Home > Advertising and Marketing > Does Advertising Content Work? Let’s Find Out…

Does Advertising Content Work? Let’s Find Out…

English: Portrait of Milton Friedman

English: Portrait of Milton Friedman (Photo credit: Wikipedia)

One of the great advances in economics to emerge in recent decades is the field of behavioral economics. The preceding generation of economists, including Milton Friedman and others, believed that humans were entirely rational consumers. When they made a purchase decision, it was as a result of a neat mental weighing of opportunities costs verses actual costs and other factors.

Now we are starting to understand the enormous hubris of our own assumed rationality. First Kahneman and Tversky came along and pointed out that human cognition is effected by its own limitations, and that we are┬ásusceptible to errors in judgement based on these limitations. Dan Airely noted that human irrationality follows predictable patterns. Then Richard Thaler famously pronounced that you could effect (“nudge”) social and economic outcomes by changing decision contexts. This acceptance and exploration of human irrationality and cognitive bias is giving us a richer understanding of the way we work.

So, let’s see this effect in a true marketing context. Professors Marianne Bertrand (Chicago Booth) and Dean Karlan (Yale), together with their team, designed a field experiment in South Africa. They partnered with a cash loan lender to send direct mail advertisements to potential loan customers. The customers were offered rates selected at random, but that were more favorable than the current market. Some of the mailings only represented the interest rate. Other mailings (randomly) included any of a number of psychological manipulations (in other words, “marketing”). These manipulations included elements like competitive comparisons, promotional giveaways, suggested loan uses, pictures of demographically similar people on the mailer, deadlines and other suggestive priming.

No surprise: these psychological factors, when considered as a whole, had a significant effect on loan take-up. The demand increased by as much as a 25% reduction in the interest rate. This effect should not be possible under traditional economic thought.

There were a few interesting subtleties to the results. First, the psychologically-loaded marketing was generally more effective when the interest rate is high (i.e. the loan is more expensive). In other words, as consumers were influenced more by price, they were influenced less by psychological factors.

Also, there were no subgroups of customers who were more or less susceptible to psychological factors than any other. Many have hypothesized that psychological marketing has a greater effect on the less educated and less wealthy. This does not seem to be the case.

Much of new classical research was conducted a...

The University of Chicago, home to Professors Richard Thaler and Marianne Bertrand. (Photo credit: Wikipedia)

Finally, the psychologically-loaded marketing did not seem to attract a poorer class of borrowers. Normally to increase demand for loans one lowers the interest rate, but in so doing one risks attracting borrowers who are less likely to repay. Therefore there is a certain market equilibrium that exists regardless of the present interest rate. Psychologically-loaded marketing increased demand for loans without changing the risk profile of the borrowing pool. That is, it changed the equilibrium of the market on its own. This means that psychological marketing could be seen as its own competitive dimension, particularly in areas of low price sensitivity.

About these ads
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

Join 3,129 other followers

%d bloggers like this: