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3.4 The effectiveness of strategies used by businesses to influence consumer behaviour
• Not shown in figure 3.2, but around 50 per cent of government rebates went to the highest 20 per cent of income earners. This increased social and economic inequality. • In addition, critics point out the huge opportunity costs of the private health insurance tax rebate scheme.
Had the same money been diverted into the public system there may have been greater benefits for the wider community, not mostly for those who are relatively well-off.
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Another government strategy to influence consumer health decisions is the free provision of COVID-19 vaccinations and testing. Thinking of the traditional viewpoint and behavioural economics, this strategy provides an incentive for consumers to get vaccinated to help lessen the health emergency and its adverse impact on the economy. It means that cost is not a barrier for individuals. This boosts consumption. This strategy is also combined with informative advertising campaigns to get people to think of others (e.g. family and friends) not just themselves, and get the jab. In combination, these measures have been highly successful in reducing deaths by perhaps 40 000 and our national fully vaccinated rate is around 95 per cent of those aged 16 and over — one of the highest proportions in the world.
3.3.4 The effectiveness of government subsidies for consumers installing solar panels to reduce emissions As we know, climate change is a problem closely linked with the production and consumption of some types of goods and services that involve high emissions of CO2 . These discharges of greenhouse gasses accelerate global warming and cause more frequent and severe weather events. Over recent years, the Australian government has used several strategies to reduce emissions. One of these was Permission clearance pending UNCORRECTED PAGE PROOFS
Australia’s carbon tax (2012–14). This was a levy paid by key polluters. It primarily targeted dirty businesses by putting a cost on their pollution (starting at $23 per tonne of CO2 emissions). By imposing this tax, it helped to make pollution less profitable, forcing firms to clean up their act.
Another government strategy designed to change the behaviour of consumers of electricity and reduce CO2 emissions, is the payment of rebates to households that install rooftop solar panels. The strategy started in 2011 and has been part of meeting Australia’s Renewable Energy Target.
The use of federal and state government solar panel subsidies act as incentive to make the installation of clean renewable energy cheaper, driving up the demand for solar panels so that one in four houses have taken up the offer. Thinking of the traditional viewpoint and behavioural economics, this strategy is designed to help overcome the problem of consumer self-interest where the cost (and pain) of installation was too high, limiting the government’s success in reducing emissions. In addition, promotional advertising campaigns appealed to consumers doing something for others and the environment, not just themselves. The success of these strategies acknowledges that there is bounded self-interest that sometimes consumers may be prepared to make decisions that benefit others.
Figure 3.3 helps to confirm that, overall, the combination of solar panel rebates and media strategies have been reasonably successful. In graph 1, for example, notice the steady rise in panel capacity since 2016; and in graph 2, see some of the achievements in renewable energy.
In addition, relative to other countries, Australia has one of the highest rates of take-up for household solar panels. This has helped to reduce emissions by changing consumer behaviour. However, critics point out that because installation is still very expensive consumer subsidies need to be higher, especially in lower socioeconomic postcodes, so they are more affordable. Unfortunately, the government’s current intention is to gradually phase out rebates.
FIGURE 3.3 How the government’s strategies to encourage renewable energy using solar panel rebates for households along with other schemes have helped to reduce emissions 0K 200K 400K 600K 800K 1000KCapacity (kW) 1200K 1400K 1600K 1800K 2000K 2200K YTD capacity Months 10–12 Months 1–9 40% Graph 1 – The change in the capacity of installed solar panels UNCORRECTED PAGE PROOFS
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: Sun Wiz, see https://www.sunwiz.com.au/end-of-year-forecast-for-the-australian-pv-solar-market-2020/.
Graph 2 – The encouragement of renewable energy including solar panels
Source: image copied from the Australian government, Australia’s making positive energy, see https://www.positiveenergy. gov.au/?gclid=EAIaIQobChMI6e-L5qjP9gIVVpJmAh3CoAT5EAAYBCAAEgJn1vD_BwE&gclsrc=aw.ds. 3.3.5 The effectiveness of the government’s first home loan deposit scheme for consumers For many, an Australian dream is to own a home. However, ownership rates have been falling now over several decades and record high property prices have made this dream a nightmare for many first-home buyers. The problem is that most people want to live in capital cities. This is where the jobs are located. However, a combination of geography that limits urban expansion, rapid population growth (boosted by mostly high levels of immigration), record low interest rates on borrowing credit, extremely generous tax discounts on capital gains (made from buying property when prices are lower and selling after prices rise), and the use of negative gearing when purchasing property (using the cost of borrowed credit as a tax deduction), have all contributed to the property boom and price hike. To help home buyers, the Australian government has introduced several schemes including First Home Owner Grants of cash to reduce the cost for consumers, supposedly making ownership cheaper. The latest strategy for 2021 and 2022 is the First Home Loan Deposit Scheme. This is designed to help up to 10 000 eligible first-home, low-income buyers who have saved as little as a 5 per cent deposit (not the normal 20 per cent requirement) to obtain a bank loan by the government acting as the guarantor. Like most previous schemes, it has resulted in an increase in the demand for housing by growing the number of potential buyers or consumers. UNCORRECTED PAGE PROOFS
Thinking of behavioural economics, the Fist Home Loan Deposit Scheme would appeal to consumers who have a short-term or present bias and downplay the long-term consequences of their decisions including their ability to repay the loan — a possible problem when they haven’t been able to save a reasonable deposit. There is also a framing effect. Home buyers who initially had to save 20 per cent deposit are now offered a deal involving
saving just 5 per cent deposit. Possibly bounded willpower could also be involved in the government’s tempting offer or incentive — luring buyers into a scheme where they may not be able to afford the loan repayments.
But has this incentive for homeowners been a success from a consumer’s point of view? Most commentators believe that, unintentionally, it has made home ownership even less affordable by increasing the demand for property without increasing its supply — driving prices even higher. It is therefore not a surprise that despite a range of strategies over the years, home ownership rates continue to fall, and many households have massive mortgages to repay, creating financial stress (especially when interest rates on loans rise). Some suggest a far better solution to help increase first-home ownership would be for the government to build and sell low-cost housing. This would increase supply relative to consumer demand, perhaps making property more affordable.
3.3 Activities
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Track your results and progress Find all this and MORE in jacPLUS 3.3 Quick quiz 3.3 Exercise 3.3 Exercise UNCORRECTED PAGE PROOFS 1. Explain why governments sometimes use strategies to change consumer behaviour. (2 marks) 2. Identify and outline three important methods used by the Australian government to alter consumer behaviour.
(3 marks)
3. The government sometimes tries to change the decisions made by young consumers under the age of 18 years. Giving examples, explain why and how this happens. (2 marks)
4. Outline why a tax rise of 40 per cent on alcohol is likely to have a bigger impact on those with lower incomes. (2 marks) 5. Explain why a hypothetical decision by the government to build 20 000 new low-cost homes for young people, may be more effective in raising ownership than giving first-home buyers a cash grant of $20 000 or guaranteeing a smaller deposit to facilitate a bank loan. (4 marks) 6. If the government provided bike helmets free of charge, explain how this could work to change consumer behaviour. Outline another option that might also be needed for success. (2 marks) 7. The government decides to pass a law, making it compulsory for all people in the public sector to be triple vaccinated against COVID-19. Explain why this attempt to change behaviour may not be totally successful. (2 marks) 8. a. Explain how the payment of government subsidies to those taking out private health insurance may take the pressure off waiting times and queues in the public health system. (2 marks) b. Explain why some might consider these subsidies to be unfair or inequitable and involve large opportunity costs. (2 marks)
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KEY KNOWLEDGE • the effectiveness of strategies used by producers/businesses to influence consumer behaviours
Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. There are lots of successful strategies used by businesses to influence consumer behaviour. In selling goods and services, some of these tactics are drawn from an understanding of the traditional viewpoint of decision making, and others from behavioural economics. Ultimately, firms use these strategies to help drive up company sales and profits. Strategies used to influence consumer behaviour Marketing to appeal to consumers Nudge as a specific marketing strategy to drive consumer sales
Multi-branding to boost consumer sales 3.4.1 Marketing to appeal to consumers Without effective marketing, it is likely that many businesses wouldn’t even exist. Marketing includes a range of strategies that businesses use to attract consumers, capture their attention, get them interested, and sell UNCORRECTED PAGE PROOFS products. The process makes use of what is called the marketing mix or the five Ps of marketing. These are summarised in figure 3.4.
FIGURE 3.4 The 5 Ps of marketing products to consumers
Product: • Meet s a n e e d • D o es t he j ob be t ter • Mak es l i f e e a s i e r • Is s u per i or i n t e chno l o g y a n d desi gn • Is r el i ab l e wi t h a l o ng w arran ty Price: • D e cis e n or m a l s e l l i ng p r i ce • D i s co u n t s • S p eci al of f e r s • T erms of c r e di t • P r i c e m a t c hi ng str ateg i es • N on -pri c e f a c t ors can al s o b e i mpo r t a nt People: • Staff are key • Must be knowledgeable, friendly, patient, customer oriented, efficient, and positive • Create a positive shopping experience • Company website must be user friendly given that it replaces face to face contact Place: • Is th e m e t hod of d i s t ribu t in g t he go o d o r s erv i ce be i n g s ol d • Mu s t s u i t t he t a rg et m a r k et or gr oup • T h e l oc a t i on m a y b e i n a s to ref ro n t or i nc reas i ng l y , o n li n e • Mu s t of f e r c on v eni ence f o r t h e t y pe of pro d uct s o ld Promotion: To successfully appeal to consumers, businesses consider the 5 Ps of marketing C a n i n f o r m pe opl e us i ng t r adi tion al a dv e r t i s i ng o n T V or r a di o, i n n ew spap e r s a n d m a g az i n es , or i nc reas i ng l y v i a o n li n e c ha n ne l s i ncl ud i ng b us i n es s we bs i r e , and s o c i a l medi a Product The first step in the marketing mix or strategy used by successful businesses is to conduct research to discover exactly what consumers want. The right product is likely to be one that brings some benefit, solves a problem, makes life easier, or is superior to an alternative in terms of performance, reliability, warranty or guarantee, appearance or style, design, functionality, technology, and quality. For example, as a successful company, Apple only makes products that it believes are better than its rivals. UNCORRECTED PAGE PROOFS
Price
The next part of the marketing mix is to decide how much to charge consumers for the product being sold. This might not only include decisions about the normal selling price, but also special offers or incentives, reward schemes, discounts or specials (perhaps using the anchoring effect to encourage sales), procedures related to price-matching against rival sellers, and the terms of payment or credit. While the final price must be high enough to cover costs and make a reasonable profit, it also needs to represent good value for money when compared against that of rival sellers. For example, Amazon is an e-commerce seller that attempts to offer a huge range of products at very low prices. While the profit margin per item is small, it makes up for this since their low prices mean high sales volumes and repeat customers, expanding profits. In addition, behavioural economics tells us that apart from price, there are also other things that affect consumer decisions. In other words, while the traditional economic viewpoint sees price as the main determinant of the consumer demand, behavioural economics also notes that other things unrelated to price can also be important in affecting sales (e.g. consideration of status quo, framing bias, and anchoring effects). In addition, when setting the price, a business’s position in its target market is also a consideration. For example, selling in the top end of the market for mobile phones allows Apple and Samsung to charge higher prices. People will pay more if they feel that they are getting a better product, and/or have an emotional attachment or brand loyalty. People When dealing with consumers, businesses need to employ staff who are very knowledgeable about the product they are selling and enjoy working in their job as part of a team. Those dealing with customers must also be helpful, efficient, warm, patient, friendly and trustworthy. If there is a problem, staff need to be able to fix it quickly. Perhaps you have experienced going into a store to buy a mobile or some other item, and you discover that the staff member is disinterested, was too pushy, tried to sell you something that was unsuitable, and in some cases, had even less knowledge than you about its features. Alternatively, when buying online, have you ever been frustrated by an inability to find the necessary product information that you require to make a decision? Here, the website needs to act as a user-friendly and easy-to-navigate substitute for a face-to-face staff member. Place Traditionally, consumers went to a storefront as the point of sale. Indeed, this still suits the selling of some products, especially those where consumers want to inspect or try a good before they buy. For example, Apply and Telstra have set up purpose-built stores for exactly this purpose. They appreciate that when purchasing technology-based devices, consumers (especially those that are not IT-savvy) need to experience, handle, receive detailed information from experts, and try out the product. UNCORRECTED PAGE PROOFS
However, for other types of products, many consumers want greater convenience. This is offered by e-commerce where shoppers can go online whenever it suits them, 24/7, and then have the item delivered quickly and cheaply to their home. For instance, in some areas, Amazon as a company
can deliver goods rapidly within two days, catering better for consumers with a ‘present bias’. Also, having free returns helps to overcome the problem of loss aversion if the item is unsuitable. All this enhances the shopping experience and encourages repeat customers.
Promotion
Promotion is one spoke making up the wheel of marketing. It involves the strategies businesses use to let consumers know about their product or service. This can take many forms, each finely tuned to target specific markets and consumers. For promotion, most people think of the traditional methods including advertisements on TV, radio, buildings, and billboards, and in magazines and newspapers. However, increasingly, businesses are forced to embrace internet-based marketing starting with their own eye-catching, informative, and user-friendly website to make purchasing easy. Some businesses pay search engines money so that when customers are looking for a product, the firm gets higher exposure (called ‘pay-per-click’). Then there is blog marketing (to nurture interest), social media marketing (using Twitter, Facebook, Linked-in, and Instagram), and video marketing to inform and educate customers. In addition, there is influencer marketing by prominent people with many loyal followers and fans, green marketing (to appeal to the environmentally conscious consumer), and even viral marketing (to encourage people to pass on information about a product). 3.4.2 Nudge as a specific marketing strategy to drive consumer sales One specific part of a promotional strategy that is commonly used by firms is the idea of the nudge. Essentially, this notion comes from behavioural economics where the decisions made by people are not always rational, well-informed, or in their self-interest, as traditionally assumed. The nudge is gentle strategy, a reminder, a prompt, or something that catches attention. It seeks to alter people’s behaviour in a predictable and wanted way, without forcibly limiting their choices. It can also help correct our natural biases and negative behaviour, redirecting this to improve outcomes and wellbeing. Governments and councils use the nudge widely. For instance, there are signs painted on the footpath to remind people to watch their step, along with boldly labelled recycle bins to remind people to sort their waste as they bin. Businesses, too, use this strategy in the workplace to help keep staff safe (e.g. painted footprints and lines on access routes used by speeding forklifts, pictures of hard hats and other protective gear). They are also used to try and influence consumer choices. Indeed, well designed company websites demonstrate that they understand the psychology behind the nudge. For example, many have the following features: • Many include review or star ratings on products to show consumer popularity and trendiness (for those with a bias towards herd behaviour). • Most have search facilities, and display the product UNCORRECTED PAGE PROOFS brand or logo to make shopping easier for those consumers who know what they want (e.g. perhaps customers who follow the status quo). • Most have smart overlays and pop-up prompts. These show the firm’s special offers, new products, encourage customer sign-ups for emails, provide the buyer information on how many other people looking at this product, and the product’s green credentials or energy star rating. • They often apply strategies to prime people’s price expectations and decisions (e.g. the anchoring effect).
• Many have online short cuts or simple suggestions to make consumer decisions easier without limiting their choice. For example, options like: • ‘The best picks for you’ •
‘ou could also like’ • “‘Your Favourites’.
When selling in a normal retail store: • Some socially responsible supermarkets place healthy food with high star ratings at eye level, rather than down low on shelves, while others that are less concerned place tempting but unhealthy treats near checkout queues to appeal to impulsive consumers with bounded willpower or perhaps a short-term or present bias. • Some stores place quantity limits on the number of units of a product that each customer can purchase at the one time. This is designed to give the appearance of scarcity, motivating increased sales. • Some businesses advertise in big print their special offers like five packets of cereal for $10, when the hidden small print says that the unit price is $2. Again, this is an attempt to nudge consumers into purchasing more by pretending they are getting better value for their money. 3.4.3 Multi-branding to boost consumer sales Multi-branding is a common selling strategy where one company owns others with different names, even though they may produce a similar product. There are lots of examples of this. For instance: • L’Oreal owns 36 brands mostly producing cosmetic or beauty products including Garnier, Maybelline New York, and Roche-Posay. • Nestle incorporates over 2000 brands including KitKat and Nespresso. • The Volkswagen group own Porsche and Skoda. • Unilever includes Dove, Lipton, and Magnum. • Facebook incorporates Instagram, Messenger, WhatsApp, and Calibra. What firms are trying to do is to drive up consumer sales. For example, in the kitchen, laundry, biscuit and healthcare sections of supermarkets, companies that multi-brand have more shelf space, attracting extra attention from consumers and higher total sales, without customers being aware that the one company produces several products on display. It also appeals to consumers who like to try new things or buy on impulse. In addition, for those buyers who decide to purchase a product based on a brand’s good reputation, multi-branding offers a reliable choice. This can also help to boost profits. While not all businesses are successful, we will take a quick look at how two successful companies, Apple Inc. and Amazon.com, have used strategies to influence consumers. Case study: Apple Inc. — the effectiveness of strategies to affect consumer sales Starting in 1976, Apple was founded by university dropouts, Steve Jobs and Steve Wozniak. Today, Apple is the dominant company in the market for mobiles, smart watches, and iPads (although it lost in the laptop wars to Microsoft). Apple has grown to one of the world’s most profitable companies making $57 billion in 2021. The business is currently valued at $2 trillion and generated revenue of $365 billion in 2021 (of which UNCORRECTED PAGE PROOFS over 52 per cent came from the sales of iPhones).
Referring to figure 3.5, it seems that Apple must be using effective strategies that attract consumers. In graph 1, notice the consistent growth of quarterly revenue, while in graph 2, the company’s size (measured in terms of the total market value of shares) is bigger than the GDPs of most countries (shown as white shading).
FIGURE 3.5 The growth of Apple as a tech company largely reflects its success in influencing consumers
Apple makes a product if it believes it can do it better than rivals Although some firms appeal to consumers by inventing a new product, Apple tries to focus on making things that are better than its rivals. If that can’t be done, typically, the product is not made. This attracts customers and builds a strong and trustworthy reputation, successfully driving up consumer sales. For example, with over 1 billion active iPhones in the world today, consumers must feel that it readily meets their needs. Permission clearance pending UNCORRECTED PAGE PROOFS
The product is stylish, standardised, and easy for consumers to use
To have a wide appeal for consumers (many of whom are not tech savvy), Apple tries hard to design beautiful products that are simple and intuitive to use, even when moving between the range of items. This also helps to grow consumer loyalty and appeals to those who follow the status quo when they are purchasing their next mobile. Consumers expect top service and an impressive in-store hands-on experience with knowledgeable service Many consumers want to try before they buy and have a real hands-on experience, especially when buying technology devices. With this in mind, Apple set up its own purpose-built retail stores. Here, sales staff are more likely to ask, ‘what would you like to experience today’, rather than, ‘what would you like to buy’. Clients get the impression they are special and are purchasing no ordinary product. The strategy is to appeal to consumers and meet their practical and emotional needs better than other brands. Apple knows that at the top end of their market, products are not just sold on price. Keep ahead of rivals in product development Today, Apple spend around $20 billion annually on research and development (R&D) so that they are a couple of years ahead in their product ideas against some of their rivals. Being innovative like this sets the industry standard. It appeals to consumers and helps to grow product trust, identity, and loyalty — developing a cult following, perhaps to encourage herd behaviour. Social responsibility Many consumers these days consider a range of factors, not just price, that influence whether they purchase a product. Companies with a poor reputation are often shunned if rival firms are adopting more socially responsible and environmentally friendly practices. Apple is trying to move in these directions. For example, it has a $350 billion commitment in the USA to promote greater racial equality. It has also moved towards using more recycled materials and no plastics in packaging, and has greatly improved energy efficiency for its product operations. Case study: Amazon.com — the effectiveness of strategies to affect consumer sales Amazon.com started in Jeff Bezos’ garage in 1995 only selling books that he posted off to customers through the mail. Subsequently, Amazon has become the biggest e-commerce company in the world, marketing millions of different products that can be delivered to almost anywhere. Its website has over 5 billion site visits by consumers each month and so it should be no surprise that Amazon has quarterly sales revenues of around $130 billion, and annual gross profits of around $55 billion. Figure 3.6 helps to illustrate some aspects of Amazon’s remarkable success, including the expansion of gross profits (graph 1), its size against countries GDPs based on its capitalisation (graph 2), and the value of sales by global market UNCORRECTED PAGE PROOFS zone (graph 3).
FIGURE 3.6 The growth of Amazon.com driven by consumer sales and customer satisfaction
