Marketers unknowingly promote purchase paralysis by overwhelming consumers with Choices.

Just can’t click that last button to complete an online purchase? Putting off that decision about a new phone service because you’re overwhelmed by alternatives? Regret that you’ve switched to another credit card?

You can blame the companies that are not applying the principles of behavioral economics to help customers make purchasing decisions. The Internet, in essence a worldwide department store, can be a consumers’ paradise. But offering a mind-boggling array of choices without thinking about how customers really buy can be a recipe for disaster, warns Diamond Management & Technology Consultants, Inc.

“Most companies don’t test their online interfaces to optimize the choices they offer to their customers,” said Bill Abbott, a Diamond partner and co-leader of the firm’s information and analytics practice. “Simple factors can have a profound impact on consumer behavior — how offers are presented, how many choices are available, and how orders are executed, for example. Fortunately, the Internet offers the flexibility to test various factors to uncover the optimal choices.”

“The central premise of behavioral economics is that humans, constrained by time, a lack of information and other factors, do not always make ‘rational’ economic decisions,” said Dan Ariely, the Alfred P. Sloan Professor of Behavioral Economics at the Massachusetts Institute of Technology (MIT) and a Diamond Fellow. “It’s the marketer’s job to understand how customers really approach the decision-making process.

“For example, consumers tend to value current consumption over future consumption, even when that future consumption is worth far more,” added Prof. Ariely. “The lesson learned is that offers of short-term gains can influence consumers into buying products far more than promises of long-term gains, even if those long-term gains ultimately are of far greater value.”

Prof. Ariely’s upcoming book, “Predictably Irrational: The Hidden Forces That Shape Our Decisions,” studies the ways in which — contrary to popular belief — consumers often do not make rational decisions.

“Behavioral economics research also has shown that seemingly subtle presentation factors can have a meaningful effect on conversion rates,” Prof. Ariely said. “For example, consumers are more likely to complete a purchase that offers ‘7 Days Risk-Free’ as opposed to ‘7 Days Free.'”

Spending Remains High, but Where’s the Payoff?

Across industry lines, companies continue to spend heavily on online marketing and sales, but not all of this spending is paying dividends. Online shopping cart abandonment rates remain high and conversion rates remain low.

According to Diamond’s report, consumers too often face a confusing selection of product combinations and uncertainty around the online purchase process. Web sites neglect to give people peace of mind about when they’ll receive their orders, and when and how much they’ll be billed. In addition, customers are not convinced their information is secure online.

Faced with these frustrations of the online purchasing process, consumers often opt for a higher-cost channel such as ordering over the phone, or they might migrate to a competitor or delay the purchase entirely.

Diamond’s report presents three specific ways companies can use behavioral economics to their advantage to improve online sales: filter choices, eliminate perceived risk, and frame choices for the consumer.

Choice Filters: Companies can help customers filter an exhaustive list of products or services to complete the purchase process. A credit card company might use “explicit filtering” by asking customers to select from a drop-down menu of options. Amazon.com was an early adopter of “implicit filtering,” by offering customers new products based on their past purchase
histories.

Risk: Companies can raise conversion rates by eliminating any perceived risks in the purchase process, which can be largely divided into three categories. Risk enters the picture when consumers are confused by steps in the online purchase process, believe they might find a better price elsewhere, or worry that the wide array of choices could lead them to select the “wrong” product — leading to regret.

Framing: The positioning of choices can influence a consumer’s purchase decision. When done effectively, framing provides a consumer with a reference point to understand a product’s value relative to available alternatives. Framing can help companies cross-sell, up-sell, or drive customers toward more profitable options.

Putting It All to Work: Defined Priorities and Consumer Targets

Understanding these behavioral economics principles is only half of the equation. Applying these concepts requires some creative thinking as well as a rigorous process to test and measure their impact. In the report, Diamond proposes four steps to get companies started:

1. Define the Focus: While commercial Web sites typically serve multiple purposes, Choice Optimization should focus on areas that are likely to produce a high return on investment. For example, a car company’s Web site, geared towards driving traffic to the dealer network, should provide a rich educational environment of models, features, options and pricing. But a site selling inexpensive consumer products should focus on helping customers narrow down their choices and quickly complete a purchase. Consumers’ decision points vary across companies and industries, and each company’s customers have their own unique “pain points” that must be considered as part of this stage.

2. Establish Baseline and Improvement Targets: It is critical for a company to establish a baseline in order to measure how applying behavioral economics principles affects conversion rates. How many product combinations are being offered? What are the conversion and abandonment rates? How many clicks are required to complete a purchase? As a company begins to implement improvement efforts, measuring their progress against these kinds of baseline measures will help determine whether efforts are improving or degrading business.

3. Identify and Prioritize Improvement opportunities: One of the most powerful tools at a company’s disposal is the ability to use the customer’s perspective to determine where behavioral economics principles can deliver the best results. Examples of how to acquire this knowledge include brainstorming workshops, root-cause analysis of Web data, customer surveys, and industry research.

4. Test and Implement Improvement Opportunities: Continuous hypothesis testing, in which multiple versions of an offer are tested using statistical analysis, can help companies uncover the offers with the highest success rates. Try different offers (free shipping or discounts on multiple purchases, for example). Test multiple options at the same time, using a multivariate test design. Collect responder data and evaluate the economics of various offers to determine which offers warrant a broader rollout.

“Using an approach that segments customers and analyzes offers through behavioral economics will help deliver the right products to the right customers — and boost a company’s online conversion rates,” said Abbott. “In order to achieve this, companies need to truly understand profit drivers by segment, characteristics of effective offers within each segment, and lessons learned that can be applied to future offer design.”