Is the coffee you buy from a coffee shop worth its price? Behavioural economics refers to study of irrational decision making process of customers and range of cognitive biases of the customers. Coffee shop owners have understood consumer psychology and faulty decision making process. Coffee shops use several marketing strategies based on behavioural economics. Visually appealing stores and shops are the simplest way to attract customers. Secondly, customers make decisions based on what staff recommends.
Coffee shop staff recommends food items that are profitable for the company. They give customers only few ‘best’ options to choose from (decision paralysis). They would also use technique of attribute priming that is talking to customer about benefits of certain type of coffee. Another way to attract customers is to give free samples or other freebies. Some coffee shops will have schemes such as “brew your own coffee” (Norton, Mochon and Ariely, 2011). This is based on what is known as IKEA effect (consumer places relatively high value on products they created partially). Food and beverage combo is another example. Decoy effect (dominated alternatives) is known as asymmetrically dominated choice and occurs when people prefer to choose one option over other as a result of adding third option which usually similar but less attractive. Pictures and images of more expensive of coffees, sandwich etc. can be used. This is known as picture superiority effect. Some brands also position the certain product in appropriate position.
Example of a coffee shop using techniques of behavioural economics is Starbucks.
Economics assumes customers to be rational. If people were 100% rational in their approach, then marketing strategies based on behavioural economics would be less efficient. Neo classical reasoning relies mainly on factual, artificial assumptions (Diacon and Calance, 2014). Consumers have limited information with respect to product. Therefore, rational decision making becomes a difficult task.
Satisficing refers to process of decision making wherein consumer aims for satisfactory results and not optimal solution. Prospect Theory weighs profit and loss differently and makes decisions based on perceived gains.