placed in the middle; to buy a product in the middle is to take the easy route. If we are going to spend some of our hard earned money, we might as well do it in the easiest way possible.

So product placement is a significant factor for the “before purchase” category, as is the way in which stores are designed: as in, do they slow people down upon entrance or not? But there are more internal factors which influence before purchase behavior, of which are all derived from psychological principles of human behavior. Let’s explain them now.

For starters, humans are selective information processors. Everyday we are bombarded by more information than we can process. As it is commonly said by language learners or bookworms, there is not enough time in their life to read every book or learn every language. Which is true, there is far more information out there than we can ever process. Consequently, the human mind became rather good at selectively processing information.

Consider the functional blindness experiment that involved a gorilla. In the experiment a human subject was instructed to keep track of a basketball being passed around, so that they can count how many times it was passed. Then, unbeknownst to anyone, a gorilla – that is, a human in a gorilla costume – nonchalantly walked through the court. When participants were asked about the gorilla after the counting task, very few had any clue about the gorilla. Most participants missed the gorilla entirely.

Why? Because humans selectively process information. Whether the gorilla was processed unconsciously or not matters little here, because we at the very least know the information never entered conscious awareness. And so, we could have not consciously deliberated on the information. That is relevant for consumer behaviour.

Consumers, in America or Canada, often enter a store looking for something very specific; very few walk down every aisle: only 21% do that. Majority of consumers in the Americas, that is 79%, walk directly to the aisle where their products are located and then leave. So, in the Americas, it is far better to design signs and information posters to provide the information that consumers are looking for.

However, in other countries, consumers are not always so cut-throat about their shopping behavior. In countries like Brazil, customers are more likely to walk all the aisles. Which means, marketing strategies for precise shoppers in the Americas might not carry over to other countries well.

Another before purchase factor relates to familiarity and habituation. Familiarity is in reference to having already been exposed to something before, which in our case can be brands and products. Habituation means, in ordinary english, to grow accustomed to something, which in our case can mean rewards from foods or wearing pricey brands.

For us, familiarity can lead a consumer to pick one brand over another simply because of the fact that the familiar brand has the advantage of being known. We prefer known over unknown, since known is predictable. It is true that people will often pick a mediocre, known restaurant, when ordering food, over an entirely unknown restaurant which they have never ordered from before. So familiarity can result in better sales.

Habituation can be particularly important for predicting when a company ought to release a new product and thus increase consumer demand. Consumers experience diminished reward from a product after first use, and that diminishment continues after each use. As a result, customers will buy the product less due to lower reward. In example, someone who eats 10 bags of ketchup flavoured chips over the period of two months might want to change their chip flavour, and if the brand has no new flavours to offer, then the customer will go to a new brand.  So habituation is yet another factor which influences before purchase behaviour.

The last psychological factors to be discussed are from gestalt psychology. Briefly put, Gestalt psychology views perception as a collection of patterns and configurations, as opposed to viewing perception as being composed of a bunch of singular things. For example, we tend to perceive a chair as a whole unit rather than view the chair as composed of individual parts, we tend to perceive a movie as a whole rather than as being composed of a collection of still shots. The whole is more than the sum of its parts, that is the essence of Gestalt psychology.

Now, with that view comes many principles, but we only need to give an example of two in order to demonstrate the influence that gestalt psychology has on before purchase behaviour.

First, the law of proximity. The law of proximity states that things which are close to each other are perceived as belonging together. Chairs and tables when placed close to one another are perceived as belonging together: being members of the same dining set. Likewise, when childrens toys are placed near candy, the two are perceived as belonging together. Another good example might be placing pop next to chips, or gum next to cigarettes. These are all products that when placed separately might seem unrelated, but when placed close together can provide an obvious function when used together. As a result of their closeness, they seem to belong together since they complement one another so well. 

The second law is the law of similarity. The law of similarity states that when things look similar they belong to the same family. In example, an iPhone looks similar to a mac, and a mac looks similar to a tablet. These three distinct items are perceived as belonging to the same brand because they look incredibly similar. As much is true for most brands. The law of similarity will allow us to quickly judge the origins of a product; that is, whether the product came from a company like Microsoft, Apple, or Sony.

Both the law of proximity and similarity can have impacts on sales. When a product is placed closely with another product, and both have a reasonably good complement when being used, then we would expect to see the secondary product be sold in higher quantities. And when products look similar to each other, we can expect familiarity, brand loyalty, and other relevant factors to help boost the sales of a product; for instance, Apple can rely on their brand awareness for macs to then sell ipads and things alike.

So, there are many internal and external factors which can determine to a reasonable degree whether someone buys a product or not. Let’s now consider some of the factors relevant for during the purchase.

During the Purchase

The variables during a purchase likewise come in two broad categories, namely, internal and external. Two extremely important variables of such a sort are self-awareness (internal) and physical space within the proximity (external). But also, the environment more generally can likewise be important for during purchase behaviors.

Self-awareness can have a tremendous impact on consumer behavior! Whether someone buys a basket full of snacks and goodies or fruits and veggies can be determined by self-awareness. That is, in some studies, when people were shown their reflection in a mirror they shopped healthier on average and bought less junk food. And so, when there is no mirror to show someone their reflection, they are more likely to buy healthy foods. Likewise, when customers are shown the total amount of money inside their cart, while they are shopping, they are more likely to buy less.

So, because people begin to associate what is in their cart with who they are, their purchasing behavior is altered. It becomes more apparent that what they buy is truly a reflection of themselves, their purchase represents a choice to be someone. And since most people associate themselves with a positive image more than with a negative image, they tend to then make choices that reflect their positive self-image due their newly found self-awareness.

But self-awareness of themselves and their behaviors is not the only way self-awareness impacts consumer behavior. Self-awareness of values and principles can likewise impact consumer behavior. For instance, when european consumers buy clothes, they are less likely to buy from a brand if that brand is environmentally unfriendly, or what is known as fast-fashion. Why? Because they have values and principles which encourage them to pursue environmentally friendly behaviors and make decisions that benefit the environment. Which means, we can influence purchasing behavior by reminding people about their values and principles, by making them self-aware about their own philosophies on life.

Now, another way to influence during purchase behavior is physical space. In specific, how much personal space a consumer has. When people become crowded while shopping, they are less likely to hold products, read labels, and make purchases. For example, when customers are holding products in their hand, presumably thinking about whether they need it or not, they are more likely to put the product down and move on if someone comes and hovers over their shoulder. Even furthermore, shoulder space aside, when stores are overly packed, customers become frustrated. Being unable to walk uninterrupted down aisles can cause some customers to leave their cart where it is, products and all, and leave the store. Why? Because customers not only want to be able to walk in peace, but they also don’t want to navigate the bad cart-driving of other customers!

So shoulder space and good traffic flow are important for during purchase behaviors. But so too is the smell of the area.

In one study, where there were two conditions, the researchers found that smell has a significant impact on behavior. One condition was a group of participants who were given cookies to eat, and then asked to leave afterwards; another condition was a second group of participants who were also given cookies, and likewise asked to leave afterwards; however, the second group was eating the cookies in a room that smelt like scented aerosol. The result? The second group was far more likely to clean up all their cookie crumbs!

So what does this mean for during purchase behaviors? Well consider a bakery. If a bakery can evoke a fresh bread smell while consumers are looking at breads, they might buy more bread. If the aisle where cleaning products are located smells like flowers, then consumers will think they are good products; whereas, if a cleaning product aisle smelt fowl, then the sales of cleaning products would assuredly decrease. In order to positively impact the during purchase behavior, we need to make sure the points of sale have the appropriate smells!

The physical space, be it how much room a customer has or the smell of the environment, can impact during purchase behaviors, and so too can the level of self-awareness a customer has.

The last process of the purchase to be discussed is the post-purchase behaviors. The things which occur after a customer bought a product.

After Purchase

Because of the fact that what happens after a purchase can have a strong impact on both the before and during purchase phases, we need to be aware of how to influence after purchase behavior. A product bought that simply brakes after three uses will result in a company seeing no repurchases. And customer loyalty will be non-existent. So we need to understand after purchase influences!

Some important ones to note are customer support, customer expectation, product narrative, as well as genuine utility provided. All these factors have an important impact on the emotional state of the customer, and we want to avoid leaving a negative emotional impact; otherwise, we demotivate them from making another purchase with the company.

Companies like Amazon are a perfect example of how good customer support makes people return to the company, even if it is not for the same product that they bought before. And as much of a no brainer as this may seem, most companies get it wrong. If a customer has a problem with a product they bought from you, they will want help if a problem arises. But if no help can be offered, then the customer will feel like they are stuck with a deficient or frustrating product. Consequently, the customer won’t return or buy another product from the company! Bad customer relations can have a heavy impact on product demand.

Another important variable is expectation. People form expectations all the time. Most people in America expect doors to open when pulled, cars to drive when a light is green, and books to have words. But when an expectation is violated, people become stunned, confused, and sometimes frustrated.

When we build expectations in a customer’s mind via our marketing, we are entering potentially dangerous territory if we have no way to fulfill that expectation. For example, supplements that sell people on weight loss, but actually provide no benefit, do not last long in the market-place. They are usually replaced. Why? Because weight loss alone is not something a product can achieve, that depends on individuals to change their lifestyle. And so, the companies fail to provide the expectation they set up via marketing and as a result see fewer returning customers.  The same happens with video games.

When video games are over hyped, the game eventually underperforms because word of mouth. People spread the word that the game fails to live up to the hype, and so should not be bought.

Failing to live up to a customers expectation, especially when we set the expectation, can ruin sales and therefore demand.

Another incredibly important, and often overlooked, factor in the after purchase phase is the narrative. Products play a narrative in peoples’ lives. Philosophy books help people feel intellectual and academic, flashy t-shirts help customers feel likable and popular, and mac devices help customers feel modern and creative. These are all already existing narratives in the lives of the customers, and each of these narratives can be further developed or enhanced by a product!

A normal bottle of water might not add to a fitness narrative in someone’s life, but a cool thermos which is marketed directly towards fitness people, and that comes from a brand known for fitness, will definitely add to the narrative! It will help them fulfill their self-perception needs about being into fitness and appearing to be health conscious. If a product fails to fit into the narrative of someone’s life, then the sales can be negatively impacted. Why? Because customers look for more than just utility in products, they have identity needs which they want fulfilled as well. That is a major component of why Brand names charge more than non-brand names. Products should fit into narratives in the lives of consumers!

Conclusion

What we can conclude from our above conversations is that traditional economics, in light of consumer psychology, often fails to explain what is really going on. Consumer behavior before, during, or after a purchase can have a greater impact on product demand than any fluctuations in price or supply can. But that is not to say the traditional views should be thrown away, either.

The utility of the classical views comes from how oversimplified it is. Sometimes, rather than understanding the actual details of a purchase, or the actual details of a demand curve, we only want a simplistic notion called “demand”. We don’t always want the level of sophistication which comes from consumer psychology.

Thus, we are to conclude that traditional supply and demand models fail to accurately account for things, but can provide great utility if we are after a higher level of analysis that oversimplifies things.

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