← The Brainy Business | Understanding the Psychology of Why People Buy | Behavioral Economics
The Brainy Business | Understanding the Psychology of Why People Buy | Behavioral Economics
516. The Behavioral Economics Behind Amazon's Success
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In this episode of The Brainy Business podcast, Melina Palmer revisits her insightful behavioral economics analysis of Amazon, originally aired in July 2021. She explores how Amazon transformed the shopping experience by understanding consumer...
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Melina Palmer
Welcome to episode 516 of the Brainy Business Understanding the Psychology of why People Buy. In today's episode, we're diving into a behavioral economics analysis of Amazon. Ready? Let's get started. You are listening to the Brainy Business Podcast where we dig into the psychology of why people buy and help you incorporate behavioral economics into your business, making it more brain friendly. Now, here's your host, Melina Palmer. Hello. Hello everyone. My name is Melina Palmer and I want to welcome you to the Brainy Business Podcast. Have you ever added something to your Amazon cart just because it would arrive tomorrow? That little change, reducing shipping time from two days to one might not seem like a big deal, but it had a massive impact on what people were willing to buy. Suddenly, Amazon wasn't just for gifts or gadgets, but it became the go to for paper towels, toothpaste, and everything in between. And that shift, it's all about behavioral economics. This refreshed episode, which Originally aired in July 2021, is a replay of my behavioral economics analysis of Amazon. These company profile episodes are always a fan favorite, whether I'm looking at the psychology of Costco, Peloton, Disney World, or the Apple Card, because it's so helpful to see these concepts and action with companies you know and interact with all the time. And I chose to bring this one back now because this Thursday in episode 5 17, I am joined by the incredible Devorah Rogers to talk about the future of retail and shopping behavior. Devorah is a longtime human behavior researcher, co author of Influencing Shopper Decisions, and she was the lead researcher on Google's original Zmod study. She knows how people shop and what's changing, and what better foundation for that conversation than a deep look at Amazon? Also, if you happen to catch my recent conversation with Bob Goodson about the history of the like button, you may remember how he talked about the way that tiny signal a thumbs up changed the way we interact online. Amazon's use of reviews, ratings and even likes on reviews taps into the same psychological patterns. And it's all connected. And this is a great reminder that if you aren't already subscribed to the Brainy Business podcast, now's a really good time to do so to ensure you don't miss any of those upcoming episodes and to make it so you can easily go back and check out past ones really quickly. Before we get into this episode, I want to be sure you know there are links in the show notes for my top related past episodes, books, ways to get in touch and more it's all within the app you're listening to and@the brainybusiness.com 516 now let's jump right in and talk about the behavioral economics of Amazon. Much like Disney, there are a lot of different directions where this episode could have gone, and we won't be covering every single aspect of how Amazon is using behavioral science in the episode today because we'd be here for a long time. For one example, I'm not going to be really getting into their streaming service or photos or things like that. In case this is your first behavioral economics analysis episode with the brainy business, what you can expect is a fairly rapid fire list of things I see from Amazon where they're using tactics that tie back to concepts from behavioral economics. I'll share what I see there. Note of course that I haven't worked at or for Amazon and haven't had conversations with anyone on their teams to know if any of this was specifically intentional. To Behavioral Science, I will give tips along the way for what you can learn from this for your own business. And remember, as with most anything you hear or see in a case study or best practice, just because something works for one company doesn't mean it's generalizable for every other business. In every possible situation, it's always good to keep an eye out for survivorship bias, where we can look back and say what we think made someone or some company successful, but might be missing a big item that we don't see when we're looking for what worked. There is of course an episode on survivorship bias linked for you in the show notes, so I'm not going to get into that more now here. So what makes Amazon so special? What are they doing that allowed them to become the mega giant they are today? As you might have guessed, the answer is a lot. The first thing I want to mention really goes back to the beginnings of Amazon, and in order to understand what they've done right to where they are today, it's important to reflect upon what the world was like before they came along. It's probably hard to remember a time before Amazon. Do you even realize how inconvenient things were? I mean, you had to leave your house to do pretty much anything. If you did order something to be shipped to you, it was most likely via mail order, or a long time on the phone with someone, or standing in line in a physical shop waiting for a person to go look something up. And who knows if they knew about the perfect book or other product for you Maybe they were new and didn't have an enough background knowledge to make a great recommendation. You might end up disappointed or leave with nothing. Of course, at the time no one really realized how inconvenient this was. There wasn't another option and people didn't know what their lives could be. They didn't know to ask for a world where things were delivered in two days or less and they could find virtually anything they wanted from around the world with free shipping and the ability to return almost anything also for free, and get tons of instant recommendations for what they might like without even starting to ask. And this gets to the first and possibly most important piece of behavioral science built into the entire company of Amazon, which comes back to the biggest mistake I've said time and again most businesses make when trying to implement behavioral economics into their work or just working on most projects. And it's understanding the real problem you're trying to solve. Amazon took the time to look beyond what existed, what people might say they want, and what competitors were doing, beyond the status quo and the known truths that challenged them, saying what if it didn't have to be this way? Taking the time up front to understand the behavior that needs to be changed and what might be motivating it. And on the flip side, how to make it easy for people to change is so important to the success of Amazon. The Behavioral Insights team created a model called east to get people to take action. It stands for being easy, attractive, social and timely. Cass Sunstein, co author of Nudge, added an F to make it feast, saying that interventions also need to be fun. And in my book I added an S to the end to emphasize the importance of telling a great story. When you think about Amazon, especially in the beginning, they really ticked all those boxes. It was much easier than anything else around. Its website is simple but arguably attractive in the way it's so well organized. It's social because people want to talk about this cool thing they found and how easy it is to use, so they look smart. It's timely in that it solves a problem of finding a book or other product as people are motivated to go search for them and things arrive incredibly quickly before you lose interest in them early on. I'm sure the process was much more novel and fun than it is now that we're used to it, but the art of the search must have been incredibly exciting when first using the service and to talk about the story. Most people have heard at least something about how Amazon got started and became the mega giant it is on the shoulders of an innovative thinker in Jeff Bezos. Love him or hate him, there's a story there. I'm not going to harp on this anymore. Maybe I'll mention it a couple times through the episode, but like I said, there's already a whole episode and a bunch of space in my book dedicated to this. Truly understanding the problem before jumping into a solution is incredibly important for every single business, no matter your industry or background or what department you're in. You can invest more time in understanding the problem. You don't need to become Jeff Bezos and reinvent global commerce. Good on you if you do, but it isn't a requirement. Whatever you do, I can pretty much guarantee you will do it better if you spend more time up front thinking about the problem before you jump in with a solution. This brings me to another cool way that Amazon thinks differently by reframing their approach to projects. Matthew Confer and I talked about this on his recent episode of the Brainy Business and it's called the Press Release method or the Working Backward method. It's a simple enough concept. Essentially, before starting any project, the team is asked to imagine the new product is ready to ship and draft a press release announcing it to the world. This is done with the ideal customer in mind, and there are a few steps. After drafting the press release, you evaluate the opportunity to decide if it's compelling enough and worth building, then discover solutions and get approval from stakeholders. Next, build the high level roadmap and identify themes, followed by creating the backlog and assigning tasks, and then you can actually start working on it. There is of course a link an article with more details on the method, but take a moment to consider the genius of this reframe. It does of course help reinforce my earlier point on the importance of spending more time thinking about the problem. This simple mental shift framing the project differently can help people get out of their myopic approach to what's in front of them and ask some great questions. Again, I would say this is a method that would help most any business, from entrepreneurs to global corporations. Funny enough, we just watched the original Jurassic park with the kids this weekend, of which our 8 year old said it was boring and so we ended up turning it off. Sad to think how times have changed since that movie came out. Anyway, we did get to see the part when Jeff Goldblum's character says you were so preoccupied with whether or not you could, you didn't stop to think if you should. We do this more often than we realize in business and in life. Which is why I really love the question in the second step of if it's worth building. Even if you can do whatever you started out with or thought that you wanted to do, should you? Reframing with the press release method can help you to ask the right questions early enough and avoid potential cataclysmic failures. And of course, plenty of small ones all right, the next thing that Amazon does is one that you're likely most familiar with. They really took herding and social proof to a new level again. This has become pretty much commonplace these days, but Amazon changed the world with suggestions for things you may also like or that people like you have bought, as well as making the simple star rating so commonplace. As Dr. Robert Cialdini said when he was on the show a few weeks ago, social proof is an incredibly powerful tool for selling and persuasion. If you remember from that conversation or his book Influence When a restaurant in China added most popular for a label on some of their most popular dishes on their menu, they became even more popular. It increased the orders by 13 to 20% on those popular items. Star ratings, reviews and recommendations for what other people like us have done before are hugely influential in getting someone to buy. As Cialdini said about that menu example, the most popular notation was impactful across all sorts of demographics, age, gender, etc. Because the one thing those people had in common was that they hadn't bought from that place before. It was unfamiliar territory to them, so they looked to see what others like them had done before, which was much more influential than anything else. When someone has eaten at the restaurant before and they know what they like, the recommendation of what others have done doesn't matter as much. That person already has an opinion. The herding instincts really kick into overdrive when we're going to try something new. While there are many items purchased on Amazon as repeat items, which I'll talk about a little bit later in the show, or that someone already knows a lot about. When it comes to their core space of where they started their roots in buying books, that isn't usually something you buy over and over again. You're trying out a new title or author for the first time. Perhaps you finished all the John Grisham novels and want something new to try. Who do you ask? What if you buy something that has a similar cover and the writing style is totally different? You can't go by name or title. And we know why we shouldn't judge those books by their covers. So what do you do? Cross your fingers and Hope it's not a total waste of money. With Amazon, you can see that other people like you, who love John Grisham, also love these other three authors. They also let you overcome that additional uncertainty by reading a few pages and taking a peek inside, or by showing reviews from other readers saying why they liked it. People from around the world who you couldn't have asked otherwise, letting you know if this is good or terrible. When you see that one vendor is selling at half price of everyone else, you can check the ratings and reviews to see if they're legitimate or selling garbage. Thanks to negative dopamine that comes with a bad experience, people are not shy about leaving scathing reviews for vendors they think did them wrong. And this also gets us into the network effect that comes from Amazon. The more people who use Amazon, the better it gets. There are more options to buy from. Sellers are forced to keep honest and sell good stuff or they get bad ratings. Reviewers are also given more clout for verified purchases, and Amazon puts barriers in place to keep people from creating fake reviews. If there weren't enough sellers, buyers would leave. If there weren't enough buyers, sellers would leave. Both sides need each other and as one grows, the other can too. It's symbiotic and really helps make Amazon work and grow. But if they didn't properly monitor and manage, it could all crumble incredibly quickly. Conceptually this is easy enough to understand, but in practice the network effect is very nuanced. There's a whole episode on it linked in the show notes to help you determine if it's a good path for you and if so, which way. You may want to build your network with links within the show notes for that episode. So definitely go check it out if you're interested. Once someone finds something they think they want based on the reviews and past actions of others, they may still be on the fence and debating whether they should order or not. After all, they don't actually know these people and the idea of wasting money isn't something anyone really loves. To help overcome the loss, aversion and fear of regret, Amazon makes most returns incredibly easy. Just like Costco or Nordstrom, there's almost no risk in the process. If you buy this shirt and it's the wrong color or it doesn't fit, return it for a full refund and you don't even have to pay for shipping. These days you don't even need to print a label. There are many drop off locations available, making it incredibly easy to return things you don't want. I'VE Talked about these 100% satisfaction guarantee approaches on the show multiple times before. They're much more likely to encourage additional buys than what you're going to see in returns. They are incredibly effective and almost every business who uses them will come out net positive. And honestly, you're likely to have more happy customers as long as you're selling good stuff that people want. They're willing to give you a try, have some anticipation and dopamine release waiting for that product to arrive, but not too long. If they're ordering as a Prime member and if it meets or ideally exceeds their expectations, they'll be happy with you and maybe leave a great review which keeps that cycle going. Another way that Amazon makes it easy to buy is with their one click purchase setup. You're likely very familiar with it, but what you may not know is that Amazon actually patented the one click buying process back in 1999, making it so every other company, including some of their main competitors like Barnes and Noble, had to incorporate a second click. Just a little bit of friction that asks are you sure? Or makes you take one more step before the purchase. It may feel like this is insignificant. I mean, think about the processes in your own business. How many times have you said it's just one more form, one more text box, one more click, one more person to speak with, one more step as though it was no big deal? How many unnecessary steps are in your processes? Things that make it easier on your staff maybe, or help you with the selling process down the road, but aren't necessary for the buying experience right now? Probably a lot. And you may think it isn't that big of a deal. But. But Amazon spent a lot of money over the years defending that patent. And if that isn't enough to convince you, how about another amazing innovator? Steve Jobs paid a million dollars to Amazon to be able to have the one click buying process in itunes. That's a million dollars to remove a single click. If each of those one more items was a million dollars each to your business, might you look at them differently? Simplicity and reduced friction while working with the brain makes a huge difference. And this can all come back to understanding that real problem you're trying to solve, which you already know is of paramount importance. Where are the unnecessary steps in your process that can be immediately removed to make things easier on your customers? Get rid of them now and see what makes a difference. Now I've briefly mentioned it already, but it's so important to talk about the prime membership at Amazon paid on an annual basis. There are lots of perks and benefits from being a Prime member, the biggest arguably being free two day shipping on a huge number of items. According to an article from Digital Commerce 3 from April 2021, Amazon prime now has 200 million members worldwide. Sure, it may seem like doing the math on those hundred dollar or so memberships would be a staggering amount of money they make on the memberships themselves, but they also give a lot back to keep the value high. Someone still has to pay for all that shipping and return shipping we talked about earlier. On the surface, it might even appear to cost them money. So why continue to offer it? One reason is the incredible loyalty of prime members. According to that same article, half of all purchases made on Amazon are done in 15 minutes or less and 28% in three minutes or less. Most of those are made by prime members who have trust in the process and recommendations based on some of the behavioral economics concepts I've already talked about about in this episode. A survey quoted in the article says that 26% of US online consumers say shopping efficiencies such as one click purchases and saved payment information are a top reason why they buy on a marketplace versus a retailer's website. And as Amazon is by far the top marketplace, it's beneficial for them to be the top place people will turn when they need to buy anything. If all things are equal, or even if you might be able to pay a little less on another marketplace. If the shipping will be longer and you aren't sure how reliable the seller is and you have to add in your payment information, you may still buy on Amazon to be safe. All those extra purchases mean lots of revenue for Amazon. And remembering that loyalty piece, 69% of people who sign up for a free trial membership of prime keep the service. Once it's time to pay 93% to continue to pay after a year and 98% after two. In other words, people don't leave once they become prime members. There's so much value there and people buy so much money more than what they pay out in fees. How could you not see the value in that subscription? Why would you ever cancel? Let that be an important lesson to you. For all the free trials and subscription models being set up out there, sometimes the subscription or membership is the only way you make revenue. It's the whole monetization plan for your business. But it doesn't have to be. If you create a huge amount of value that drives loyalty and other purchases and engagement and revenue, the subscription is more of a mechanism to build the habit, and as we're seeing from Amazon, it can be far more valuable than the cost of the membership itself. Take a step back to really look at your model. Where should or could your revenue come from? What might be better than what you're thinking about or doing right now? What are loyal purchasers worth to you? People don't stick with Amazon prime because they were tricked into a free trial that was hard to cancel and then lament not being able to turn it off. They're thrilled to pay Amazon that annual fee and in many cases don't even consider canceling. This again is a networking effect where there's value for the purchaser and Amazon and they benefit from each other. It's a virtuous cycle that allows both sides to win. Look for the value you can create to make it an amazing deal that people will love and want to talk about and you're likely on the right track now. One other note on subscriptions, you've likely noticed that in recent years Amazon has started offering subscription pricing and options for many items. For example, I went to Amazon to buy mascara and the default option was for a monthly subscription. It would cost me less per item and arrive without me having to go back and order each time. There was also an option to turn that to a less frequent subscription, say every two or three months, or to toggle to a one time purchase. For people who use a lot of mascara or want to use this for toilet paper or diapers, or who tend to forget to reorder items in time, this is an awesome option. It makes decisions easier by reducing overwhelm on the brain and you save a little money on the things you order most easy and helpful. But if you don't, this nudge won't force you to set up a subscription. It's just a suggestion. And while I know there's a lot of value to Amazon to have me on a subscription plan, I give them the benefit of the doubt in recommending this to me first. For many people, I'm sure this is a great option they appreciate. Whether you're selling products or services. It may feel like you're being pushy to have the default be a subscription and let someone self select to change to a single time purchase. But that's all in your logical conscious brain. As long as you're helping someone get something they want and need, there's likely a great value to them in offering a subscription or membership or whatever this somewhat scary suggestion might be, and it may sound harsh, but the best way to get over this type of mental block, if it's holding you back, is just to get over it. You have to tell yourself it's okay and do it anyway. Even if it starts out feeling scary. Put yourself in the customer's shoes. Think about a time when you were a customer buying something like on Amazon. If you really think about it, you've probably been thankful for these types of nudges more than they annoyed you and you may not have even consciously noticed them. So test them out and see how it goes. Come share with me on social media. I would love to hear about it. You can find me everywhere as the brainy biz now, it wouldn't make sense to talk about prime and not at least mention Prime Day. This episode comes out very shortly after Prime Day, so that's fitting. And it's not quite a day. It was currently 48 hours dedicated to deals and limited time only sales on Amazon. According to CNBC, Prime Day in 2021 generated more than $11 billion in sales, up more than 6% from the year before. They were the two biggest days of digital sales for the year so far. So you know, not bad revenue for a couple of days. The main concepts here are loss aversion and scarcity. Time pressure from short term offers with limited quantities make people overcome their risk aver and become very loss averse. And scarcity with herding makes us feel something is a great value and want to jump on offers. Especially if you're watching things sell out in front of your eyes or those ticking time clocks which can make you feel very, very compelled to make a purchase right now. The good news is these tactics don't have to be reserved to giant events like Prime Day. You can use them at all sorts of times in your business, but the key is making sure that whatever you say is scarce really is scarce. If you're constantly having sales or making exceptions for people and extending the rules, it will not have the same effect to have true scarcity and loss aversion triggered. Some people can't get the deal. I know this can be a hard concept for some of us entrepreneurs especially. Just know that it works. It's okay and often good to not let everyone get that best deal. It's a solid strategy and it's worth giving yourself permission to try it out. All right, we're getting close to the end now. Just a couple more things to mention. Again with the reminder that there are oodles of things I could have touched on today. And with more than 12 million products that make up Amazon we come to this item of structuring complex choices with how easily our brains get overwhelmed. It's amazing that the 200 million prime subscribers and all the other purchasers of Amazon are able to find what they need and buy in 15 minutes or less half the time. If you remember that stat I talked about earlier. How many times have you gone to Amazon? Not really sure what you're looking for? You type in some sort of vague explanation of what you might want and see what it suggests. Maybe the problem you're trying to solve. How does it sort through those 12 million items to give you suggestions in a way that will keep you on the site and help you find what you need quickly? There are a ton of ways to sort the information by Star Ratings, by price, by vendor, by color, by prime status, and they need to pick a place to start that default in the complex choice. To test this out, I typed in something simple and incredibly vague into the search bar chair. My first recommendations were for office chairs. There are lots of great pictures in a few videos helping with priming and triggering those mirror neurons. The first row has no prices at all. When you look for it, you can see in the upper right hand corner that the default was to sort by featured and the three items in that top row are part of a sponsored ad from a specific brand, but it feels cohesive as a shopper, not intrusive. It looks like it could be any old result. Scrolling down, multiple items have bestseller labels. They all have star reviews, many in the multiple thousands, and tout their free prime delivery. They let me know when there are multiple color or pattern options. The featured brand from the top and one of the exact chairs and images also appears in that first selling row. And because of familiarity, bias and liking things we've seen before, even if not consciously registering it, a customer might be drawn to that particular chair, even though it's almost double the price of the chairs on either side of it, though this can help with relativity and anchoring if I'm not particularly interested in that chair for any reason as I continue to scroll down. Some options have a green banner to show they're on sale, or a red banner to show they're on a limited quantity, using those scarcity tactics I just talked about. Then comes a section of editorial recommendations by Real Homes, which has a staff pick for ergonomic desk chairs, followed by Best for Movie Night and Best for Events, Most Versatile and Comfort and Style categories. In case I'm looking for something other than a chair for the office, then a section on what's top rated from Amazon's private and select exclusive brands, and on and on as you scroll through the page. Once you click on something, it'll have more targeted recommendations and if you don't like the original order, you can narrow the search using simple suggestions on the left or reordering by price or new items or really whatever you want. They make an unbelievable amount of information seem almost effortless, which is an amazing feat when you think about it. And something to keep in mind is we talk about what you can learn in your business from Amazon, what you should do based on all these things I've talked about for the last half hour or so about Amazon. So as we close out the show, I'm going to give you my top three tips and lessons I think are most important for every business to learn from Amazon first, and this likely isn't that surprising, but you need to spend more time thinking about the problem you're trying to solve. Get a really clear picture of why you exist and who you're for, and then make it as frictionless as possible on the path that helps people to get there. Before you use the but they're a huge company with a giant team of people excuse, remember that it wasn't always that way. It takes some investment, especially up front, to know what you're trying to achieve. There's a lot of value in measuring twice and cutting once. Once you know the goal and have that as a touchstone to come back to, everything else can become easier. The second tip is to use social proof and herding whenever you can. They work and they're incredibly easy to implement. If you could add two words to your website or menu or shelf in a store and increase the sales of your top selling item by 20%, would you do it? Good news? You can. And it really can be that easy. Ratings, star reviews, testimonials, most popular tags. They all make a difference and are worth using. Ask for those ratings, reviews and testimonials and show them off. The third tip is to make suggestions. People don't always know what they want, so help them find their path. Whether it's a default sorting method or mixing up styles and types like with the chair example, or showing what's popular with what's on sale and what's scarce to see which frame works for people. People try some stuff, test it behind the scenes to see how it works and keep track, but don't be afraid to suggest things. People like expert advice, especially when they are unsure, so help them out if they don't want or need the suggestion. They're free to look another way, but many people will appreciate it. So what got your brain buzzing as you explored the behavioral economics of Amazon today? For me, I'm always impressed by how Amazon removes friction at nearly every step. They've created a space where choice, architecture, loss aversion, anchoring and social proof work in harmony, and most of us barely notice, at least on a conscious level. It's part of what makes their experience feel so seamless and intuitive, and why it's so easy to spend more time and money there than maybe we planned. It's also fascinating to think about how much of this has shifted because of social feedback, those little likes on reviews, recommendations based on past behavior, and the ability to see how others respond to products in real time. If you heard my recent conversation with Bob Goodson, one of the original creators of the like button, you know that tiny thumbs up helped shape how we give and receive feedback online. And Amazon has absolutely leaned into that behavioral pattern. And all of this is the perfect Setup for episode 517 coming your way this Thursday, where I'll be joined by Devorah Rogers to talk about the future of retail. From shifting attention spans to the rise of new decision making pathways. It's a fascinating conversation and one you don't want to miss. Until then, I'd love to hear from you. What's something you've noticed in your own Amazon behavior or something clever you've seen them do that shifted how you shop? Come share it with me on social media. You'll find me as the brainy biz pretty much everywhere and as Melina Palmer on LinkedIn. There are links in the show notes to make it easy as well as for related past episodes, books, ways to get in touch and more. It's all waiting for you in the app you're listening to and@the brainybusiness.com 516 and just like that, episode 516 on the Behavioral economics of Amazon is done. Join me Thursday for a brand new episode with Devorah Rogers to discuss the future of retail and how shopping behavior is evolving. It's going to be a lot of fun. You don't want to miss it. Until then, thanks again for listening and learning with me and remember to be thoughtful. Thank you for listening to the Brainy Business Podcast. Molina offers virtual strategy sessions, workshops and other services to help businesses be more brain friendly. For more free resources, visit thebrainybusiness.com.