How Klarna uses present bias and temporal reframing to make shopping feel irresistible

Welcome back to Behavioral Science for Brands, a podcast where we bridge the gap between academics and practical marketing. Every week Richard and I sit down and go deep behind the science of some of America's most successful brands, I'm Michael Aaron Flicker, and I'm Richard Schulton. And today we're talking about the science of shopping. We're talking the psychology of instant gratification and the business that changed the landscape of D to C e commerce, Klorna. Let's get into it. But before we get into today's episode, Richard and I wanted to share something very exciting that we've been working on for over two years. On September 30th this year, our biggest collaboration yet is coming out and it's called Hacking the Human Monitor. It's a full book that dives into 17 different brands and the behavioral science principles that power it. It's like we do here on the podcast, we go deep into the brand and we unpack over 30 different behavioral science principles. Really practical book, very simple to read, lots of great examples. And the early reviews have been very good, Robert Childi, he said he couldn't put it down. Roy Sutherland said it was a book for the ages. You can pre-order it now on Amazon, just search the title, Hacking the Human Mind, or find it wherever books are sold after September 30th. Thanks for your support. So Richard, today we're talking about a brand that really created a whole new industry in online shopping. That brand is Clarna. And we love this example so much. We actually dedicated a chapter in our new book Hacking the Human Mind to this. You might have heard a little commercial break that Richard and I put in the beginning in this podcast. But Hacking the Human Mind is coming out September 30th. Please don't miss your chance to get a copy. But today for Clarna, we really ask ourselves, why do people love the feeling of getting something for nothing? And that's literally what Clarna has banked their business on. Started in 2005 by a young Sebastian Sematowski. He worked part-time at Burger King while studying at Stockholm School of Economics. And he came up with this idea that he pitched to his classmates. What if we let customers buy online today, but pay later? And that idea, which they loved so much, didn't strike everyone as genius at first. In fact, they came in last in their school's entrepreneurship competition, judged not just by major Swedish bankers, but by the king of Sweden himself. And they're reasoning for why it was such a bad idea. If this concept was viable, the banks would already be doing it. But that was precisely the point that Sematowski and his colleagues were making. The banks weren't doing it. And so they launched the brand originally called Credit Tour, now Clarna. And today, Clarna serves over 150 million users across 45 countries. They partner with 500,000 retailers, and they do 2 million transactions a day. So there's interesting tech and business behind this. But what we want to focus on is the way they brilliantly take advantage of some well-known behavioral science biases. So let's start today with their flagship product, they call it buy now pay later. So to simply put, if you are at an e-commerce store that has partnered with Clarna, when you get to pay, you have the option to pay on a credit card now, or you could choose to pay with Clarna. And that allows you to choose a few different payment options. You can choose an option like pay in four, which is four inches free installments, usually over six weeks, or pay in 30 days where you pay nothing and at the end of the 30 days, you pay the full amount without incurring interest or fees as long as you pay on time. So you get the product now and you pay later, there's some behavioral science happening here. Definitely. So the key bias is this idea that sometimes known as present bias, sometimes present preference bias, sometimes temporal discounting, and it's the idea that pleasure or pain that is going to happen to us now or imminently affects us deeply. That same level of pleasure or pain, if it's in the future, the median future, the distant future, it affects us much less. So it's almost as if we think of our future self as being very different from our current selves. As in many cases, the Simpsons have kind of covered this this bias, there's a famous episode where I think Marge catches Homer mixing vulgar in with the mayonnaise and just drinking it straight. And she suggests this is a very good idea, and Homer favours his sense, well, that's a problem for future me, boy, I don't envy future me, that's an extreme version of present preference bias. And it's so interesting because you have this emotion all the time. You're at a wedding and you chose the healthy option and you're looking at everybody else getting the stink of potatoes and you're a little disappointed with the fish that you got. But this idea that you can put off in the future rather than deal with it in the present moment, it comes from something much more evolutionary, right? I mean, we've talked to other guests in the past about hunter gather societies and humans that lived in high degrees of uncertainty about where their next meal is coming. So right now, whatever the food I could get right now was prioritized over the future food that I might get later. Yeah, absolutely. I think so many of the very powerful biases, you can see this obvious evolution in root. And if the most of our revolutionary history, the biggest problems were immediate ones. Well, you would evolve to deal with those. The biggest problems were starving or being by a light end. You're very much focused on the now. Obviously, though, society has changed radically, the economy has changed, culture changed, and we have all sorts of long-term problems now as a species to deal with, you know, diabetes or not saving enough for our pension. Those are massive problems, but we have evolved to be influenced by what is happening to us in the here and now. So often these biases explain why we have got these rules of thumb that guide us that were so suitable hundreds of thousands of years ago, but often lead to irrational, supposedly behavior in this current environment. Yeah, it's a point that our brains develop and adapt more slowly than our conditions around us, let's say, right? The conditions change much faster. So there's lots of books written about this topic. We've covered this in previous podcasts, but we have some experimental evidence, some recent experimental evidence that really demonstrates this quite nicely. That's the great thing about behavioral science that it isn't enough to make an argument from logic alone, instead you've got to prove these insights and ideas work in peer-reviewed controlled experiments. So one such study comes from 2015, Liam Delaney at the University of Sterling, recruits group people, 144 people, and it gives them a whole series of offers, you know, you can either pay me some money now or pay me a different amount in a month's time. And one of those examples is he says to people, do you want to pay me £13 now or £16 in a month's time? Now the logical thing to do is pay the smaller amount now. An extra £3 over a month equates to a 23% monthly interest rate that is £1,09% annual interest rate. It's an astronomical increase in costs, but just as present preference by suggests, the majority of people, about 60% of people would rather pay the largest sum in a month's time than the smaller sum now. Again and again we see in these studies that we are putting great away on what's going to happen to us now and we put too strong a discount on what's going to happen to us in the future. Yeah. And as we even go through that study, you can feel the human emotion. Starting with £13 now or parting with a little bit more, a few bucks more 16 later, we're not human calculators. You don't calculate the monthly interest rate or the annual percentage rate. You just say, well, 13 hours, 16 later and you almost make this irrational or this irrational decision that's more emotion based than the math based, but this is a thought experiment. This is a question that Delaney and Lades asks, what about a real world study that may give us more insight? You're absolutely right. I think the strength of this Laney study is a very clear demonstration, but he is asking people what they would do and there's always a bit of a gap between what people say they do and what they actually end up doing. But there's another story. a bit more of a complicated one, but suitably enough for Clana comes from Sweden, which demonstrates this principle in the real world. So, it's a 2006 study. It's run by Anna Bremen, who at the time was an academic at the Stockholm School of Economics. She's now the deputy governor of the Bank of Sweden. She worked with a big charity in Sweden called Dioconia. So Dioconia have a process in place where they are ringing out existing donors, and they ask those donors to give more money. What Bremen does is for 1134 donors. Half of them are told about why Dioconia is so brilliant, and then they're asked to donate more than in there. And on average, they increase their donation amount by 19 Swedish Kroner. The other half of the participants, they are run up, they're given the same spiel, the same story about Dioconia white and amazing charity, but they are asked to give more money, but in two months time. So, they will make an agreement today, and then the money is automatically come out in two months time. And that group, they donate 25 Swedish Kroner on average, an increase of 25 Swedish Kroner. So, in the original standard setting, 25 in the setting that pushes the cost into the future. So, there is a 32% increase in donation levels. Now, that is a very real world study that shows this principle affects actual commercial behaviour when it's dealing with real money. And you can see the transition from a thought experiment to a real life, a real life world study, and I think what really sticks with me about this is you can imagine how that deferral of the payment is so much more appealing to people. You can feel the emotional tug of that. And it's interesting that Kroner was started Sweden because a number of Scandinavian countries, and there may be other places in the world, have taken to Kroner and similar services like AfterPlay over using a credit card, which essentially has the same offer. If you swipe a credit card, you do not pay for it now. But at the end of your billing cycle, you have to pay or get charged interest. But there's something different about the Kroner offer. It's something that feels more unique, which is really interesting here. Anything coming up for you before we go on to the Kroner's second feature? So the only thing I would say is that when people are thinking about present bias, one of the, if you run an e-commerce site, I think there's a very strong hope to put Kroner in, because people will treat a hundred pound jumper very differently if they have to pay them there, or if you've introduced Kroner and they have to pay for it in a month of time, that people will become less price sensitive. So there's a real simple application of what we've been talking about, which is introduced these types of programs. But you can apply all these principles in lots of different ways. If you are ever in a situation where you need to increase your bill to your customer, you could apply this principle. Let's say you send out letters four weeks prior to the increase. What this set of experiments would suggest is test increasing the amount of warning you, people. Give them six months, six weeks notice or eight weeks notice. The argument here is that same increase costs will affect people less, the more, more notes they're given. So it's a very practical study that lots of people can apply absolutely. Yeah, I love that idea. So we have a second feature of Kroner, which maybe in Europe is paying three in the US is paying four, but it's equal installments, let's say four equal installments over six weeks. There's a little bit of a different bias that we're taking advantage of here. There's definitely a linkage, but I think this is a clear demonstration of what's known as the pennies a day effect or temporary framing. And it's the argument, if you ever have a cost, you want to be breaking it down to the smallest possible units. So the original study was done by Goreville at Harvard, but it was a thought experiment. It was in the world of charities. So I reran his study, probably about 10 years ago now, created 500 people, randomised them into four groups, and they all saw details of a car financing offer. And sometimes people saw the price as a daily amount. So I think it was four pound, 57 a day. Other people got the same information, but a monthly cost. And then finally, some people got an annual cost. Now all these costs, if you converted into an annual amount, they would come to the same amount. So some people saw four, 57 a day, some saw 1668 pounds per year. In effect, it's exactly the same number. So yes, if people behaved like computers, and they were logical, rational, calculated machines, every different group should have thought the offer was equally good value. But that is not what happened. The people who saw the annual amount thought it was a pretty terrible deal. Only 11% of them thought it was good value. That number jumped to 40% for the monthly group, 43 for the weekly group, and it peaked at 51% of people think the deal was good value for those who saw it displayed as a daily amount. So you've got this fascinating situation in which everyone sees, in essence, the same absolute cost, but because it's displayed in a slightly different way and because it's broken down into smaller time units, the people that see that daily equivalent price, they think the cost is far more acceptable. So you have this strange situation in which people seem to be behaving as if nine times three doesn't equal three times nine. They are giving really big weight to the headline number you mentioned. They are giving too little weight to the unit of time that's being discussed. And you see this all over business. When you go to buy, you use the example in car buying, and certainly when you see all car advertising in the US, they're showing you the price per month, not the least price for the buy price per month, not the total cost of the $50,000 car. For sure, you see that happening. What I think happens in white so powerful is if you say this Mercedes going to cost $50,000, suddenly people are thinking, well, gosh, that means it's going to struggle send the kids to university or I can't go away for two or three holidays a year. If you say it's $400 a month, suddenly it's like, oh well, that's a weekend away. It's almost if people see the headline amount, they convert it into a concrete thing that they can buy for that amount of money, and then they don't do the job of multiplying that item 12 times, it's a month of the cost 365 times, if it's a daily cost. So I think that's what might be happening. I think that's very insightful. I also wonder if you imply the value based on the division of the unit that you're comparing it to. So if I show a price per day, then I think, well, is that mean one less coffee, one less drink at the bar? If I show a price per week, do I think, well, I have to, I can spend a little less on my grocery rent. If I do one per month, I'm thinking, well, maybe I need to reduce a monthly subscription or I need to do one less weekend away. So it's not only the price they compare, but I think they're thinking about the denomination of time, gives them an anchor to think about what to compare to. Yeah, I guess almost by definition, the absolute cash amount shrinks as you break it down into these tiny units. Of course. By hypothesis, and this is a thing, it's only over hypothesis. What we see very clearly is communicating a daily price beats communicating a weekly price, which beats a monthly, which beats a yearly, which would beat the total price. So we've got this very clear finding. Then what explains it is slightly speculative. And I've always gone back to some of these other studies around concreteness. We know from what by ear and beg that people are very good at remembering, concrete, visualizable things, they're very bad at remembering or dealing with abstract ideas. And a set amount of money and is an abstract idea, like $10 or $100 is an abstract idea. But what you can do is quickly convert that into a concrete thing. So $10 might be a pizza. Now, the point here is that if it's a pizza a day as a cost, we fix it on the pizza. We are very bad at times in that by 365. $10 a year is $3,650. Now suddenly you're in the realm of, you know, holidays or second-hand cars. And I think it's that ease of creating the mental picture that explains this. But I mean, really it's speculation. Yes, speculation. And I think the speculation is helpful because it stretches our mind to ask like, well, what could be the explanation for this? The only other thing that comes to mind for me is we spend time in a previous episode talking about Nespresso. And how much effort they spent saying, don't compare a pot of Nespresso to drip coffee that Nespresso pot is, let's say, 50 cents. Don't compare it to a nine cents the cost of your drip coffee for a cup. Rather compare your 50 cents Nespresso to a four dollar Starbucks and look how much of a value it is. And so in that way, by using a smaller denomination of time, and therefore, as you say, by definition, a smaller denomination of money, do we give them a chance to reframe what they're comparing it to? I think that's just an interesting speculation, but I think that could be what's happening. What's interesting there is we have been talking up to now about breaking costs down by time units. And that is super useful to hundreds of brands. But lots of brands don't sell services over time. They sell physical items. But you can absolutely apply this principle to physical items. So if you're ever selling multi packs like a case of beer, if you're selling 24 beers, you can apply this principle. So this is a study you and I did back in 2022. We looked at 282 people and we split the two groups and half were told about a 12 pack of beer selling for 1899. And that people were asked whether it was good or bad value. And 14% of people thought that product was good value. We then get another group of people. We showed them exactly the same brand, exactly the same number of bottles, the same price 1899. But we added a few extra words on. We said that's the same price as $1.58 a bottle. And by drawing attention to the bottle cost, suddenly we're seeing a jump more than doubling in value perceptions. Now 29% of people think that product is good or great value. So yes, you can apply this when you are selling time-based products. But you can also apply it when you are selling physical items. If you have a bag of what we call them crisps, you know, multi-pack of crisps, there are six individual bags in there. Don't tell people the total price is $6. So that's $1 a bag. You know, break those prices down. And again, you see the same approach as the pennies a day effect. And like so much of the studies we talk about, so often the challenges, can I think about my business challenge? I think I match a behavioral science principle that's going to help. And so this idea of temporal reframing pennies a day effect can really help you think about different ways to apply it, whether it's time-based or it's per unit. Yeah, yeah. And it's such an interesting topic to get stuck into because virtually every brand in the world wants to increase their customers' willingness to pay. Present bias, temporal reframing, they give you very, very simple tactics that are completely costless to apply, that you can increase that willingness to pay. So whichever brand you're interested in trying to sell more of or trying to increase willingness to pay, you can apply these principles. It doesn't cost you anything. Now, there aren't many situations in life where you can say that. You know what strikes me as we're talking about this is and of course it needs to make practical sense to the buyer. I was just thinking about walking down the grocery store. I don't know if they have this in the UK, but in the US, there's always two numbers under a product. There's the cost, the dollar amount, and right next to it, it's the per unit cost. But so often you'll see the per unit cost or there is an unusual number that doesn't add any value. So it's not good enough to just break something down. It's got to be number of bottles in the case. It's got to be number of days in the week that you're going to pay for something. It has to make sense. That's why corner does four payments over six weeks. It's not only easy to understand, it makes sense to break things down that way. In Britain, if you go to a really big supermarket, there will be a total price and then they're lofting further into a per hundred milliliters. So there's two problems there, which is one, it's often a very, very small little sign, so most people don't notice it. And secondly, they're lofting talk about a unit that doesn't really make sense. I'm not really sure how much under binalities are. It's all a bit confusing. So I think you're right. Even if the supermarket is doing this to a very small degree, you as a brand can still apply this principle to much bigger effect. So there's still, I think, cash being left on the table around this price. The other thing that occurs to me is we caution marketers time and time again from using discounting to lower the perception of the brand. And this is a way to talk about value without actually changing the sale price. It's a way to talk about the deal that someone's getting without actually discounting the product. So you're showing a smaller number, you're showing the value, but you're not actually changing the sale price, which doesn't erode the overall perception of the brand. Yes, you've got, if you actually reduce your price, you've got two problems. Firstly, you're eating to your margins very significantly. So you're reducing profitability. So the argument from behavioral science perspective would be before you reduce prices, why don't you make the psychological impact of those prices less by using things like temporary framing or present bias? So this is a marginal protection argument. And then the second problem is there is a strong association between the price they pay and the quality of the product. And that's the argument that we essentially assume high price items are high quality. And that assumption is so powerful, it changes the actual experience of the product. There's some lovely Babbership studies that show people drinking a wine they think costs $45 will rate it 70% better than people drinking exactly the same wine that think it's from a $5 bottle. So price sets our expectation of products and then that expectation affects our actual experience. So this argument to me is be careful about excessive focus on cheekness. Of course, there will be occasions where you need to push their extra sales. But if you're doing it very regularly, you're running very steep discounts, the danger is that you train your buyer to think your product isn't very high quality and that will become a self-fulfilling prophecy. So I think that's one of scale. Or at least not worth the value. At least not worth the value that you're charging for it if you're able to discount all the time. Yeah, I guess it's if you discount and you do that all the time, exactly the same product will be thought to offer less quality. Now, that means that trying to claw back the price later date, that's going to be quite tough. Well, sir. Well, very interesting topics today. Richard, would you do the job of summarising what we've talked about? So we've talked about three broad areas. Firstly, we start with present bias. This is the idea that we are deeply influenced by things that are going to affect us in the current moment or in the near future. Those same effects, if they are pushed into the medium or distant future, they influence us far less. So the argument here is, if you ever are trying to sell an item, try and let people have a low price to begin with and push the higher price to offer into the future. If you're ever going to increase your prices, give people lots of notice. Now, you can play with time to increase your sales. The second thing that we then talked about was this idea of the pen is a day effect or temporary framing, which is the argument that the more you communicate your price in smaller units, the more willing people will be to pay. So a pound a day or a dollar a day feels cheap, 365 dollars a year feels expensive. And we had a debate about why that might happen. But the underlying finding is repeatable and consistent and replicable. And then we talked about how that idea of the pen is a day effect can be applied on physical items. We called it unit reframing. If you are selling multiple items in one go, don't just talk about the total price break it down to the per unit price. So a 24 pack of beer that is $18.99, it's okay value. If it's $18.99, that's the same as $1.58 a bottle. That's great value. So three costless approaches you can use in your pricing to boost willingness to pay into boost sales. And like we always say, these ideas can be used by people. big nationwide international brands and they absolutely can be used by small business owners, anybody who is interacting with consumers and helping them decide if it's a good value to buy or not. So lots of applicability of these three topics to a wide range of people. And there you have it, everybody. If you liked today's episode, it sparked a new idea for you. Do us a favor, hit the follow button, leave a review and please share this with someone who loves marketing as much as we all do. And if you have a favorite behavioral science principle or an example of something in the world that you think is working, let us know and we might feature it in an upcoming podcast. Until next time, I'm Michael Ironflicker. I'm Richard Shulton. Happy listening. Behavioral Science for Brands is brought to you by Method 1. Recognize as one of the fastest growing companies in America for the third year in a row, featured on Inc's 5,000 list. Method 1 is a proudly independent creative and media agency grounded in behavioral science. They exist to make brands irresistible, helping people discover products, services, and experiences that bring moments of joy to their lives. As behavior change experts, Method 1 creates emotional connections that drive true brand value for their clients, focusing primarily with indulgence brands in the CPG space.