What Does Psychology Tell us About the Explosion of NFTs?
By Matthew Hellon, Senior Research Executive, Northstar Research
Views expressed are the author’s own.
Marketing Frontiers is a series from Stagwell exploring the methods, mediums, and messes modern marketers will grapple with over the next decade as they chart transformation in the discipline. In February, Stagwell is exploring the rise of NFTs.
NFT craze is a strong case study in three behavioral psychology concepts: Scarcity, Social Proof, and Signaling.
Marketers who leverage these concepts to drive NFT adoption are poised for growth.
Marketing is all about creating value above and beyond a product or services’ inherent value. How can I charge more for my bottle of water that’s basically the same as the one right next to it?
NFTs are perfect for studying marketing. Most NFTs have no inherent physical value. Most do not ‘do’ anything in the physical world (though some do have a physical component such as restaurant reservations or social clubs). Most can be copied with a simple screenshot or screen record. Their value is predicated on someone else wanting the same NFT.
So how do you get someone to buy something with no inherent physical value? Marketing and psychology.
This article is going to cover some of the psychological principles behind the current explosion of NFTs and the lessons they provide for marketers.
Scarcity is one of the most well-known economic and psychological principles. As supply decreases, demand increases. Humans tend to want resources that are difficult to obtain or are in short supply.
NFTs are an interesting case of scarcity because almost all NFT scarcity is artificial. Some of the best-selling NFTs are programmatically created (such as Bored Ape Yacht Club). They’re made using a computer program that varies several factors (facial expression, facial features, clothes etc.) to create different characters. It would be simple to create more characters or more copies of the same characters. They are not constrained by raw materials, production costs or distribution.
However, NFT producers limit their supply. In fact, their limited nature and sense of exclusivity is partly what makes them appealing despite it being entirely manufactured. NFTs have seemingly been able to avoid criticism for artificially constricting supply. This has often not been the case for brands selling physical products. Some speculated whether Nintendo’s supply problems during the launch of the Wii in 2006 were really production issues or a strategic play to drive up sales. High end fashion brands are often criticised for burning their unsold clothes to control their prevalence. Despite this, some brands, such as Supreme, have thrived by limiting stock and driving up demand.
The current culture around NFTs seems to allow brands to artificially constrain supply without much public backlash. However, this could quickly change, especially if consumers realize they’re bidding on something where supply is being artificially constricted.
As the world becomes even more digital, NFTs could become the ultimate signalling, luxury good. What’s better than a luxurious coat? A luxurious line of code.
More fuel to the NFT fire is social proof. Humans are social creatures. We’re heavily influenced by the behaviour of others, especially role models. NFT sellers have done a good job of breaking into celebrity culture. The list of celebrities owning NFTs is extensive (Eminem, Jimmy Fallon, Steph Curry etc.). This adds to their legitimacy (and drives up prices should they ever wish to sell their NFTs). YouTuber and boxer Logan Paul and businessman Gary Vee (9.7m and 22.1 mil Instagram followers respectively) have been extremely vocal about their NFT collections.
Those looking up to these celebrities are more likely to follow their lead and purchase NFTs for themselves. Abercrombie and Fitch used a similar strategy. They marketed to younger people. This in turn led to older people buying their products to stay ‘trendy’. NFTs that manage to get a celebrity sale will also get sales from other people looking to ride the hype train.
Linked to social proof is signaling. We like to display our status. It helps us to judge ourselves and our in-group vs others. What better way to show that you’re an affluent, tech savvy, early adopter than to buy a digital image or video with no inherent value?
Many people buy NFTs and then share them on social media to show off their purchase, proof of the power of signaling. Signaling is the primary motivation behind many luxury goods. Further, many social acts such as voting and switching to electric vehicles are being encouraged through signaling such as ‘I voted’ stickers and green number plates respectively. As the world becomes even more digital, NFTs could become the ultimate signaling, luxury good. What’s better than a luxurious coat? A luxurious line of code.
Ultimately, people buy NFTs because they’re scarce, new, celebrities & business leaders are buying them, and they say something about the owner. Or, like cryptocurrencies, they’re bought simply to be sold later for a profit.
The future of NFTs is hard to predict. The housing market bubble leading up to 2008 popped partly because people realized the underlying value of the asset was far lower than was being portrayed. If everyone keeps believing in the value of NFTs, they will continue to prosper. However, even if the NFT bubble bursts, it’s been a quintessential lesson in how value can be created where there is none, with scarcity, social proof and signaling.
Matthew Hellon is a Senior Research Executive at Northstar Research Partners, a full-service global insights agency in the Stagwell network. Hellon was named Young Researcher of the Year in 2021 by the Market Research Society for his contributions at the intersection of marketing and behavioral science. Connect with Matthew on LinkedIn.
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