Earlier in the semester, my students bravely endured the usual microeconomic approach to understanding consumer choice. You know: budget constraints, indifference curves, and tangencies. Very useful when deployed appropriately, but rather abstract.
To lighten things up—and illustrate some important truths about how consumers actually behave—we then spent a class on the psychology / behavioral economics of consumer choice.
For me, the most fun part was discussing menu engineering. In the usual economic model, people make choices based on prices and the attributes of the goods they can buy. Those things matter in the real world too, but consumers are also influenced by other information. For example, their purchase decisions can sometimes be steered by crafty decisions about what options to include on the menu.
One good example is Dan Ariely’s now-famous experiment with subscription rates for The Economist magazine. In one experiment, his students were offered the choice between paying $59 per year for an online subscription or $125 for print plus online. In a second experiment, they were offered three choices: $59 for an online subscription, $125 for a print subscription, or $125 for a print/online subscription.
Standard economic analysis suggests that the print-only option in the second experiment shouldn’t matter. No one should choose it since they could get print+online for the same price. In practical terms, then, the comparison is the same as the first experiment: online at $59 or print+online at $125. And so standard economics would predict that consumers would make the same choices in the two experiments.
That’s not the way it worked out. In the first experiment, 68% of his students chose the online edition of The Economist and 32% went for print+online. In the second experiment, however, 84% went for print+online, while only 16% went for the online. The good news for standard economics is that no one chose print only. The bad news is that including that option had a big effect on choices. Even though people didn’t want that option, it made the other $125 option look more attractive. In short, it established a reference from which people might decide that the $125 print+online choice was a bargain. So many more of them chose it.
Retailers have understood this psychology for years, of course, while economists are just catching up. But growing interest in behavioral economics has also spawned further innovation in retail, and we are seeing the rise of a new species of consultant: the menu engineer.
Menu engineers advise restaurants and other retailers how to design their menus to encourage customers to buy more and to steer them to more profitable purchases. Consistent with The Economist example, one standard piece of advice is including high-priced items just to make everything else look like a bargain. Menu engineers also recommend that restaurants not use dollar signs; people spend more when they aren’t reminded it’s money. And then there’s a whole science to writing the mouth-watering prose describing each item.
If you have a few minutes, this Today Show interview with a menu engineer is quite amusing.
P.S. For completeness, I should note that, according to the Economist entry linked above, the Economist stopped using the three-part pricing system. So maybe it doesn’t work as well in the real world as Ariely’s experiments suggest.