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Free Money, Distrust, and The American Consumer

Written By: Bob 2 December 2010 Other Posts By: Bob

The following article takes a look at the state of entrepreneur business models and projections and how they can maximize value by taking notice of the level of distrust in the vast majority of American consumers.

Predictable Irrationality

In Dan Ariely’s Book, Predictable Irrationality, he showcases his experiments in Behavioral Economics.  In one such experiment, Ariely creates a booth at a crowded commercial area in Cambridge Massachusetts.  He erects a banner that reads “Free Money.” and gives away free bills for few hours.

What percentage of people do you think stopped by and picked up free cash?  100%?  90%  75?

It varied based on dollar amount, but when he was giving away $1 bills, only 1% of people stopped to take a free $1 bill. There were no strings attached in the transactions.  Anyone could stop at the booth, take a dollar and leave.  The rate increased to only 20% when Ariely’s group was giving away $50 bills.

After reading about Ariely’s experiment, I created a list of key takeaways startups should consider when creating there business.

Have Distrust in Mind When Creating Your Business Model

If consumers think something is too good to be true, they’ll stay away.  The vast majority didn’t walk to the booth to inquire about the offer.  They simply kept walking.  You may have a great product or service in your startup that may revolutionize your industry.  If your claims sound too good to be true, users won’t visit your site, poke around, and make sure you’re legit.  They’ll stay away.  Don’t make claims that sounds unrealistic to consumers.

Charge Because People Expect It

People expect a hidden cost if the stated price doesn’t match the services provided.  The average person expects there to be a hidden fee when receiving a t-shirt to sign up for a credit card.  The question in their mind is will the value received from the shirt outweigh the negative value from potential credit card fees.

If you are charging for your product in easy to understand terms you will not face this pricing issue.  When buying a loaf of bread, you expect to pay the cashier $2 for the bread and end the transaction.  The same model should be applied to web applications.  Take the distrust away from the consumer and don’t leave conversions to guessing games.  Your conversions will be lower if you charge, but you won’t have to guess as high about the psychological reasons for a person signing up.  They simply didn’t think your price was worth the added benefits of the product.

Developing a Level of Trust with Your Customers

Straightforward business models can  also help your company develop a level of trust with your consumers.  You don’t have a second chance to make a first impression.  If your company creates an initial impression of distrust, don’t expect you to create a trusting relationship with your customers.

The Web Has Always Seemed Sketchy

Since its beginnings, the web has been filled with hackers and scam artists.  Credit card fraud, viruses, questionable subscription payments – these are all ways that the internet has helped create a level of distrust.  The distrust on the internet is probably much greater than the distrust measured in “the real world” by Ariely’s experiment.

Ambiguity = Sketchiness.  Be Clear, Not Sketchy

Since the internet has a higher level of distrust, you should make a concerted effort to make things as clear as possible.  Ambiguous websites create an opportunity for users to create assumptions.  Don’t let users’ imaginations run wild.  State what’s obvious and make sure they know there’s nothing sketchy about your company.

Be clear.  Not sketchy.

This article was written by Bob Cavezza.  He’s currently building his next startup at EasyUnsubscriber.com.

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