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The 4 Principles Of Delusional Economics

IStock_000009238415XSmallWhen it comes to economic theories, there is plenty of fascination in the business world around how to explain what drives business and purchasing activities. Behavioural economics, the field of economics concerned with examining why people behave the way they do when it comes to their purchasing behaviour, is hot right now.  Bestselling books like Freakonomics and Predictably Irrational dig deep into the psyche of people to try and explain seemingly illogical actions.

My own upcoming book called Likeonomics, to some degree, looks at a similar theme of why we do business with people and businesses we like and what impact likeability has on building a trusted business. As part of the research for that book, I have come across a disturbing number of examples of a new type of economic philosophy which is becoming sadly common, and which cannot be explained by modern economic theory.

I have started referring to this philosophy as Delusional Economics – a new economic principle which explains the growing number of businesses who expect some type of unreasonable behaviour change or act of altruism among their consumers in order to help their business succeed.  This is not a strategy for success, even though sadly many businesses fall prey to it. Here are what I believe the four key principles of Delusional Economics are, and how you might avoid applying them to your own small business:

  1. Change a customer’s worldview. A worldview is generally how a person sees the world around them, and it is usually the toughest element of perception to change. It is why people vote the way they do, why they sometimes blindly believe something or someone, and why they approach life in the manner that they do.  To attempt to change how they see the world as part of your business strategy is usually a waste of time and effort.
  2. Getting people to pay for something that is currently free.  When a customer has become used to getting something for free, you really need to offer a compelling reason about why they should pay for something similar. Is it better, faster, more complete or more premium? Whatever the benefit, you need to make sure it is truly compelling to move people past the hurdle of being free.
  3. Basing a business model on revenue from nonexistent advertisers or customers.  More than one tech startup has been launched over the last several years with an extremely naive view of what advertisers will pay for.  They have a revenue model based on advertising, but no pipeline or ability to get those customers.  The end result is that their entire business success hinges on being able to connect with a key audience that doesn’t even really exist.
  4. Overestimating a customer’s ability to appreciate value worth paying a premium for.  A common problem with products or services targeted to the higher end of the market is that people in general are not that good at being able to detect what value is worth paying for. If I told you a bottle of wine was $100, you would assume it was great wine. If a wine bottle cost less than $5, it probably wasn’t. This is fine when it comes to wine, but in your business and industry it is probably much harder for a customer to discern the real value that they get and understand that it may be worth paying more for.
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  • http://Www.peoplepatterns.com.au Bri

    Rohit, congratulations on a great post and topic area. Judging by the retweets you have a success on your hands! I think as business people we get trapped in our own perspective and forget to step in the shoes of our customer. Kind of arrogant isn’t it? Does your research look at empathy in this regard?

    Re point 2 getting your customers to pay for something that has been free, that has been playing out in the newspaper industry. If you are interested, I wrote about the intro of pay walls from a Behavioural perspective http://bri-williams.blogspot.com/2011/11/how-to-introduce-charge-for-free.html

    Look forward to the book

  • http://www.affiliatedmarketing.com kamrul

    i find this article a great work on consumer behaviour and the approach we take for our business set ups. i am looking forward to the upcomming book of the author. i applied some of the principles in my business approach.
    http://www.affiliaedmarketing.info

  • http://www.affiliatedmarketing.com kamrul

    i find this article a great work on consumer behaviour and the approach we take for our business set ups. i am looking forward to the upcomming book of the author. i applied some of the principles in my business approach.
    http://www.affiliatedmarketing.info

  • http://www.homepagepays.me Home Page Pays

    Home Page Pays is doing that same thing. They are taking the show me the money approach with the ad dollars…the only exception is they are going to put a portion of the ad money back into the hands of the people willing to use the FREE product. They used to charge $30 for this product and starting January 31, 2012 it will be FREE for everyone. Different kind of approach.

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    It is very difficult to distinguish why people act very weird when it comes to purchasing behavior.

  • http://www.expertentrepreneurship.com sudip

    Wait for your book Likeonomics.

  • http://strategy-keys.com David

    The delusions seem practical enough. I wonder to what extend people really buy from those they like? It seems that buying is very much a WIFM decision. Your book has my really intriqued!

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    It was a great book to look when you are in a small business. I like how you list the four key principles of delusional economics and how to prevent them on your small business.