How Walmart uses psychology to become the world’s largest retailer

Tram Ho

Founded by Sam Walton in 1962, Walmart is a retail company. They are the world’s largest company by revenue, with $ 514,405 billion on Fortune’s 500 Global 500 list. The company employs 2.2 million people – more than the population of New Mexico (and 15 other US states).

Walmart’s reason for existence is value. The whole brand revolves around “Low Prices Everyday” and everything they do has to deliver value to the customer. That’s the promise Walmart makes, with shoppers saving about 15% on a typical grocery cart.

Because of its low price, Walmart’s experience must drive a lot of sales

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Walmart may have bottomed prices, but to make those prices profitable for the business, they have to engage customers and convert as efficiently as possible.

As Sam Walton writes in his autobiography Made in America:

“Let’s say I bought an item for 80 cents. I find that by pricing it at $ 1, I can sell three more ties than it costs $ 1.20.

I could only make half the profit per item, but since I sold three times as much quantity, the overall profit was much larger. “

So how does Walmart provide that sales volume? One way is to apply behavioral science and psychology – consciously or not – to design, frame, and deliver your retail experience.

How Walmart applies psychology and behavioral science to its experiences

There are countless ways Walmart uses psychology and behavioral science for their experiences – some on purpose and some by chance.

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Walmart Goal: Disrupt shopper behavioral scenarios

If we have to think deeply about every moment of the day, we quickly burn out. In order to avoid being flooded with constant information, our brains develop shortcuts.

Shortcuts that help us navigate everyday situations, like shopping in a store, are known as behavioral scripts. These scripts describe the sequence of events that we expect will happen in any given situation.

A behavioral scenario is a series of things we expect to happen in any given situation, based on our processes and habits.

We develop these scripts through repetition. For example, when you eat at a restaurant, you sit down to order food, eat your portion, order dessert, then pay and leave. That is the behavioral scenario of most people when they go out to eat.

But if you walk into a restaurant that asks you to sit down, pay, eat dessert and order an appetizer, you won’t be sure what to do or what to expect next.

Behavior scenarios for shopping include walking down large, empty aisles and picking products from the shelves.

But Walmart is a master at breaking shopper habits.

They created an area in their store called Action Alley. It is a series of pallets (wooden shelves) with products in the aisle.

1. Object bias in “Action Alley”

 

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Action Alley is home to the best bargains in Walmart. By placing them in the center of the aisle, even if this interrupts customers, Walmart wants to make sure people see and buy them.

Walmart is not blind to the disruption Action Alley caused. In fact, they discontinued this activity in 2009 to free up more aisle space for customers. But the sales impact of Action Alley’s removal was so significant that it was brought back just a year later.

The psychology and behavioral science behind Action Alley

Why is Action Alley so effective? This is because of a behavioral science principle called “Prejudice prejudice”.

What is dominant prejudice?

Dominance describes how striking or emotional something is. The dominant stereotype says that the brain likes to pay attention to the striking elements of the experience.

Visual accessibility is relatively easy to measure. Like the example below, a heat map can help us see where a customer is looking and what information they are paying attention to or missing.

When designing a retail experience, whether online or offline, there is a lot of truth to the saying: “If they see it, we will sell it.”

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Another example of hospitality in action is Walmart’s Welcome Tower, located in the front area of ​​the stores. These towers make the online pickup area so prominent it is almost impossible to miss.

It’s a great solution to a common problem of customers not knowing where and how to pick up their items.

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2. Anchor effect in discount offer

Because Walmart relies on “Daily Low Prices” to attract customers, it offers discounts – either permanently or temporarily in the retail price of an item.

As you can see from the sign below, the base price is always displayed in the upper right corner. In this case, these cans were 64 cents and are now backed up to 50 cents a can.

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Why does Walmart always keep the previous price close to the discount? It depends on a behavioral science principle called Neo.

What is an anchor effect?

The anchor effect says that our decisions are influenced by the first information we see. We anchored this information without being aware of its effects.

In 2006, researcher Dan Ariely led an experiment at MIT. First, he shows students random objects in his class, like a bottle of wine or a textbook.

Ariely then asked students to write down the fake price for the item using the last two digits of their Social Security number. For example, if my Social Security number is 123–45–6789, the price for a bottle of wine will be 89 USD. After students write down the fake price of each item, they bid it in an auction.

Result? Students with a high Social Security number pay up to 346% more than students with a low number for the same item.

Why? Because the first number students see – even though it is completely irrelevant – affects how much they decide to bid. The higher your Social Security number, the higher your bid.

How Walmart applies the anchor effect

By displaying the old price for each product on the billboard, Walmart is drawing customers to a higher number. The discounted price then looks like an even better deal than this higher price.

The use of anchors in pricing speaks to a fundamental principle: the customer doesn’t know how much an item should cost.

When retailers add context as an anchor, they make the new price seem a bargain. Not in comparison to every other can of green beans in America, but in contrast to the prices in front of the customer and therefore what they would consider.

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3. Power Principle of how Walmart puts goods on the shelves

Remember that Walmart’s mission is to provide value, not just low price. Each year, their suppliers have to offer lower prices of the same quality items or keep the same price and increase the quality of the item.

Why? Research has found that customers see value as price plus quality. If the price is low but the quality is too low, the customer thinks your product is of low value. But if the price is low and the quality is high then your product is of high value.

One way customers perceive quality is by relying on the reputation of a well-known brand. As Stephen Quinn, former Chief Marketing Officer at Walmart told the New York Times,

“Customers really need brand assurance … We used to focus on low prices.”

How Walmart applies the Principles of Authority

The electronics division at Walmart is a prime example of the strategic use of brand names. The company found that it could improve sales, not just by offering the lowest prices, but by matching those prices with a well-known national brand like Sony, Samsung and Magnavox.

As we have established, value is a combination of price and quality. Low prices are obvious, but Walmart also needs to bring a sense of quality to customers. Low prices combined with no-name brands lead to a perception of low quality because the brand serves as a spiritual shortcut to product features like quality.

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Why is brand name so powerful in creating perception of value? It’s a psychological concept known as the Principle of Powers.

The Powers Principle says that people are easily persuaded by authority figures. That could include police, government leaders, professors and experts. Or, in this case, a well-known brand.

For example, when a customer watches a Samsung TV, they assume the quality is to a degree. Low price combined with brand name applying the Principle of Authority. This combination creates a sense of value, rather than just the low price.

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Source : Genk