Economics is a hidden piece of advertising and marketing. It can explain the many reasons why people make certain choices and take specific actions. Freakonomics by Steven D. Levitt and Stephen J. Dubner looks at “the hidden side of everything.” Their perspective is important to marketers because the authors explain the incentives behind everyday consumer choices, as well as how to best reach consumers.

According to the authors, incentives have three main components: economic, social, and moral. A single incentive may be based on one component, two components, or all three.

  • The Economic Component

    The economic component of an incentive is a basic cost-benefit analysis, as the consumer considers if the benefits of a choice outweigh the potential costs. An individual’s risk aversion or tolerance comes into play. The higher an individual’s risk tolerance, the higher cost they are willing to take on for the same benefit.

  • The Social Component

    The social component of an incentive is based upon the consumer’s belief of how others will view them after they make a certain choice. If a choice will reflect poorly upon them, the individual may be less likely to make that choice. If it will reflect positively on them, the individual may be more likely to make that choice.

  • The Moral Component

    The moral component of an incentive is based upon how a consumer’s choices affect those around them. Most consumers want the best for themselves and others. If an individual’s choice will negatively affect themselves or others, the individual may be less likely to make that choice and instead choose a less hurtful option.

When introducing these three components, Levitt and Dubner use the example of an anti-smoking campaign. In this case, the economic incentive is a “sin tax” for each pack of cigarettes. Consumers must decide if the extra $3 is too high of a cost when weighed against the benefit of receiving a new pack of cigarettes. The social incentive is that cigarettes are banned in restaurants and bars. Consumers will not want to smoke in restaurants and bars because their peers may frown upon this choice. The moral incentive is that smoking has negative effects on the health of non-smokers and it can raise healthcare costs for everyone. Consumers do not want to negatively impact the health of those around them or increase healthcare costs for everyone, so this realization is a moral incentive to stop smoking.

Understanding these three components of an incentive can help you be more strategic and generate better results.

Economic incentives in marketing can lead to the creation of a customer loyalty program. As customers continue to buy a product or use a service, they could earn a future discount or “freebie”. A social incentive with applications in marketing is adding a “friends” component to a product or service. Consumers will be incentivized to perform better if their friends can see their progress. Finally, a moral incentive with marketing applications could involve your company donating a specific percentage of profits to a charity or a specific cause.

When faced with a marketing challenge, understanding incentives will enable you to more efficiently target and motivate your audience. Your campaigns, messaging, and call-to-action can work together to present an incentive and achieve the results you seek.