Think back to that microeconomics class you took in college, and you may remember that elusive concept: the “rational man.” According to economic theory at that time, people made purchasing and investment decisions rationally. The only problem is – they don’t.
If they did, everyone would save enough money for retirement, no one would take on more student loans than they can comfortably pay back, and there would be no state lotteries because the chances of winning are just not high enough to rationally justify the investment.
Enter Richard Thaler, this year’s Nobel Prize winner for economics, and co-author of the best-selling book Nudge: Improving Decisions about Health, Wealth, and Happiness. Thaler believes that people make decisions with consistent irrationality. People can tell you today what they are going to buy, and tomorrow they buy something different. After the fact, they can say to you in detail why they purchased something, although, in fact, they don’t know. So, if the construct of the “rational man” is wrong, how do we explain how consumers make decisions – and how do businesses take that into account in marketing, sales, and customer experience (CX)? While the application of behavioral economics to marketing is relatively new, here are three examples of how businesses might use these principles to influence buyer behavior:
- Make it easy and now. As Capterra reports: “This bit of insight is central to behavioral economics: Given the choice between doing what is easy now or what is better later, people can be counted on to choose the former, regardless of the expected outcome.” So, rather than long-term, performance-based incentives, offer people benefits they can get sooner, rather than later. How much would your loyal customers value a 5% discount off this purchase, versus a coupon for 10% off their next purchase? Capterra continues by saying, “Convincing people that they need to do something isn’t enough to get them to do it. A person can fully know a behavior is a good idea and that the cost of failing to perform that action is dear, and still not do it. The key to behavior change, whether it’s signing up for a newsletter or making a purchase, lies less in convincing and more in making it as easy as possible. If you want to influence behavior, spend less time making arguments and more time removing friction and other barriers.”
“If you want to influence behavior, spend less time making arguments and more time removing friction and other barriers.”
- Give a gift. Another – perhaps surprising – behavioral economic insight is that gifts can be more effective incentives than quid-pro-quo offers. McKinsey & Co. was working with a telecom company, trying to help them retain customers after a rate increase. First, when customers called to complain, the company offered them 100 free calls. After some time, instead of offering 100 free calls, the company simply said, “There are 100 free calls in your account – what are you going to do with them?” The possibility of losing a gift (something you already own) vs. losing the calls that you “earn” by not canceling proved to be much more effective in customer retention. The reason is that human beings are exquisitely loss averse. We simply hate to lose something we already have! By the way, this tip works very well in combination with the tip above: (again from Capterra) “Instead of offering an incentive for action, give away the incentive for inaction.”
“Instead of offering an incentive for action, give away the incentive for inaction.”
- Gamify the Drudgery. Video games have made a science of rewards and incentives. Why not apply that to other behaviors – especially those that are not appealing or fun for your customers? Adherence to medication schedules is a problem for many pharmaceutical and healthcare companies. Healthprize is a game-based app that rewards user patients for taking their medications on schedule. By playing the games – and taking medications – patients earn points. They also get points for answering surveys about their symptoms and medications. Healthprize has now partnered with Walgreens so that patients can sign up for the program through Walgreen’s website and can apply their point toward Walgreen merchandise. You can efficiently use this approach to enhance customer loyalty. Being a good customer is work, and they should be rewarded for it. Giving an immediate reward, even very small, is more effective than expecting customers to wait for a longer-term reward. (We notice that in marketing research, as well. Incenting participation with a small incentive paid immediately works much better to raise response rates than giving a chance to win a much more substantial prize sometime in the future.)
“Giving an immediate reward, even very small, is more effective than expecting customers to wait for a longer-term reward.”
So where does behavioral economics leave us regarding understanding customers? Keep in mind that people don’t behave rationally, and probably cannot tell you why they act the way they do. Marketing research techniques for understanding customers are still valid and valuable but don’t forget to include experimentation, testing, and observation of consumers. And expect the unexpected!