During the 1992 presidential race between Bill Clinton and George H. W. Bush, Clinton’s campaign strategist, James Carville, inscribed three key messages on a whiteboard at their Little Rock, Arkansas headquarters.

Navigating the 1992 Campaign: Fear and Slogans These messages were meant to keep Clinton’s team focused on the most critical aspects of the election. A slightly modified version of the most memorable phrase – “The economy, stupid” – became a landmark political slogan (and arguably contributed to Clinton’s victory), one that continues to resonate with voters and aspiring politicians today. You might be wondering how this relates to marketing. While marketers juggle numerous priorities, the broader economic landscape often takes a backseat to more immediate concerns. However, grasping economic principles and consumer behavior is crucial in today’s competitive business environment. Simply put, for marketers, “It’s the economy, stupid.” In his acclaimed 1998 textbook, Economics Explained, Greg Mankiw outlined 10 fundamental principles of modern economics. This post will delve into some of these principles, their psychological underpinnings, and how marketers can leverage them.

Principle 1: Tradeoffs Are Unavoidable

Unless you have a background in economics, the term “opportunity cost” might be unfamiliar.

However, you’ve likely heard the saying, “There’s no such thing as a free lunch.” In case you’re curious, this adage is believed to have originated in the late 19th century when saloons offered complimentary salty snacks to incentivize drink purchases.

David Caruso lays down the law. Opportunity cost highlights that acquiring something desirable usually requires sacrificing something else. For marketers, the most prevalent opportunity costs their plans need to address are explicit costs. If a year’s subscription to your software costs $250, the potential customer faces the explicit opportunity cost of foregoing other goods or services they could purchase with that $250. Fortunately, this principle is relatively straightforward for marketers to utilize.

Strategic Positioning is Key

Consumers are inherently aware of the explicit costs associated with transactions. Therefore, leveraging this principle and mitigating potential hesitation boils down to making the customer feel like they’re getting a bargain. This doesn’t imply misleading prospects – far from it. Instead, it suggests framing your product or service in a way that amplifies the benefits of purchase, overshadowing the explicit opportunity cost. As reiterated countless times, prospects aren’t interested in buying things; they want solutions. Thus, highlight the advantages of your product or service to such an extent that the prospect disregards the inherent opportunity costs of their decision.

Case Study: Accounting Software

Imagine you’re a small business owner in need of bookkeeping software. You’ve narrowed down your choices to QuickBooks and Less Accounting. Price-wise, both platforms are comparable. So how does Less Accounting – a significantly smaller company than Intuit – compete? By emphasizing the benefits of its software and appealing to its target audience’s desire for hassle-free bookkeeping (ingenious name, right?).

Less Accounting’s messaging is commendable for its honesty. It doesn’t attempt to glamorize bookkeeping. Instead, it emphasizes the software’s user-friendliness and acknowledges the inherent tediousness of bookkeeping. Less Accounting’s strategic positioning minimizes the perceived opportunity cost of the software (which is already reasonable) in comparison to its benefits. This establishes a strong association between the software and problem-solving, effectively neutralizing the opportunity cost objection. The availability of learning resources further reinforces this association, diminishing the perceived opportunity cost.

Principle 2: Rational Individuals Think Marginally

For this principle, let’s set aside the amusing notion of economists assuming widespread rationality and embrace the concept that rational individuals think at the margin.

The margin – the playground of rational minds. This essentially means consumers opt for products or services that optimally meet their needs, weighing price, opportunity cost, and perceived benefits in every transaction. To achieve this, prospects require ample information for informed (and thus rational) decisions. So how do marketers facilitate this?

Clarity is Crucial

Established, particularly in tech, often rely on their brand name alone. This explains the disruptive force of the startup ecosystem; the focus has shifted from legacy giants like IBM to agile startups offering genuinely innovative solutions. However, smaller companies with novel products aiming to compete with industry leaders must make their offerings and value proposition crystal clear. In economic terms, they need to highlight that the marginal benefit of choosing their product surpasses the marginal cost.

Case Study: Airbnb

Vacation rental platform Airbnb exemplifies the principle of encouraging action by appealing to rationality.

Analyzing the hospitality industry reveals why Airbnb has been so impactful. While many aspire to travel, finding affordable accommodation can be challenging. Even disregarding cost, most hotels feel homogenous. Airbnb revolutionized this by personalizing accommodation. Its messaging not only emphasizes the thrill of exploration but also fosters a welcoming experience, evident in its choice of language. This resonates with the rational decision-making process of potential travelers. Why spend $200 per night on a generic Marriott in Paris when you can stay at Arthur’s place? This creates a personal guest-host connection often absent in even upscale hotels. While prices are comparable, Airbnb’s marginal benefits, like this personal touch, make it a compelling alternative. Airbnb also underscores the “insider exclusivity” factor. Sure, your concierge can recommend a good restaurant, but Arthur likely knows hidden gems you won’t find in guidebooks.

A charming alternative to a bland hotel room. In essence, Airbnb leverages economic rationality by offering a unique travel experience at a competitive price. Why settle for a hotel when you can momentarily “live” somewhere exotic for a similar cost?

Principle 3: Incentives Drive Behavior

While some of Mankiw’s principles have limited relevance for marketers (such as the notions that trade benefits everyone or that governments can improve market outcomes), the idea that people respond to incentives is paramount. Economically, incentives are market forces influencing prices. For instance, rising prices often deter consumers. However, in marketing, incentives relate to swaying consumer choice in competitive markets.

Understanding Incentive Value

To leverage this principle, you must discern what your target audience values. Discounts or other financial motivators are common incentives. However, depending on your product and ideal customer, their effectiveness may vary. Offering a few hundred dollars off a Tesla Model X (some models exceeding $80,000) is unlikely to sway buyers, especially with many already eligible for substantial tax credits.

Image © Tesla Motors The key is to identify what truly motivates your ideal customer.

Uncovering Customer Motivations

Before offering compelling incentives, you must understand your prospects’ motivations. While analyzing user intent is important, you may need to go beyond PPC data. Demographic data is a good starting point. Understanding your ideal customers’ age, marital status, education level, and estimated income provides insights into appealing incentives. For example, a single parent earning under $30,000 per year might find financial incentives more enticing than a retired couple with a robust financial portfolio. This doesn’t mean wealthier individuals are indifferent to financial incentives, but simply reducing prices may not be as effective. Sometimes, other factors are at play.

Case Study: Warby Parker

Eyeglass retailer Warby Parker exemplifies understanding customer motivations and offering compelling incentives. The online eyewear market is saturated. However, Warby Parker strategically combines its unique selling proposition with incentives that resonate with its target demographic, creating a mutually beneficial experience.

Warby Parker implements a “buy one, give one” program. Every purchase triggers a donation of eyeglasses to someone in need, often in developing nations where prescription eyewear is a luxury. Limited access to eyeglasses has significant economic and educational consequences, making it a pressing yet often overlooked issue.

While Warby Parker’s website provides information about the program, its true brilliance lies in how it appeals to their target audience. Warby Parker’s stylish spectacles appeal to younger generations seeking to make a fashion statement. Studies have shown that younger individuals tend to be more altruistic than older consumers, making the buy-one-give-one program particularly attractive. Looking good while doing good holds immense appeal. From a marketing standpoint, it’s a stroke of genius. Warby Parker grew 500% in its first year and surpassed its first-year sales goals in just three weeks solely through word-of-mouth marketing. This was achieved by understanding their ideal customer and offering a powerful incentive that transcended personal benefit, appealing to their desire for global impact.

Knowledge is Power

These examples should offer food for thought for your marketing campaigns. Are your incentives truly compelling? Why should customers choose you over competitors? Does your positioning and messaging resonate with your prospects? These are vital questions to consider before launching any campaign. If you have any questions, feel free to leave a comment!