Why do travellers feel compelled to break the budget and book that 5-star hotel with a king-size bed, when all they initially wanted was a modest 3-star with a single?
Why do people use ride-hailing apps to travel with strangers when they could use their reputable local taxi service?
The answer is ‘behavioural economics’: the tactics employed by astute marketers to tap into our emotions and affect the economic decisions we make.
We can’t predict customer behaviour with absolute certainty, but we can help form their decisions by understanding how choices are made and designing solutions around the way they think and feel.
In this post, we’ll look at how companies in the travel and transport industry use behavioural economics to steer consumer buying decisions and increase engagement and loyalty to their brands.
Nudging is a technique used to change someone’s behaviour in a very easy and low-cost way, without reducing the number of choices available. It is sometimes described as “non-enforced compliance”.
Nudging isn’t something new. In fact, it’s used in many sectors of society and is employed at government level. America has the White House Social and Behavioural Sciences Team, and the UK government has the Behavioural Insights Team (BIT).
These government initiatives make use of nudge theory to improve social outcomes; think persuading the public to pay their taxes, or reduce their environmental footprint by engaging in recycling.
Such nudges don’t instruct people to spend less money to make sure they can afford to pay tax, or to buy fewer products in order to reduce their carbon footprint.
Nudging doesn’t seek to reduce choice, but rather to promote a particular behaviour. It’s an effective way of altering behaviour without using direct enforcement. One might say it is more a form of “coercion”. From a political standpoint, nudging is preferable to legislation and enforcement.
Nudge theory is generally used to describe situations where nudges are used to improve the life and wellbeing of people and society. From a marketing perspective, nudging leads the user to believe the product or service has their best interests in mind, that the service or product is helpful and tailored (personalised) to their needs.
Take Uber, for example. The Uber app learns default user behaviour and interacts with you by suggesting where you might want to go. In addition, the app also uses a cross-sell to nudge you towards ordering a meal via UberEats – because you might be hungry.
Uber is nudging you to take rides, a default behaviour it wants you to develop. To make this easier, it remembers your most popular destinations and suggests them to you. If you ever have any doubt as to whether you want to wait for an Uber or take a walk instead, the app helps you make up your mind by displaying how close Uber cars are to your destination and therefore how long one will take to pick you up.
Priming is where words, figures or values are displayed to subconsciously anchor the consumer’s mind to the desired behaviour.
- Displaying high value listings as ‘recently booked’
- Highlighting how much you can save if you book today
- Ordering higher value listings as ‘popular’
In the Agoda.com screenshot below, we see excellent examples of priming, and further examples of nudging.
The popularity of listings is affirmed by telling the user how many times the hotel has been booked in the last 24 hours, and what percentage of users think you should book this hotel.
Other priming includes:
- Use of the words ‘excellent location’, ‘best seller’, ‘newly built’,
- Use of the word ‘exceptional’ next to the review rating
- No matter the price, the words “rates as low as” are used to suggest that prices are always low.
- Details of popular benefits such as the distance from the city centre and whether or not the hotel has parking, free WiFi and a welcome drink.
The most compelling nudge is provided by the ‘daily deal’ countdown timer. This instills a sense of urgency in the user to book quickly or miss out! Both listings state a number of rooms left at this price. This is strategically reinforced by the fact that the third listing has ‘sold out on your dates’. This prompts the user into taking action to ensure he/she doesn’t miss out on the other hotel deals.
If any further incentive is needed, coupon codes are automatically applied, and an additional discount of up to 30% is offered for users who sign in. This motivates new users to register and existing users to sign in, which allows the company to build ever-richer profiles on their customers.
Knowing a particular users intent allows them to trigger highly personalised re-engagement campaigns to try and drive behaviour if the user does not complete a booking during their initial visit.
3. Contextual Pricing
Consumers don’t know what they want until it is put into context. Let’s put that another way: how do people know what they should be paying for a service or product if they have no reference point?
This is why you should never present a consumer with just one choice. Ideally you should present the consumer with three choices; the middle choice being the one you want to steer them towards taking.
Contextual pricing is the reason behind the popularity of tiered pricing options, think Platinum, Gold, Silver, and Enterprise, Business, Pro. Consumers compare offers and judge in terms of relative advantages. The idea is that the middle option becomes favourable based on these relative advantages.
If we consider the Agoda screenshot above, we can see contextual pricing in action. The three top options returned for the hotel search are deliberately structured with the deal the company wants you to choose sat in the middle of the three.
You can’t miss it because it’s wrapped in a big red frame. The offer saves you 61% (£231). We will see another classic example of contextual pricing later on, when we explore the ‘Framing Effect’.
We find that we can get things to feel much more or much less valuable to people not by changing the value of the thing itself, but by changing the value of the things around it.
~ Dan Ariely, Understanding the Irrational Customer
4. Decoy Pricing
In addition to contextual pricing, there is decoy pricing. As the name implies, a decoy price is introduced to force the customer into making a decision.
For example, we can offer three products: the product we want the consumer to buy, a slightly less attractive product at a lower price, and a similar product that’s good but ultimately one that we know the customer doesn’t want.
Dan Ariely, James B. Duke Professor of Psychology and Behavioral Economics at Duke University, and a founding member of the Center for Advanced Hindsight, uses a real-life example to help us understand how a simple decoy might be used in the travel industry to push the consumer into making a specific decision:
Imagine you’re being given an all-inclusive trip. On one hand, you can spend a week in Rome with all expenses paid. Or, you could have an all-expenses trip to Paris. Instantly, your mind races to compare cultural differences, which food you’d rather be eating, which country has the better art scene. In this instance, the only difference is a matter of preference.
Now imagine a third option: an all-expenses paid trip to Rome, but coffee isn’t included. Obviously, this isn’t the option many would choose. But, adding this inferior choice into the mix does alter the equation. As soon as the option for Rome without coffee is included, Paris with coffee becomes the most popular choice, even superior to Rome with coffee. (Source: Ted.com)
Adding a decoy alongside the real offer made the real offer look more attractive. Why people then went on to choose Paris over Rome might seem irrational, but it may well be because the consumer now associates Rome as a holiday without coffee, a holiday that lacks something.
5. Price Anchoring
When we buy something, we decide value by contrasting the price against another ‘anchor’ price. The first price we see will have an effect on the perception of all future prices.
For example, when intending to buy an economy-class ticket from a booking app or website, you may not have considered a flight at the premium-economy tier with extra leg-room. However, if you are presented with the high price of a business-class ticket first, the premium economy ticket suddenly seems very reasonable.
Transport and local services app GOJEK has leveraged this strategy with the introduction of alternative options for its ride hailing service.
Have a look at the screenshot below. You’ll see that GOJEK lists its three ride hailing options in a row in the main menu area.
To the far left is the cheapest option, GO-RIDE (the motorbike taxi), which we would assume that, given its primary marketplace in Indonesia, people would generally choose – because the weather is warm enough to ride outside and it’s a quick way of getting in and out of traffic. However, you also have to put up with the pollution, the humidity and the higher risk of an accident.
Positioned to the right of this option is the mid-priced option of a private ride, GO-CAR. This service is provided by drivers who use their car to taxi people around, in the same way that Uber does.
And positioned to the right of this is GO-BLUEBIRD; a public taxi service, which actually has its own app but is now integrated into GOJEK – something GOJEK was steered towards doing because of its economic disruption to the local taxi industry. Bluebird taxis are the most expensive option and in this scenario would be classed as the ‘premium option’.
This example of price anchoring is particularly interesting because the user doesn’t know the exact price of the journey at this stage of selection. However, perception and positioning makes this obvious, particularly to locals who already have an understanding of the cost of public taxis versus motorbike taxis.
We don’t know for sure, but we can assume that GOJEK makes more from a GO-CAR fare than it does from the lower-priced GO-RIDE option, and from the higher-priced GO-BLUEBIRD public taxi option. GO-CAR is therefore strategically positioned in the middle with the anchors either side.
6. The Framing Effect
The framing effect is an example of cognitive bias, in which people react to a particular choice in different ways depending on how it is presented; e.g. as a loss or as a gain. People tend to avoid risk when a positive frame is presented but seek risks when a negative frame is presented.
For example: Have a look at the framing used by Thai Airways in the screenshot below.
The user is presented with three pricing tiers: Saver, Flexi Saver, and Full Flex. Remember the contextual pricing we discussed above? That’s at play here too.
All three flight options offer 30 kg of checked baggage, and all three flight options require the user to pay a fee if a refund is required. There is one key benefit difference between the Saver and Flexi Saver option, and two key benefit differences between the Saver and Flexi Saver options and the Flexi-Saver and Full Flex options.
The most notable benefit difference between the three tiers is presented in a percentage format of mileage accrued for the journey. This mileage is mileage that will be credited to the customer’s frequent traveller loyalty card (Thai Airways is part of the Star Alliance Group).
The use of a percentage format here is a great example of consumer psychology and indeed the ‘framing effect’. While some people might be very interested in collecting miles, others might not. But this is actually quite irrelevant. The use of the ‘framing effect’ means that the brain is immediately drawn to the fact that the Saver option gives you 25% of something, that the Flexi Saver gives you 75%, and the Full Flex gives you 100%.
But the reality here is that you are actually losing 75%, 25%, and 0% of something, respectively. Thought about in this way, you’d be right to question why all the miles you fly aren’t accrued by your journey. But we don’t perceive the equation like this because the company is positively framing it as a gain, a gain that increases as we pay more for a ticket. Clever, huh?
How information is framed determines our decisions. We’ll react in a completely different way when the same choice is presented to us in context of a loss or a gain.
The psychology behind the use of a percentage format is also key here. From a young age we are programmed to understand that 100% of something is a positive thing. Generally, anything under 50% is consider quite negative, because it is less than half. However, 75% isn’t bad, because it’s halfway in between 50-100%.
When we look at the pricing, the Full Flex ticket price is £76 more than the Flexi Saver, and the Flexi Saver is £24 more than the Saver tier. Even though the majority of us working to a budget would have the intention of purchasing the cheapest ticket possible, naturally we feel as though we want to avoid the risk of taking the option that is less than 50%, which rules out the cheapest (Saver) option – exactly what the company wants us to do.
However, the risk associated with taking the 100% option is that we will pay a lot more than we would have initially wanted to. In this case, the majority of us would opt for the middle tier, the Flexi Saver, because it is low risk. It is over 50% (75% is pretty good, remember), and it is only £24 more than the Saver tier, so it appears the best value.
Of course, we mustn’t overlook the fact that the Full Flex option gives the user the ability to change the date of the flight without incurring a fee. However, in terms of visual perception of value, this is not presented as powerfully as the miles percentage.
Moreover, the fee to change your flight date is only £75, which would mean that even if you did have to change your flight date your ticket would still be £1 cheaper on Saver than on Full Flex.
Having to change a flight date when booking a long haul holiday flight like this is quite a rarity, and it is likely that people would be happy to accept that rare risk to save £76 on their ticket.
In reality, we know that the majority of people don’t check the fine print and consider the cancellation/change fee, and are more than likely to make a decision based on this visual representation and the way in which the information is framed.
We don’t have access to Thai Airways’ conversion statistics, but behavioural economics is cleverly at play here and you can bet your bottom dollar that the majority of people choose the Flexi Saver option.
It’s also worth noting the terminology used: Flexi Saver’ implies the best of both worlds – a bit of ‘save’ and a bit of ‘flex’ – when in fact no flexibility is actually provided with this option. But its name cleverly supports the middle option as the best option.
Lastly, the astute marketers amongst you may be wondering why Thai Airways used a tick mark on all of the tiers for the flight date change row, and why they didn’t use a red X mark on the Saver and Flexi Saver tiers, accompanied by the word ‘Fee’, and a green tick mark on the Full Flex tier, accompanied by the words ‘NO FEE’.
Surely introducing a visual symbol conveying this risk may prompt people to mitigate this by choosing the highest pricing option?
The reason for not adopting that approach is because it would lead to a change in the relative attractiveness of the Flexi Saver, which is the option customers are most likely to choose. Regardless of the fee involved, a tick looks more appealing than a red X, which is likely to cause concern and potential friction. And where there is friction, there is the potential for action paralysis.
Scarcity is a common tactic used by marketers to coerce consumers towards taking immediate action. When we are undecided as to whether we should make a purchase, we naturally consider putting off making the final decision until a later a date.
Marketers know that once a consumer exits the purchase funnel they are unlikely to come back of their own accord, which is why cart abandonment emails and push notification reminders are so frequently used to re-engage the user in the purchase process.
To prevent the consumer from walking away, scarcity is used to create a sense of perceived loss.
The psychology behind this is that we are more likely to respond if we think we are missing out on something than if we think that we might gain something. This is called FOMO (the Fear of Missing Out). Scarcity is a key tactic for the travel and transport industry, where rooms and seats are being sold for hotels, airplanes, trains and buses.
The most commonly used scarcity tactic is to inform the user when a limited number of rooms or seats are left. This information is usually written in red to indicate that there is a danger of the rooms or seats being sold out.
This alters the mindset of the user, who may have been thinking to come back later and book when they have more time, or when they’ve been able to think more about the available options. The thought of losing a hotel room at a great price and having to pay more for an inferior room at a later date is often enough to force the user into an immediate decision.
In the screenshot below, hotelquickly.com uses a lightning symbol to elevate the sense of urgency around the fact that just a few rooms are left. This symbol is associated with danger and need to take action immediately, and therefore draws our attention to the fact that we might miss out.
Psychology and marketing professor Robert Cialdini, author of the Six Principles of Influence, explains how scarcity has the power to ramp up consumer demand:
Simply put, people want more of those things they can have less of.
When British Airways announced in 2003 that they would no longer be operating the twice daily London—New York Concorde flight because it had become uneconomical to run, sales the very next day took off.
Notice that nothing had changed about the Concorde itself. It certainly didn’t fly any faster, the service didn’t suddenly get better, and the airfare didn’t drop. It had simply become a scarce resource. And as a result, people wanted it more.
It’s not enough simply to tell people about the benefits they’ll gain if they choose your products and services. You’ll also need to point out what is unique about your proposition and what they stand to lose if they fail to consider your proposal.
8. Social Proof
People are heavily influenced by what they perceive everyone else to be doing. We want to be “in the know”, we want to be current, fashionable and knowledgeable. This aspect of consumer psychology is linked to innate species behaviour; we want to be part of the community, part of the tribe.
Earlier in the post we saw an example of Agoda using social proof in the ‘Priming’ section: 93% of guests think you should stay here. “Wow! If that many other people think I should stay here, then why not?”
Hotels.com uses social proof in a similar way, to reassure the user that other customers are also booking these hotels. The example below shows that someone else booked the same hotel just 3 hours ago. “If someone else recently booked this hotel, they too must have thought what I’m thinking; that it’s a good hotel, right?”
This simple tactic is reassuring, because it provides validation for the decision we are about to make, pushing us one step closer to the purchase.
As we know from the potential impact of app store ratings, reviews are a powerful element of social proof. In the travel industry, reviews are often the biggest influencing factor in a person making a booking. The hotel in the example above has 1,481 reviews and an overall rating of 8.6. If so many people have taken the time to write a review, and the overall rating is so positive, it must be a safe bet, right?
Travel site TripAdvisor.com has leveraged the power of social proof to become a dominant and trusted consumer resource. Users can share not just their views but also their holiday photos, visual evidence that further proves their point.
Social proof is all about herd mentality: It shows us how people can be influenced by their peers to adopt certain behaviors on a largely emotional, rather than rational, basis. What is everyone else doing? If everyone else is doing x, then x must be good and I must be missing out.
Behavioural economics can help travel and transport platforms leverage an understanding of what consumers want to prompt them to take particular actions. Thus a greater understanding of customer behaviour through research and behavioural analysis can help greatly improve the UX design process and subsequently increase revenue and customer loyalty.
As the examples in this post demonstrate, changes needn’t be drastic and require major development. Subtle nudges, priming and changes to how pricing is visualised are easily implement and measured, and scalable if successful.