Here's a new entrepreneur guest blog on the psychology of impulse purchase and what it has to do with entrepreneurs...
Retailers have been cashing in on impulse buying for decades. Theres probably no better example of this than supermarkets, where customers preferences are boiled down to a science: candy is placed at kids eye level, marked-down items all but jump off the shelves, and essentials like milk are shoved to the back so that shelf upon tempting shelf lies between them and the customer.
Youd think the recession would have curbed that, but no: a 2010 survey, Harris Interactive', commissioned by the National Endowment for Financial Education, shows that no less than 80% of Americans made an impulse buy in the past year. Its bad news for consumers - more than two out of three impulse buyers in the survey admit they regretted their purchases shortly after - but the implications for business owners are promising.
First, what drives impulse purchases? There are different views on this. According to Engel and Blackwell in 1982, an impulse purchase is anything you didnt have the intention of buying when you first entered the store, but bought anyway. Phillips and Bradshaw, in 1993, narrowed it down to the point of sale, saying a buyer can constantly change her mind about an item all the way to checkout. But Dennis Rook, in his 1987 paper The buying impulse, provided todays generally accepted definition: a sudden, often powerful and persistent urge to buy something immediately.
How impulse buys happen
An impulse purchase starts with exposure according to Specialty Retail Report. Its all about seeing the product - thats why supermarkets are paid a premium to put certain products on the front line. The next step is problem recognition: the product will remind the customer of a problem that the product in question can solve. Take, for example, the lumping together of chips, popcorn, and soda. A buyer may only come for a bag of chips, but the whole arrangement reminds him of his last movie night. So he grabs a 2-litre orange soda, and since hes already there, figures he might as well pick up some popcorn.
Entrepreneur Virgil Klunder pares it down further to just two things: pain and pleasure. Every customer buys to avoid pain or heighten pleasure, and the easier it is for them, the more likely the product will sell. It sounds simple enough, but millions of dollars are poured into market research every year in search of the straightest line to customer satisfaction.
Online, it happens a little differently. The general belief used to be that price was the main driving force in impulse purchases, an idea brought forward by consultancy firm Ernst & Young in 2000. But a study by User Interface Engineering found that only around 8% of impulse buys arise from special prices or promotions. Rather, it appears, people simply think of buying one item while shopping for another. Users who surf the website using category links were around three times more likely to make an impulse purchase than those who found the item through search engines. The latter takes them directly to the product they need, so theres little to no exposure to the rest of the store. By contrast, navigating the site is the online equivalent of zigzagging through the whole store.
The Costco effect and other case studies
Costco, the largest warehouse club in the US, uses a unique business model to maximize impulse buying. In an interview with The New York Times, the companys chief financial officer Richard Galanti said they work out what customers really want and stock a small number of popular items, say the top 4,000. This contrasts with the business models of Wal-Mart, which stocks up to 100,000 different items, or a typical grocery, which can stock around 40,000.
This promotes impulse purchases by limiting peoples options to trendy, popular items, which include anything from consumer electronics to packed lunches. They cater equally to bargain-seekers and the brand-conscious. They also create a sense of urgency by rotating items on a seasonal basis, urging people to buy on impulse because the item may be gone when they come back.
Apple exploits impulse buying using another model, that of associated buys. The company makes only a fraction of its fortune from hardware sales; the bulk comes from selling content for these gadgets for as low as $1, according to marketing consultant Jeff Bullas, apps for the iPhone and iPad are made by third-party providers, eliminating development costs for Apple while allowing them to charge a 30% commission on sales. Impulse purchase fits in nicely with this setup because $1.99 for a cute little game doesnt usually call for a lot of introspection. People just go ahead and buy it because its just two bucks - but when there are 200 million of them, the money gets serious.
Online retailers such as Amazon have combined impulse buying psychology with targeted marketing, recommending products based on a specific users purchase history. While supermarkets take a slight gamble at the checkout counter - not every customer will want breath mints - e-commerce sites make it so that the checkout is lined with things a buyer will most likely be interested in. A perennial book buyer will be bombarded with books from the same author or genre; one who has recently purchased a camera may be offered lenses, filters, and bags. And by eliminating the physical task of walking to the counter, these sites make impulse buying all the more effortless, according to Main Street, an online financial magazine.
Promoting impulse buys
Rook outlined five characteristics that define an impulse purchase:
An overwhelming attraction to the product
An intense need to buy the product at once
Ignoring negative consequences that may arise from the purchase
A feeling of excitement at buying the product
Conflicting feelings of indulgence and self-control
Obviously, when one makes an impulse buy the first four urges win over, and the self-control factor is brushed aside. To take advantage of impulse buying psychology, businesses must cater to these urges. Chintan Bharwada, marketing expert and contributor at focus.com advises businesses to relieve the negative feelings tied to impulse (e.g. guilt over unplanned spending) and highlight the non-economic rewards (e.g. contentment over a new gadget). Basically, their advertising should say, So its $500 you never meant to spend, but hey, youve got a nice new home theater! A complex environment that gets in the way of rational thinking, and thus makes impulses seem stronger, can also go a long way.
This also means eliminating the risk of an impulse purchase, according to Bharwada. This can be done through straightforward return policies and readily available credit. Knowing that they can change their mind, or at least not have to pay up in full if they do, makes an impulse buy seem less of a bad thing.
The new consumer
More recent research suggests that the old idea - that impulse buys should be displayed at the checkout counter - may be out-dated. For example, according to an Inc.com article, the cashier may not always be the best spot to put last-minute items because impulsiveness tend to die down the longer a customer stays in the store, and the more options they are presented with. However, they say, the urge can be rekindled through properly placed signs and promotions.
Most of our examples have obviously been industry-specific. Some demographics are simply more inclined to buy on a whim - women are more impulsive than men, for example - so businesses catering to this market will rely more impulse than rational thought. Also, more and more consumers are shopping online, and as weve explained above, this will require a whole new approach to marketing last-minute buys. At the end of the day it seems to come down to the age-old tenet of knowing your customers, and subsequently knowing how to trigger their impulses.
This guest blog is written by Andrianes Pinantoan, who is part of the team that manages Credit Card Finder. When not raising awareness to live a life of financial consciousness, he can be found out exploring the seabed.
Image by Michael Holden on Flickr
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