On June 20th, 2024, we hosted our second annual Customer Meetup in New York City, where we spent the day connecting with industry experts, learning from their incredible growth journeys, and unpacking the key pillars of e-commerce success in this economy.
We took back some extremely valuable insights from our customers’ experiences in the e-commerce space. One of the standout moments of the meetup was the keynote address delivered by Brian Dhatt, CTO of BigCommerce. Drawing from his extensive experience in online retail, Brian shared insightful anecdotes from his time working with renowned brands such as PopSugar, Best Buy, and Estee Lauder.
He also discussed his professional journey that led him to his current role as the CTO of BigCommerce, highlighting the evolving e-commerce industry and the lessons he has learned along the way.
Powering global online retail behemoths around the globe, BigCommerce currently serves about 60,000 mid-market and enterprise merchants and is one of the biggest e-commerce platforms in the market.
Brian Dhatt also serves as the President of Feedonomics, a leading data feed optimization platform. In this role, he oversees the technology that enables businesses to send their product data to multiple channels, synchronize it across various systems, and optimize it to enhance sales performance.
In this blog post, we will unpack the key highlights from Brian’s keynote presentation, focusing specifically on decision theory and how you can effectively leverage it to drive e-commerce growth.
The Role of Decision Theory in E-commerce Pricing Optimization
In his keynote address, Brian empathizes that even though we’ve all been leveraging A/B testing and multivariate testing on our online stores for years now, there are some key aspects we’ve missed in our testing strategy.
“All of us have been doing A/B tests and multivariate testing for years, usually focusing on what creative works on our homepage or how to order items. But there’s a deeper science behind decision theory that can bring new insights and ideas.”
He talks about The Economist pricing experiment by Dan Ariely – Professor of Psychology and Behavioral Economics at Duke University.
When Dan was looking to subscribe to The Economist, he came across the following pricing options:
The Decoy Effect and its Impact on Consumer Choices
Dan was confused as to why someone would opt for the “Print Only” option at that price. He decided to run an experiment where he asked a group of people to choose between:
- “Web only” and “Print + Web”
- “Web Only”, “Print Only”, and “Print + Web”
In the first test, 68% of respondents chose “Web Only” and only 32% of them chose “Print + Web”. However, when presented with all three options, 84% of all respondents chose “Print + Web” and only 16% of them chose “Web Only”, while no one chose “Print Only”.
What Does This Tell Us About Buying Decisions?
Dan soon realized that the pricing structure chosen by The Economist was neither accidental nor random. It was carefully chosen by the company to play on “The Decoy Effect” which directly influences human decision-making.
In marketing terms, The Decoy Effect is a clever pricing strategy wherein one of the three options is only offered to shift consumers’ preference toward the more expensive option as it is perceived to offer asymmetrically higher value than the decoy. In this case, the “Print Only” option is the decoy that when offered as a third option, makes customers switch their preference from “Web Only” to “Print + Web”.
“Another classic example is Starbucks, which excludes the smallest, cheapest option from its menu to drive consumers toward higher-priced choices.”
How Apple Leverages the Decoy Effect to Drive Preference Toward More Expensive Products
Apple’s website today offers a puzzling choice when it comes to choosing a pair of AirPods. The leftmost option is the base model from the previous generation and knowing Apple’s users who are known to keep up with the latest gadgets launched by the brand, it’s highly unlikely that anyone chooses to buy that model.
However, does it help shift buyers’ preference towards the right? Absolutely! The cheaper, older model is presented on the website simply in order to highlight the asymmetrically higher value that the newer ones offer in comparison so that buyers are immediately inclined to opt for the latter.
Numeric vs Visual Persuasion Via The Decoy Effect
So, does The Decoy Effect have the same influence when the customer is presented with visual numeric choices?
Several studies have concluded that The Decoy Effect only comes into play when humans are presented with text and doesn’t have any influence in the case of visual options.
It’s interesting to note that despite visuals being a key factor in influencing buying decisions, especially in e-commerce, The Decoy Effect relies on text to introduce cognitive bias in the human decision-making process.
Other Pricing Theories That Influence Decision-Making and Their Practical Applications
In this address, Brian also talked about three other theories that marketers often use to optimize their pricing strategies and positively influence decisions:
Intertemporal choice: Widely used in economics, intertemporal choice refers to how current decisions impact the choices that are available in the future. This concept plays on whether someone decides to opt for delayed gratification in the hopes of a larger reward or goes for a smaller reward that is available immediately.
It is clear that consumers who opt to buy something immediately value their current interests more deeply. Therefore, e-commerce teams can utilize this theory to highlight the benefits of products right after launch to convert those buyers. However, for consumers who prefer deferring purchases to get them for a cheaper price, businesses must focus on the long-term performance of products such as after-sales protection.
Framing effect: A type of cognitive bias, the framing effect suggests that people react differently to the same piece of information depending on how it is presented to them. This can be applied to pricing, promotional messaging, product positioning, and many other e-commerce aspects.
There is a positive way and a negative way to present a message. In the case of e-commerce, for example, you can either offer an early bird discount to customers for buying a product early or use the principle of scarcity to indicate that it might not be available after a certain time frame. Both these messaging styles are likely to drive different results depending on the product, business, and target audience.
Prospect theory: Prospect theory suggests that buyers’ responses to potential losses are much greater than their responses to potential gains. One of the greatest examples of the use of the prospect theory in e-commerce is providing free shipping to customers. To avoid the financial risk of a shipping fee, buyers are likely to respond by increasing their average order value.
To understand more about how cognitive biases and decision theories impact e-commerce buyer behavior, Brian recommends reading Predictably Irrational by Dan Ariely.
Brian’s address was a goldmine of insights from his career spanning decades. He shared some incredible real-life examples that helped us understand the practical implications of decision theory.
This was just one segment of Brian’s keynote address. Follow the Noibu blog for more insights from his talk and other industry trends and updates.
