Sunk cost fallacy, Amazon marketing & branding

Episode 06 Skiing, schools, and America’s biggest e-commerce player

Amazon has revolutionized e-commerce, and this episode dives into the behavioral science behind their success.
From one-click purchasing to Amazon Prime - discover how these features rooted in behavioral
science keep customers coming back for more.

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00:00 / 17:36

Episode Transcript

MichaelAaron: Welcome to Behavioral Science for Brands Today, we're talking skiing, school, and America's largest e-com player. I'm MichaelAaron Flicker.
Richard: And I'm Richard Shotton.
MichaelAaron: and of course we're talking about Amazon. And what's so interesting about Amazon is that they use behavioral science throughout the entire experience.
MichaelAaron: We're gonna uncover two major aspects of what Amazon does and how it's based on behavioral science principles to not just attract customers, but to keep them coming back and using it more. Let's get started.
MichaelAaron: So we'd be remiss if we did not dive in and talk about Amazon. Obviously plenty of podcasts talking about their dominance, about how revolutionary they are. But for us, there's really some interesting behavioral science principles being used to keep people engaged with the brand. And again, almost what's become a theme for you and I in these podcasts is we're not just talking about the advertising creative, we're not just talking about what's in market through words and visuals.
MichaelAaron: We're actually talking about the product design itself, the brand itself, and how if you design a brand that way, you can really have stickiness and engagement at a whole different level. So let's talk about two different elements of Amazon. One Click Purchasing and Amazon Prime. Both of these are super fascinating elements of how Amazon has gotten to its dominance.
MichaelAaron: So first, Richard, can you just, for those that may not know what we mean by one-click purchasing, can you give us like a little synopsis of what we even.
Richard: So this was an early innovation from Amazon, and essentially it meant that people could purchase with fewer clicks that they didn't have to keep on re-inputting their address and their credit card details.
Richard: That could all be attached to the account you could buy with a single click. It removed a small bit of friction from the purchasing journey, but it had an outsized effect.
MichaelAaron: And Amazon innovated this first for e-commerce, and this was in their website experience. You would see a product on the page, it would say one click purchase or buy now.
MichaelAaron: Yeah. And it immediately brings you to the final page where you click purchase and you're done. They took, they, this was so successful for them, they even created Amazon buttons. For those that remember yhey were magnets that would go on your fridge and if you wanted more bounty paper towel, you'd push the button, a physical button on your fridge and it would immediately order more bounty paper towels.
MichaelAaron: For you, this idea of removing friction is kind of at the heart of what Amazon's all about
Richard: Yeah, absolutely, and again, from a behavioral science perspective, that is a really important area. Richard Thaler, who won the Nobel Prize for Economics when he is asked, what is the one thing that people should take from behavioral science?
Richard: He says - easy. Make it easy. You know, he keeps on coming back to this principle that you remove tiny bits of friction and you have a huge impact. Now as ever. It's not enough just for this illustrious person to state that. It's got to be proved. And the study I thought might be of interest to the listeners is one from two American psychologists, Bergman and Rogers.
Richard: So back in 2017, they worked with the Department of Education and they launched a new service for parents. And parents can sign up for this service, which will help them encourage their kids to work harder in one of three ways. First group of people a text, information about the service, told how amazing it is.
Richard: And then if they want to sign up, they can click on a link, it takes them through to a webpage, and they can fill a form in about 60 seconds. And then they're in, then they're enrolled. In that scenario, 1% of people sign up. So that's the kind of most difficult way to sign up. Not a very good response, right?
Richard: Not a very good response rate. The next group of people, they are texted exactly the same information, but they don't have such effort. There's no web form to fill in. All they have to do is text back the word start. So you've saved about 60 seconds of effort. In that scenario you have an eightfold increase in signup rates.
Richard: We're up to 8%. Final group, they push the ease even further. They text another group of randomly selected parents exactly the same information, but they say you are enrolled if you don't want to be, text the word stop. And there you get 97% of people enrolling. So you have this 96 percentage point swinging behavior based on the removal of what seemed like fairly inconsequential bits of friction.
Richard: So to begin with, backs up Thaler’s point - if you make it easy, it'll have a huge effect, but the clever bit comes next. Bergman and Rogers then go and recruit experts in education like teachers, teachers, school administrators, policymakers, people who know parents very well. They recruit this group, 150 of them.
Richard: They tell them about the experimental design and they get those experts to estimate sign up rates in these groups. Those experts know that friction will put people off so they get the direction of change, right. But they are wildly wrong in terms of the scale and the impact. So I think they estimate that 39% of people sign up in the standard variant, 44 in the simplified, 66 in the auto enrollment.
Richard: So they think there's gonna be this 27 percentage point swinging behavior, whereas in reality, it's a 96 percentage point swinging behavior. They massively underestimate the impact of these little barriers.
MichaelAaron: It's fascinating, and there's a few things to take away from this. Mm. The first one is that there really is this big swing in the first study of actual behavior.
MichaelAaron: Yeah. But then the second one, is that the experts really dramatically underestimate it.
Richard: Yes. And that's, Berman and Rogers argue that those experts are typical. You know, this isn't something that just affects educational policy makers. Business after business makes a mistake. They assume that the way to change people's behavior is to motivate them to want to change, and they underestimate the importance of getting rid of little barriers.
Richard: Now, if that's the case in marketing, what it suggests is a lot of people will be misallocating budget. They'll be putting too higher proportion in persuasion and too small a proportion in making the customer journey as easy and simple as possible. So the big takeout here is realign your budgets. Put more effort into making purchasing easy and you are likely to see outsized effects.
MichaelAaron: And the real insight, tying it back to Amazon was that they had early on identified removing that friction will lead to bigger business outcomes. Absolutely. And interestingly, I don't know the data, I don't know if you do, Amazon did not have major ad campaigns when they first started. Uh, we can look this up and get back to the listeners here, but really it's about having the best customer experience as possible.
MichaelAaron: And that's where they put all their innovation in time when they built the brand.
Richard: They're, they're a rare example, I think, of someone having a accurate view of human behavior. You know, putting far more emphasis in the removal of friction than, than most brands do.
MichaelAaron: Speaking of. Reducing friction and ease. Last night we had the pleasure going out to dinner and we're at, what I would say is a pretty chien stylish Soho restaurant, the name of it. Bob Bob Ricard. Bob Bob Ricard, and when we're there, there's a feature in this restaurant that has taken removing friction in the dining experience to the highest level.
Richard: Yeah. It's a lovely example and I think it's an example of applying these principles laterally. So you sit down at a table and every table has a brass plaque. And on that plaque there is little button that says “Press for champagne.” Now they claim that this releases pent up demand. They claim that they are the biggest seller of champagne in the whole of the UK so far more champagne than any other restaurant.
MichaelAaron: And this is not the largest restaurant.
Richard: No. I mean it's reasonably sized restaurant, but it's not, certainly not the biggest. But to me it's a wonderful example of, you know, most restaurants think they've already made champagne ordering as easy as possible, but there are hidden bits of friction. You know, if you are with a friend, you don't wanna stop your conversation and wave at the waiter.
Richard: The button gets around that, you know, maybe some people are embarrassed about not being seen when they are waving roundabout. Now, that's a bit of friction. What that button does so brilliantly is removing even those tiny bits of friction and it releases that demand.
MichaelAaron: And when we were doing it last night
MichaelAaron: We all took a turn pushing that button. There's also an element of novelty and fun in pushing it, but that doesn't take away from the ease that we're introducing and the reduction.
Richard: Yeah, absolutely. Absolutely. I think any real world example of a behavioral science principle being applied, it's not a scientific experiment.
Richard: There'll be multiple factors of play, and I think you're right, novelty, salient. You can't sit down at that table without at least considering whether you have a glass of champagne or not.
MichaelAaron: Take them at their word. But our waiter last night, , 95% of people push the button.
Richard: Having been there, I can believe that.
MichaelAaron: And to make the point of just how important removing friction is, the data from Amazon shows that 28% of all Amazon purchases happen in under three minutes. 50% happen in under 15 minutes. It just shows how tight every second of the customer journey is, from the moment they hit Amazon's website to the moment of checkout. So every ounce of friction we can remove is gonna make that much easier to make a purchase. So let's take a break, hear from our sponsors, and we're gonna come back and we're gonna dive deep into another element of Amazon Prime
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MichaelAaron: So we're going into Amazon Primer. But always a fun question. Last thing you bought on Amazon Prime?
Richard: 400. Earl Grey Tea Bags.
MichaelAaron: And for me, a dozen kids toothbrushes. Six for Max, six for Nina. Never enough little kid toothbrushes. So Amazon Prime. Another early element that Amazon introduces is a membership for those that don't know what it is, you pay a membership fee to get quicker shipping and less costly shipping originally debuted, I believe, at 79 99 in America today.
MichaelAaron: It costs between 120 and $140 a year to be a member of the service. Now this is interesting. You're going to become a member of Amazon Prime and you're gonna get faster, cheaper shipping. What's going on here, Richard?Why is this an important element for them?
MichaelAaron: So it's an important element because there is an idea in behavioral science called sunk costs, and it's essentially that once people have spent an element of money, their behavior after.
MichaelAaron: becomes illogical. They try and recoup that money even if there was a better alternative. So if that, that sounds a bit vague. I'll give you an example study. There's a lovely study from the early eighties by Hal Arkes, a higher university, and it is a thought experiment, but I think it proves the point nicely.
Richard: He recruits a group of people and says, look, imagine you buy a skiing holiday for a hundred dollars and you're gonna have a quite a good and then later on you see an even better skier holiday for $50. Uh, and you buy that as well. And then later on you realize, unfortunately, they're both on the same weekend and he says, you've spent the money, you can't get it back.
Richard: It's just which one you go on. And he asks people to pick. So basically people have got to decide whether they go on the quite good holiday for a hundred dollars or the really good holiday for $50. Now that should, if we are rational, calculate machines be a very simple choice. Go on the better holiday, go on the one you enjoy more, right?
Richard: But the majority of people pick the other one. 54% of people pick the more expensive, but less good. and Arkes's argument is this is the sunk cost effect. Once we have spent money, we hate the idea of wasting it. So we try and use that money even if there is a better alternative out there. So once you've spent money on Amazon Prime, in a kind of hypothetical scenario, let's say you could buy the same book for cheaper elsewhere and to get you quicker, many people would still use Prime because they think, uh, they don't want to waste that previous investment
MichaelAaron: and they reinforce it with every purchase they strike through the cost of shipping. They show you your savings, and so it's like a virtuous circle. I've invested the money and then they keep telling me how much money I'm saving. I don't know if I added up all my savings, if I would've even paid for it.
Richard: I didn't know they did that.
Richard: And there is a lovely study by Priya Raghubir who I think is NYU. They do it in America. What she does is she shows people a picture of a pearl bracelet sometimes on its own, sometimes to other people they see it as a, as a free gift with a fancy bottle of branding or something. And when she asks people how good, They think that bracelet is, the people who saw it as a free gift think it's worth about 35% less than the people who saw it as a standalone item.
Richard: What she argues is, if you give something away for free, people tend to, to not appreciate it. Discount is value. Exactly. But what she shows in a follow up study is if you put the product up. You get rid of that negative effect. So what I think Amazon's doing cleverly in America is making sure people don't take the free shipping for granted.
Richard: If you keep on referencing it was X, but you are paying nothing, Amazon get the benefit from that.
MichaelAaron: Amazing, amazing. And you know, there's another element that seems to be a play to me here, which. You are also badging or branding with the company. We were talking last night about REI. Yes. Which is an American company that when you become part of their loyalty program, you actually become a shareholder in the company.
MichaelAaron: Their corporate structure allows everybody to own a piece of REI. Yeah. How, how does sunk cost and what's going on with Amazon play into that?
Richard: I would say it's exactly the same principle being applied in a slightly different way. And I love that REI example because, you know, lots of people might think, well, you know, I didn't have the breadth of service Amazon offers.
Richard: I can't do this, you know, paid for shipping approach. But think of REI. Yeah, you just apply the same principle with a bit of a twist that fits your brand. So same principle can be applied in lots of different ways. Pretty much any brand can take that concept and benefit it.
MichaelAaron: So to make the point of just how effective this sunk cost insight is, Amazon publishes data on Prime versus non-Prime members.
MichaelAaron: Prime members spend an average of $1,400 a year on the platform. Pretty high number. Non-prime members spend $600 a year on the platform. Same groups of Americans, same shopping habits. Once I'm a member, I spend over two x the amount on the platform. Pretty amazing results.
Richard: Yeah. I mean, most brands that would be happy with the $600 here, but still, yeah. Doubling.
MichaelAaron: amazing, amazing outcome. So let's bring it home for everybody. Richard. The most important things for marketers to take away from this.
Richard: First thing, three words - make it easy. Removing friction will have a bigger unexpected effect. So realign your budgets and put more time and effort into removing those small barriers.
Richard: And then the second thing is this idea of sunk costs. If you can get your customer to make a commitment to your brand, maybe a financial investment paying for a service or a membership, they will use your service more than a logical one would suggest.
MichaelAaron: So that brings us to the end of the episode.
MichaelAaron: If you enjoyed today, please give us a good rating. Please give us a review, and be sure to come back for our next episode. We have a lot more in store in upcoming episodes. I'm MichaelAaron Flicker.
Richard: And I'm Richard Shotton.
MichaelAaron: And, uh, Richard, on our outro today one click button. What would you have delivered?
Richard: Oh, uh, a pile of Nobbly Bobbly Ice Creams.
MichaelAaron: Check out our ice cream podcast to learn all about Nobbly Bobbly. And let's see, what would I have delivered? Milk's favorite cookie - Oreo.
Richard: Very nice.

Episode Highlights

Make It Easy

02:47 - 07:23

Economist Richard Thaler and psychologists Bergman and Rogers prove if you remove small frictions in the consumer journey you will have enormous success. Amazon's one-click purchase is a perfect example.

Press For Champagne

07:23 - 09:23

Equipped with a “Press for Champagne” button at every table, Bob Bob Richard successfully removed friction in their dining experience, pouring more champagne than any other restaurant in the UK.

Sunk Cost Fallacy

11:36 - 16:11

Describes our tendency to follow through on an endeavor if we have already invested time, effort, or money into it, whether or not the current costs outweigh the benefits.