Last week, the WSJ ran an article on the increasing use of insights from behavioral economics by businesses and organizations. Organizations are using these insights to ‘nudge‘ customers and clients toward specific behaviors–e.g. using less energy, opting in to the home delivery of prescription drugs, etc.
The essence of behavioral economics is that humans fail to meet the assumptions made by economists in important ways. As a result, economic models of human behavior often fall short in their predictions of what people “should” do. By understanding the limitations that actual people have in terms of their knowledge, computational ability, and emotions organizations can design products, services, and processes that lead or ‘nudge’ actors towards better choices. The article mentions a few examples, such as using peer pressure (people do not like being outliers, or being left behind by trends) and short circuiting the inertia of past choices (once we make a choice it tends to stick, regardless of how suboptimal it may be), that have been shown to significantly alter behavior.
One theme that I have heard again and again from some critics is that businesses are using strategies that are underhanded or manipulative in order to get customers to spend money in ways that run against their interests. No doubt, some may use nudge strategies to take advantage of others, but using a behavioral approach does not necessarily imply that a business is simply trying to manipulate customers into making choices that run counter to their interests–in fact, I would argue the opposite is true.
Because none of us are perfectly rational actors (i.e. homo economicus), we all need help from time to time understanding what action or choice is truly in our self-interest–what choice maximizes value for us. What behavioral economics tells us is that this isn’t as straightforward as previously thought. How a choice and/or information is presented to us makes as much of a difference as what is presented. To me, the lesson to be drawn from behavioral economics is not that businesses need to manipulate their customers, but that they need to be more strategic and more precise in how they make their case for their product or service. Businesses have a tremendous amount of information about how their service is used by a wide range of actors. This means they are in a unique position to analyze 1) the most efficient and effective ways to use their services 2) the relative use of their service by different types of clients. Most clients don’t have access to this kind of information and are therefore at the mercy of their supplier for these insights, or frankly they just guess.
Successful businesses take into account what service will be of the greatest value to clients and customers. By providing great value they ensure that clients will stick around, building a long lasting and reciprocal relationship. If businesses manipulate clients into less valuable purchases in exchange for short term sales, both parties will be worse off in the long run. The key is to align interests; businesses have an interest in recurring revenue and clients have an interest in finding high quality solutions to their problems–when these interests are aligned both parties will be better off. (The “Shadow of the Future” plays a significant role here.)
However, as behavioral studies have shown, people don’t always make the best choices for themselves. Why should customers be any different? How businesses present choices and service options to clients is just as important as the content of those services. Clients are people, and therefore have the same barriers to overcome in terms of choices that serve their interests. In order to nudge clients towards optimal services and service utilization, businesses should present solutions to clients in a relational way–e.g. people like you use this version of the service, or use the service at this rate–presenting solutions in this way can help to counteract the inherent inertia of human behavior.
The key to a relational strategy is data and the visualization of that data. You have to present the right data in a way that tells a compelling story to the client or else they will not be jolted off of their current path. Looking back on situations where I was nudged it was typically the result of a profound story about my peers told through compelling data. It is important to remember that data isn’t just important for bean counters–its critical to story tellers. The better story you tell with your data about how a client’s peers leverage your service the more likely they are to choose the same behavior, see greater value as a result and appreciate your helping them get there, and, most importantly, remain clients in the future.