We deal with people, Humans
like to believe that they are rational but research shows most of the time we
are not. A field that increasingly recognized in providing insights into
understanding this is Behavioural Economics. Lot of people would have heard
about it or read about it. In this article I will share how this can be
practically used in our line of business.
Rule 1 :- Don’t
overload consumers with too much choice (Decision
Paralysis)
We generally believe that
we like choice; the more choice, the better, and we assume that our desire for
choice and our ability to manage it is unlimited. The reality is that consumers
often struggle with the number of options available to them, as illustrated by
the classic ‘jam sandwich’ study. This research involved setting up an ‘exotic
jams’ tasting booth at a high end grocery store in California. On one occasion
there were 6 jams at the tasting booth, while on another occasion 24 jams were
displayed. Consumer reaction and subsequent purchase was tracked with
compelling results; despite the initial appeal of the wider choice of 24 jams,
in this case only 3% of consumers actually purchased a jar. In contrast, of the
consumers browsing the tasting booth when only 6 jams were available, a
staggering 30% went on to purchase a jar.
Consumer product company
Proctor & Gamble has since made use of these findings, reducing the number
of versions of Head & Shoulders shampoo from 26 to 15. Sales subsequently
increased by 10%. Even Apple uses this to give minimal product range to
consumers, they have gone to the extent that the new version of the iPad is
referred to as exactly that, ‘the new iPad’, not even giving it an upgrade
number as has been common practice in the past. We all know the market cap for
Apple.
A point for customer
service, Giving multiple options (call, SMS, Whatsapp, twitter, FB, Linkedin )
is good but keep tracking that you don’t end up turning off people. In a
Cross sell campaign we tried an experiment to give only one specific task to
people to execute and got great results from the campaign.
RULE 2: Consider the
positioning of your most profitable options (Dominated
Alternatives: )
Prior to making a purchase
choice, consumers generally review the market and begin to identify their
preferences. Behavioral Economics research has shown that it is increasingly
clear that preferences are actually very malleable and influenced by all manner
of context effects. An interesting example is the effect of a decoy option on
preference for The Economist subscription renewals. Participants for this were
shown a combination of 3 options: (1) Online only for US$59 (2) Print only for
US$125 (3) Print and online for US$125.
The first group saw all 3
and unsurprisingly no body picked option 2 and 84% chose option 3. So what is
the point of option 2? Well, when it was removed for the next group the number
of people choosing option 3 dropped to 32%. Option 2 effectively acted as a
decoy making the print and online subscription seem far more attractive than
when it was absent.
This can be effectively
used in online marketing in making profitable propositions by playing around
with Riders.
Rule 3 :- Help consumers
make fast and frugal decisions
Consumers struggle to
juggle a large number of variables at a time. One study illustrated this well
by looking at the way in which magistrates (a court official in UK courts) make
decisions concerning whether to allow defendants to have bail (go free until
their next court appearance) or whether to retain them on remand (keep them in
jail until their next court appearance). Although magistrates are instructed to
make their decision based on a wide range of different variables, in the vast
majority of cases the researchers found that it was ultimately only one or two
pieces of information that influenced the decision (in this case the advice of
the prosecution). This ‘fast and frugal’ means of decision making is a useful,
adaptive skill we adopt in an attempt to simplify the otherwise complex myriad
of everyday decisions we may have to make.
This is highly effective
for the branding and product team, The proposition should be not more than 3
and should be strong enough to drive the point.
Rule 4 :- Encourage
consumers to take ownership of your services
Once consumers make a
purchase and own an item they revalue it, resulting in a reluctance to give it
up or exchange it for any other item. People are disproportionately affected by
loss compared to what they might gain. This partial ownership changes our
perception, so instead of gaining a product at the point of purchase we are
effectively losing one, making it hard for us to give up what we just had. A
great example of this is online retailer Amazon’s free trial of its express
delivery service Amazon Prime. Their limited trial makes customers focus on
what they will lose if they cancel their subscription. A food for thought
for the renewal team to work upon communication.
Studies have shown there
to be a difference between what consumers have actually experienced and what
they remember experiencing. This is a subtle but critically important
distinction that has significant implications for the way in which brands
manage customer experiences. The clear lesson here is to create positive peaks
and positive endings. The former could be a surprise free gift. Meanwhile, a
positive ending might be extending a subscription for a short while. Many
companies aim to deliver on these. A good example is food-delivery company Abel
and Cole which regularly puts tasty surprises in its vegetable boxes. We
suspect that the often low value items, such as an avocado, have a
disproportionately high impact on consumers and are, therefore, a great means
of driving customer loyalty.
Based on the same concept,
small and tangible offering were given on a regular basis to customers
which has helped in changing the perception of customers and make them open for
cross sell and retention. Customer service team should focus on creating such
positive peaks for customers.
The bottom line is
insurance companies have to start thinking in the new way and align their
processes with the way customers are behaving. As peter drucker says
“Doing the right thing is more important than doing the
thing right”
