Why do marketers need to have some basic knowledge of economics?
First, let’s look at the definition of marketing.
Marketing: Marketing, in English, is also known as marketing, marketing or marketing. The market is a category of commodity economy and a form of economic connection with commodity exchange as its content. For enterprises, the market is the starting point and destination of marketing activities.
From this we can see that it is necessary for marketers to master some basic economics.
This article will help you sort out the general knowledge and economic theories that marketers should have.
1. Prospect Theory
Prospect theory, also known as prospect theory, was proposed by Professors Daniel Kahneman and Amos Tversky. It applies psychological research to economics and has made outstanding contributions to human judgment and decision-making under uncertain situations.
Prospect theory holds that people usually do not consider issues from the perspective of wealth, but from the perspective of winning and losing, and are concerned about the amount of gains and losses.
The basic principles of prospect theory mainly include five aspects
Certainty effect:Between certain benefits and "taking a gamble", most people will choose the certain benefits. That is, people overweight certain outcomes relative to merely possible outcomes.
Reflection effect:When given a choice between a certain loss and “taking a gamble”, most people will choose “taking a gamble”.
Loss aversion:The happiness brought by picking up 100 yuan for free is difficult to offset the pain brought by losing 100 yuan.
Obsessed with low-probability events:Many people have bought lottery tickets. Although the chance of winning is very small and there is a 99.99% chance that your money will support welfare and sports, there are still people who take chances on low-probability events.
Reference dependence:Most people's judgments about gains and losses are often determined based on reference points. For example, in a multiple-choice question between "others earn 60,000 yuan a year and you earn 70,000 yuan a year" and "others earn 90,000 yuan a year and you earn 80,000 yuan a year", most people will choose the former.
The application of prospect theory in marketing is very common, the most common of which is the blind box which has become popular recently.
Let’s take Pop Mart as an example. A hidden version will be set up during the basic blind box setting process. For veteran players, they will be particularly obsessed with "hidden items". They will continue to buy them until they win the hidden items. This is a behavior of being obsessed with low-probability events.
Many students may ask, why not buy a second-hand hidden model?
In this regard, I also asked some Pop Mart players, and they gave the following explanations: 1. It is better to have biological children, that is, it is better to have the ones you have drawn yourself. 2. Sunk cost: when you have invested a lot of time, energy and cost and are unwilling to give up this behavior.
Secondly, many of Pop Mart’s “lucky bag”-related gameplay also have the shadow of prospect theory.
For example, to play this lucky bag, you only need to pay 99 yuan to get a certain model, and you also have the opportunity to get 2-3 blind boxes, that is, you can get a maximum of 4 blind boxes for 99 yuan, and the probability of getting different blind boxes is given.
At this time, in order to understand the psychological activities of the players, there is first a certain model, which corresponds to the certainty effect in prospect theory, and there is a certain blind box.
Secondly, players may know that the remaining items are bad or they don’t like them, so they will still take a gamble, because when choosing between a certain loss and “taking a gamble”, most people will choose “taking a gamble”.
The above are some applications of prospect theory in marketing. As practitioners in the marketing industry, we must study these theories in depth.
2. Opportunity cost and sunk cost
These two concepts often appear when influencing users to make consumption decisions.
Opportunity Cost:
Opportunity cost refers to the opportunity given up by an enterprise to engage in a certain business activity in order to engage in another business activity, or the other income given up when using certain resources to obtain a certain income. The profit or other income that should be obtained from another business activity is the opportunity cost of the business activity being carried out. Through the analysis of opportunity costs, enterprises are required to correctly choose business projects in their operations. The basis is that actual benefits must be greater than opportunity costs so that limited resources can be optimally allocated.
Sunk Costs:
Refers to expenses that occurred in the past but are not relevant to current decisions. From the perspective of decision-making, the expenses incurred in the past are only one factor that caused the current situation. The current decision should consider the possible future expenses and the benefits brought about, without considering the expenses incurred in the past.
So, how do we apply these concepts in the world of marketing?
The first is opportunity cost. Opportunity cost is actually why consumers would give up your competitors and choose you?
This is very critical, so when you refine the selling points of your product, in addition to your explanation of the selling points, there is another very important thing, which is the reflection of opportunity cost.
Your product can provide the advantages of existing alternatives and give users a sense of benefit.
For example, a very common product is a dishwasher.
Why use a dishwasher? How is it different from washing dishes by hand? What feedback can advantages bring?
For example, you can use the time saved from washing dishes with the dishwasher to spend time with your children. This is one scenario.
Therefore, when writing copy and designing activities, the user’s opportunity cost must be considered. If you give up on me and choose something else, then you will lose something.
About sunk costs:
Sunk costs are widely used in the field of marketing. The essence of sunk costs is that it is difficult for you to give up your current efforts. What this means is, for example, if you participated in an event and set a goal of getting 15 people to help, if you only got 10 people, and you were only 5 people away from success, then if you gave up, you would feel it was a pity, and the time and energy you wasted on getting those 10 people to help would be a sunk cost.
3. Marginal Effect
In economics, marginal effect refers to achieving maximum economic profit at the lowest cost, thus achieving Pareto optimality.
Refers to the utility of the last unit of a good or service compared to the previous unit. If the utility of the latter unit is greater than the utility of the previous unit, then the marginal utility is increasing; otherwise, the marginal utility is decreasing.
The marginal effect is widely used. For example, the law of demand in economics is based on this, that is: the more goods a user buys or uses, the lower the cost he is willing to pay for each unit of goods (because the utility brought to him by the later purchased goods is reduced). Of course, there are a few exceptions, such as alcoholics who become happier the more they drink, or philatelists who collect a set of Cultural Revolution stamps. In this case, the marginal effect of the last stamp collected in the set will be the greatest.
Application of marginal effect in life
For example, if you are hungry, the first bowl of noodles is particularly delicious, the second bowl of noodles is very delicious, the third bowl of noodles is okay, the fourth bowl of noodles makes you full, the fifth bowl of noodles is too much to eat, and the sixth bowl of noodles makes you annoyed just by looking at it! That is to say, the effect of the sixth bowl of noodles is zero or even negative. It is this marginal effect that, when material consumption reaches a certain level, people begin to feel tired of this kind of consumption.
Application of Marginal Effect in Marketing
When we go shopping, we almost always buy a cup of milk tea, and the negative effect model of the marginal effect is used here. They use the method of half price for the second cup to increase consumers' greed for the product for the first time, that is, the "desire value", and at the same time increase product sales, but the marginal cost remains unchanged.
Once consumers purchase the beverage, negative effects may occur because they may not be able to finish it. What is reflected here is that the value of a commodity depends on human desires and the proportion to which those desires are satisfied.
4. Gambler’s Fallacy
The gambler's fallacy is a common illogical reasoning method in life, which believes that the results of a series of events all imply an autocorrelation relationship to some extent. That is, if the result of event A affects event B, then B is said to be "dependent" on A.
For example, a gambler who has a bad night always believes that after a few more hands, luck will turn around and he will be lucky. In the opposite case, a streak of good weather has led to concerns that heavy rain will fall over the weekend.
5. Cat Economics
Cat economics is a new term that has begun to appear frequently in Japan. In recent years, a conclusion has even been reached in the Japanese economic community: no matter what field is involved, as long as cats are used well, profits can be made, that is, cats equal economy. The humble little cat has become a bridge connecting Japanese culture and economy. The root cause is that cats can meet the emotional and spiritual needs of the Japanese people, thus creating real market demand. Japan’s “cat economy” tells us that if we want to do a good job in the cultural industry, we must calm down and look for the real emotional needs of the people and find the right entry point to achieve twice the result with half the effort.
6. Lipstick Effect
The "lipstick effect" refers to an interesting economic phenomenon in which lipstick sales are hot due to economic depression, also known as the "trend of preference for low-priced products." In the United States, whenever the economy is in recession, lipstick sales will skyrocket. This is because, in the United States, people think that lipstick is a relatively cheap luxury item. In an economic downturn, people still have a strong desire to consume, so they will turn to buying relatively cheap luxury items. As a "cheap non-essential item", lipstick can have a "comforting" effect on consumers, especially when the soft and moist lipstick touches the lips. Furthermore, the economic recession will reduce the spending power of some people, which will leave them with some "spare money" which is just right for buying some "cheap non-essential items."
7. Scale Effect
Economies of scale are also known as economies of scale. As production reaches a certain scale, the average cost of the enterprise decreases, thereby increasing product profits or creating room for price cuts.
So why do economies of scale reduce costs?
1. Allocate fixed costs. The more output, the lower the fixed cost allocated to each product.
2. Lower raw material prices and large-volume purchases create room for high discount negotiations.
Some companies will adopt a strategic loss logic based on the market of their products. There are many examples of this in the Internet industry, and there are also many in fast-moving consumer goods. The core premise is that the market for this category is large enough to leverage economies of scale to spread the initial cost expenditures.
In order to occupy the market in the early stage, Internet companies usually adopt the strategy of crazy subsidies to occupy the scale and then make profits.
This is actually a strategy adopted to gain scale. For the Internet industry, the marginal cost is very low, but the return is high, so the average cost of enterprises will decrease and profits will increase in the later stages.
8. Endowment Effect
The endowment effect means that once an individual owns an item, his evaluation of the value of the item will be much higher than before he owned it. It was proposed by Richard Thaler (1980). This phenomenon can be explained by the "loss aversion" theory in behavioral finance, which holds that a certain amount of loss will reduce people's utility more than the same amount of gain will increase their utility. Therefore, people's weighing of benefits and harms in the decision-making process is unbalanced, and their consideration of "avoiding harm" is far greater than their consideration of "seeking benefit". Out of fear of loss, people often ask for too high a price when selling goods.
Application of the Endowment Effect in Marketing
The shadow of the endowment effect can also be seen in product design.
For example, at the end of each year, Internet companies such as Meituan, Keep, Zhihu, and Douyin will launch an annual summary of users, recording every detail of the user's life through the collected user behavior data. For example, you are the nth user of the product, how many times you have checked in using the product, what is the song you have listened to the longest time in a day, what is the latest short video you have watched, etc.
These annual summaries give us a real sense of ownership by putting ourselves in their shoes. We believe that this is our own, unique annual summary, so we will have enough motivation to save this ritualistic report and share it with people around us. For the product, this is also an opportunity for secondary dissemination.
9. The Latte Factor
The "latte factor" is a financial management concept proposed by American financial writer David L. Bach in his book "The Latte Factor: Why You Don't Have to Be Rich to Live Rich". It refers to those expenses in life that are not necessary but can have a cumulative impact.
10. Nash equilibrium and Hollint model
Nash Equilibrium:
In a game process, if one party will choose a certain strategy regardless of the other party's strategy choice, then this strategy is called a dominant strategy. If the strategy chosen by any participant is optimal when the strategies of all other participants are determined, then this combination is defined as a Nash equilibrium.
Hollint Model:
The Hollint model is often used in brand site selection.
In the Hotelling model, consumers believe that each manufacturer's products have a special position in the geographic or product characteristic space, and the closer two products are in geography or product characteristics, the better substitutes they are. The farther the consumer is from the seller in geographic or product feature space, the higher the cost of the purchase.
Application of Nash Equilibrium and Hollint's Law in Marketing
If we understand Nash equilibrium and Hollint's law, we will understand why McDonald's is opened next to KFC.
Suppose, on a street of about one kilometer, two stores, A and B, are to be opened, and the products of the two stores are very similar.
Where do you think they are better?
Now there are three options: a, b, c:
a: The two stores are located at opposite ends of the street.
b: Open at a distance of 200 meters from both ends.
c: Both stores are located in the middle of this street.
Which one would you choose?
From the perspective of game theory, we can see what the results might be if we choose to open in different positions.
In the first case, assume that A and B are opened at the two ends of the street respectively. Without considering other factors, from the perspective of distance, customers going to the two stores are evenly distributed.
But this situation is unstable, and in order to gain more customers, one party may move first.
We assume that B moves 100 meters to the left, so that he can reach a wider range of customers and naturally attract more customers.
A will definitely not sit idly by and watch this situation happen. If you move 100 meters towards me, I will move 100 meters towards you.
What might happen if the game continues to the end?
The two stores are next to each other, in the middle of the street.
Because only in this situation can a balance be achieved. No one can move. No matter where you move, the number of customers you can reach will decrease.
In the second case, suppose A opened a store 100 meters away from the left side of the street.
For B, the best strategy is to get next to store A so that he can cover the crowd within 900 meters on the right.
However, if B does this, A will move to the right, until the two companies, after fierce competition, are finally able to drive side by side in the middle of the street.
Although customers on both sides may feel a little inconvenient, judging from the results of the game, this is the most appropriate one. No matter who moves, it will not be more appropriate than this.
This is also the reason why KFC and McDonald's are always opened next to each other.
11. Transaction Utility
The so-called transaction utility is the effect of the difference between the reference price of a commodity and the actual price of the commodity. In simple terms, it is the good deal bias. The existence of this good deal bias causes people to often make irrational purchasing decisions.
Application of transactional utility in marketing
We can see that the definition of transaction utility is the difference effect between the reference price and the actual price of the commodity. At this time, we may have questions. Transaction utility and anchoring effect are similar in meaning, so what is the difference between the two?
Let’s take a classic case as an example, the case of Evian mineral water.
If Evian mineral water is sold in Starbucks stores, we can regard it as an anchoring effect, because the purpose is to use Evian coffee mineral water as an anchor point to highlight that Starbucks coffee is cheaper. But if Evian mineral water is sold for 22 yuan in a hotel lobby and 5 yuan in a supermarket, then this is transaction utility.
In general, transaction utility is affected by environmental factors. For example, Evian mineral water is sold in different environments such as a hotel lobby and a supermarket.
Here is another classic example:
The transaction utility theory was first proposed by Professor Richard H. Thaler of the University of Chicago. He designed a scenario for people to answer: On a hot summer day, you are lying on the beach and the thing you want to do most is to drink a cold beer. While you are daydreaming about your favorite beer, your companion goes to a nearby phone booth to make a call, which just happens to help you find out if the nearby grocery store sells beer. He wants you to give him the highest price you are willing to pay. If the price of the beer is within your price, he will buy it for you. If the price is higher than this, he will not buy it. So how much is the most you're willing to spend on a beer in this little grocery store? He asked a group of people to answer the questionnaire, and the average price he came up with was $1.50.
Then he changed the phrase "a small grocery store nearby" in the questionnaire to "a high-end resort hotel nearby" and gave the new questionnaire to another group of people, asking them to bid the highest price. Do you know how this small change changes the results? The average price after the change was $2.65. It's the same thing as drinking a glass of cold beer on the beach. There is no difference between buying the same beer from a hotel and buying it from a grocery store. You don't enjoy the elegant and comfortable environment of the hotel by buying it in the hotel, nor do you suffer any loss due to the simplicity of the grocery store. But why are people willing to pay a higher price if they buy it from a hotel?
The above are some of the economic principles and concepts that marketers need to master.
