Behavioural economics posits that all human behaviour, including in business, is shaped by irrational and unconscious influences, such as bias, social pressure and cognitive inertia. The notion of psychology as a driver of economic action is not new: As an academic discipline behavioural economics dates back to the 1970s, and the foundational principle back at least to Adam Smith’s The Theory of Moral Sentiments (1759). Behavioural economics has, however, only in recent years found widespread currency within the business world, spurred by a plethora of bestsellers, including Thinking Fast and Slow (2011) by Daniel Kahneman and Predictably Irrational (2oo8) by Dan Ariely.
Increased interest from the business community is due to the insights gleaned from the discipline, which have been used to successfully “nudge” customer behaviour in a variety of sectors, such as wealth management, insurance, customer products and retail. Specifically, behavioural economics has been used by product managers to guide consumers toward certain product choices (i.e., “choice design”), by marketers to develop brochures and Web sites that more persuasively communicate marketing messages and by service managers to design better support experiences.
The field can provide hundreds of potential “triggers” to augment behaviour, depending on the business objective, situation and context. Psychologists Robert Cialdini, Noah Goldstein and Steve Martin identify 50 different possible applications in The Small Big: Small Changes That Spark Big Influence (2014). Three among the list include:
- Leverage social proof: People will make the same decisions as a group with which they identify. Nudge people to adopt a new behavior by showing them a training video featuring their peers doing the same thing.
- Invoke first names: Get and keep people’s attention by frequently using their first name. A sales representative’s repeated use of a prospect’s name will cue their attention through the clutter of other sensory inputs and focus attention on the key message.
- The power of loss avoidance: Individuals strongly prefer avoiding losses to acquiring gains. Marketing studies have shown that consumers would rather avoid a $5 surcharge then get a $5 discount even though the net effect is the same.
Case study: behavioural economics in action
Communications Case Study
A technology company was struggling with customer support issues, resulting in unsustainable levels of customer churn, high support costs and wasteful discounting. We were tasked with identifying the root cause of the problem and recommending fixes.
We reviewed the support scripts and escalation processes and listened to call records. Using the lens of behavioural economics to look for unconscious biases, explicit and implicit incentives and insidious social pressures, we discovered both that the existing scripts were ineffective and that the prescribed escalation process was not being followed by most service reps.
While management believed more resources and training were the answer, we convinced them to first experiment with a pilot program that featured rewritten scripts and process redesign. These changes included a variety of nudges to trigger the desired service experience, including:
- Establishing a rapport from the get-go: People are more easily persuaded by those that they like and have some connection with.
- Starting with the bad news but ending on a high note: Getting bad news out of the way shows empathy, acknowledges responsibility and allows for a good finish.
- Following the script: Because a good process is only effective if it is consistently applied, we recommended having service reps formally and publically commit to following the revised protocol.
By implementing insights gleaned from behavioural economics, customer satisfaction scores increased, service escalations fell and cross-selling rates improved.
Behavioural economics for your business
As mentioned earlier, how you should apply behavioural economics insights to your business depends on your circumstances and your goals. However, here are five general tips to guide your strategy:
1. Understand the business context: What business problem are you trying to solve?
2. Audit key customer decision points:Look for hidden bias, social and incentive pressures and opportunities to catalyze desired actions.
3. Prioritize your opportunities: The economic, operational and brand impact of each decision should be considered.
4. Identify suitable nudges:This should involve an optimized choice design that guides actions and decisions toward your desired result.
5. Experiment, measure and scale: Only then will you discover the optimal strategy for your business.
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