Are your prospects buying irrationally?

How your business could harness the power of behavioural economics

Overview

Talk to any dedicated technophile and they’ll give you any number of reasons why their android phone is superior to an iPhone – better user interface, more capacity, functionality or more robust software.

To an Apple enthusiast, all these rational arguments are meaningless. What matters is that the iPhone is cool, it’s nice to use, everyone has one, and it’s familiar.

The idea that we as humans are irrational beings isn’t new, but many businesses have yet to catch on. They operate under the misapprehension that success will come with offering a better product or a lower price. The world of branding and marketing has known for years that when talking to the irrational human, that kind of logical equation rarely delivers as expected. Factors such as bias, social pressure and cognitive inertia play a much stronger part in decision-making than a rational calculation that would leave the purchaser genuinely better off.

“It’s not about the delivery of some idealized ‘best product at the best price’; it’s about understanding what ‘drives’ customer behaviors and then wowing customers by exceeding their expectations on those things they most value.”

That’s the tenet behind behavioural economics, which dates back as far as the 70s, with foundations in Adam Smith’s The Theory of Moral Sentiments (1759). Modern business thinkers have brought the theory back into light, with books such as Kahneman’s Thinking Fast and Slow (2011) and Ariely’s Predictably Irrational (2008).

Connecting the theory to everyday operations is where the opportunity lies for business. Professor Richard Chase at the University of Southern California’s Marshall School of Business made a start, when he set down a set of principles for the design of any customer interaction:

  • Finish positively by dealing with the ‘bad stuff’ first.
  • Spread out the pleasant parts – this means your customer perceives the interaction as more positive than negative.
  • Finish strong – the final parts of an interaction will stick in your customers’ mind.
  • Give customers choice, so they feel more in control.
  • Let them stick to their habits – unexpected change can be surprisingly uncomfortable.

For business, the opportunities are much wider than in customer service interactions – leveraging psychological drivers to change behaviours and guide decisions, both internal, and external, has the potential to impact on almost every business metric.

The first step, of course, is to accept customers and team members as the irrational beings they are. That will necessarily involve downgrading the importance of the rational arguments you once used. Then comes the trickier task of truly understanding the logic (or lack thereof) behind decision-making and behaviour.

Uber’s controversial tactics demonstrate just this – built into their driver’s software are prompts, or ‘nudges’ that play on human psychology. These nudges aim to encourage behaviours in drivers – ones that critics say are not necessarily to the drivers’ benefit.

Putting aside the question of whether this is ethical or not, Uber’s tactics work because they’ve pinpointed the real motivators behind behaviour and built their services, products and experiences around those.

Here are five ways you can do the same.  

1. Make things easy

The whole of human history has been a drive towards doing as little as possible.

It makes sense then, that the less you ask someone to do – nothing, ideally – the more likely they’ll comply with your desired behaviour. For example, a scheme where everyone is automatically enrolled, with disinterested participants having to opt-out will be significantly more successful than those asking interested parties to opt-in.

Similarly, a scheme to make chlorinating water cheaper and widely available in countries like Kenya was failing – with only 10% of families using the life-saving, and seemingly simple, treatment. Researchers got that figure up to 60% by making chlorination so easy, it became almost a default. They established free, hard-to-miss chlorination stations at commonly used water sources, that dispensed in standard quantities.

Regardless of the behaviour change you’re trying to create in customers, staff or other stakeholders, try focussing less on rational reasons supporting the change, and more on making it so easy it becomes the default setting – want more sign-ups to your newsletter? Reduce the number of clicks. Want your staff to eat better? Strip the office of junk and replace it with fresh produce. It’s about removing the emotional or physical barriers that could make things feel harder than they are. 

2. Use 'loss aversion'

Numerous studies have highlighted a peculiarity in human nature – we’d much rather avoid a small loss than take the chance on larger gain – losses might even feel twice as impactful as a gain. Put simply, losing $100 decreases satisfaction twice as much as gaining $100 increases it.

A study on consumers’ reaction to changes in insurance policy prices illustrates the point – it found that a price increase had twice the impact on customers switching than a price decrease.

Often this can be as simple as the way an offer is framed. Consider the mission to reduce the use of plastic supermarket bags. Should we charge people 10c for every plastic bag used, or give 10c off their bill for every reusable bag they bring? Loss aversion suggests that the 10c charge would create a stronger incentive. That, of course, makes no logical sense –  the values are equal, yet our irrational minds don’t see it as such.

Fundamentally, we’re all much more worried about the stick than interested in the carrot.

Consider loss aversion for your next incentive schemes – how can you reframe the offer as a potential loss, rather than a gain? 

"The world of branding and marketing has known for years that when talking to the irrational human, that kind of logical equation rarely delivers as expected"

3. The power of free

In his book, Predictably Irrational, Dan Ariely outlines the results of a study – he offered participants the choice to buy either a lower-value Hershey’s Kiss chocolate for 1 cent, or a luxurious Lindt Lindor chocolate truffle for 15 cents. Since the truffle is seen as a higher-priced item, paying just 15 cents for one sounded like a good deal – participants overwhelmingly chose the Lindt Lindor. When the price of both chocolates were reduced by 1 cent the outcomes was reversed. While still exactly 14 cents cheaper than the truffle, the Kisses were now being offered free, completely changing the perception of value: far more people chose to take the free chocolates, than the ‘good deal’ on the truffles.

Thus, people appear to act as if zero pricing of a good not only decreases its cost but also adds to its benefits.– Kristina Shampan’er and Dan Ariely

What do we learn from this? That zero-pricing on goods or services – particularly those that people already want – is perceived as more valuable than a discounted item; buy 10 coffees and get one free is far more compelling that the same discount, applied across each of the 10 cups. Think about the financial incentives you offer – can you reframe any as ‘free’ rather than discounts? According to behavioural economics theory, this could make the incentive far more effective. 

4. Make it a game

The irrational human is very poor at valuing long-term benefit, especially when faced with a short-term inconvenience. It’s why we struggle to stick to fitness or healthy eating goals, and why convenient petro-chemical products and combustion engines are still abundantly used, despite what we know about the long-term effects on our environment.

‘Gamification’ is one way to help your customers or staff continue working towards long term outcomes. This could be as simple as introducing an element of competition with leader boards, social encouragement, token rewards and arbitrary goals. For example, health and fitness app My Fitness Pal allows users to connect with friends, and then shares automated (positive) updates on users’ progress. e-Bay’s seller-badge system is another example of subtle gamification, which rewards desired behaviours with badges.

This is one element in Uber’s ethically questionable software that prods drivers into working longer hours, with sometimes little financial return for the driver. For example, it alerts drivers that they’re close to hitting an arbitrary earnings target when they try to log off, and sends drivers their next fare opportunity before they drop off their current passenger.

Other examples include Recyclebank’s website, which uses points, challenges, rewards, leader boards to encourage people in ‘green’ behaviours, like recycling, driving less or taking shorter showers.

Your sales team is probably already gamifying their work with leader boards and monthly prizes; how can your other departments do the same to improve performance? When it comes to your customers, gamification offers a way to change or amend behaviour without having to offer financial incentives – offer collectable tokens on your packs, award status levels that unlock privileges, or even just social kudos.

5. Embrace the irrational

Despite our enormous brain function, humans are fundamentally irrational creatures, basing decisions on emotion, instinct, social pressure and avoidance of pain. When attempting to modify behaviours, dial down the rational reasons ‘why’ and focus on the elements that play into humanity’s illogical quirks – make it fun, make it free, make it easy. For once in business, embracing the irrational makes perfect sense.