If you want your customers to both buy quickly AND feel less regret after they buy, give them fewer rather than more choices.

Eating out may be a distant memory for many of us in current times, but cast your mind back to the last time you went to an upmarket restaurant. More than likely the restaurant had a reasonably small menu with only a few (signature) dishes to choose from. And you probably found it was quick for you to decide on what to order…

Contrast this to a time when you saw a really long menu with lots of options in a restaurant that you visited for the very first time. You might have asked for recommendations from the waiters or your dining companions, or maybe even looked at an online restaurant review app for recommended dishes. Chances are that choosing a dish in this scenario was a more time consuming, and potentially less satisfying exercise.

While companies often feel that more choice is better for their customers, human beings are generally easily overwhelmed when we are offered too many product options or choices. This is the same whether we are talking about restaurant menus, investment fund options or even the cereal aisle in your local supermarket.

The culprit here is choice overload.

What is choice overload?

When the number of relative choices increases, we get what’s called decision fatigue. It all starts seeming too hard. The risk of making a bad choice increases and humans have what’s called a “loss aversion” – we fear loss much more than we worry about gains. The more options there are, the greater the likelihood of loss and therefore regret.

When faced with too much choice, we are more likely to do one of four things:

1. Procrastinate on making a decision
2. Don’t act or buy at all – we stick our head in the sand!
3. Go with the default or recommended option
4. Go to a competitor with fewer options

We’re also more likely to feel regret after a decision if there was too much choice offered in the decision making process.

The infamous jam Jar experiment on choice overload

The most famous study around choice overload is Columbia University’s “jam jar” experiment, run by academics Sheena Iyengar and Ross Lepper in 2000. They ran several experiments in a supermarket where they set up tasting tables for jams. One day they had only 6 flavours of jam; another day they had 24 flavours. While the table with 24 jam flavours attracted a lot more people to stop for a taste test, it was the table with 6 jam flavours that had 10 times more sales (from 3 to 30% of people who sampled)

So – more options means more interest; but more importantly it means fewer sales.

What can you do to avoid choice overload?

There are a number of things you can do to reduce choice overload and ensure your customers actually make a choice AND have lower levels of regret.

1. Reduce the number of options in each category – think about removing less popular options (though make sure you test this first as sometimes the less popular options serve an important role as a “decoy”).
   
2. Categorise the options – if you’ve got more than 5 or so products, it’s time to categorise them into logical groupings. A great example is the classic Asian take-out menu where you may have 100s of permutations but generally you choose by meal type and then customise the meat etc.
   
3. Help customers make the choice – for example, get customers to work through an online wizard that helps them narrow the range of options, or use phone or web agents to guide customers, or simply make it obvious what’s the recommended or default option for them.

Choice overload or not, here’s hoping you get that trip to the restaurant soon!

The post The paradox of choice appeared first on Nudge By Design.

As we’ve become more cashless this year than ever before, we’ve inadvertently reduced our overall “pain of paying”. This is great news for companies selling products or services. But it has consequences for keeping our spending in check. Plus cash versus card is only one of many factors that influence the pain of paying.

What is the “pain of paying”?

The pain of paying refers to the generally negative emotions that humans experience when they pay for a good or service. We are a loss averse species and handing over money can feel like losing money. Of course as always there’s a spectrum, with some of us more sensitive to this pain than others. Some behavioural economists call it the difference between ‘tightwads’ and ‘spendthrifts’. My husband calls it my travel addiction ;-)!

As a business your interest is likely to be to decrease the pain of paying for your customers so that they feel better about their purchase and so are more likely to buy again, or to recommend your business to others. But as a consumer you may wish to increase that pain of paying so that you have stronger willpower and control over your spending habits and can step away from the online shopping basket!

Test your own pain of paying

Imagine the following scenarios and think about how painful, or not, it would be for you personally to pay in each instance.

• You’ve enjoyed a week away at a five star resort and participated in lots of activities, meals etc that you charged to your room. Then you receive the total bill on checkout.
• You’re eating at a sushi train restaurant and every time you pick a plate off the conveyer belt, your table bill, which is displayed on a screen at your table, makes a beeping noise and immediately increases with the cost of the plate you’ve just taken off the conveyer belt.
• You go to the casino and use your debit card to buy some casino chips. You then spend the evening winning and losing the chips. You end up with fewer chips than you started with by the end of the evening when you cash out.
• Your wife buys you the beautiful, expensive wristwatch you admired a few weeks ago and decided you really couldn’t justify buying – using your joint credit card.

If you felt the pain of paying in these scenarios would be 1) higher, 2) higher, 3) lower, 4) lower, you are on the money (pardon the pun).

Cheat Sheet for the Pain of Paying

There are a range of factors that influence the pain of paying, including:

• Whether you pay by cash, credit, or some other format (like casino chips)
• Whether you pay before, during or after an experience
• If and when you’re reminded about the payment
• Whether you pay, or someone else pays on your behalf (even though you may be using the same source of money)
• The reference point or anchor that you’re comparing the amount of the payment to also plays a role
• Whether or not the payment has an element of doing good for others attached to it

Here’s a quick guide to get you started (you can download the PDF version below too):

So here you have plenty of ways to either increase or decrease the pain of paying based on behavioural science principles and research!

The post The “Pain of Paying” Cheat Sheet appeared first on Nudge By Design.

Customers generally feel the pain of paying at a time when there are immediate transition costs, while at the same time there is uncertainty around any benefits sometime in the future. 

When you are buying something new, there’s often a transition or switching cost that is fairly certain. But the value or benefits are both uncertain AND might not come until much later. That’s one of the reasons why most sales funnels generally have a pretty sharp drop off and conversion rates suffer. Transition costs are not only the actual money cost of the product or service you are buying but can be the effort involved adjusting to the new product or service.

For example, if you buy a new kitchen, once installed you have to spend quite a bit of time sorting through your pots, pans, crockery and that cluttered miscellaneous items drawer that everyone seems to have. Or if you buy a financial advice session, you have to prepare for it, which means looking or preparing budgets and getting a good sense of your financial position. By the way, you’re in the minority if that’s your idea of a fun evening!

As for the benefits of getting advice … will the advisor give you great advice that will have a big impact on your finances in the decade to come? You won’t know for potentially many years later, or at all – so there is a lot of uncertainty there. Will you love the new kitchen enough to justify the cost and effort of installing and setting it up? After all, you could have spent that money on a trip on your bucket list, or something else you’re passionate about.

Two ways to improve your sales funnel in relation to transition costs

1. Increase certainty around product or service quality 

• Offer a money back guarantee (and make it easy to apply)
• Show customer testimonials or ratings
• Give free previews or trials
• Show data on previous successes (sales numbers, companies you’ve worked with, case studies with past customers or clients)
• Provide data on how your competitors compare (from an objective, independent source)

2. Remove friction or effort from the purchase and adoption journey

• Minimise the data customers need to give you to buy – limit this to critical data only and capture the rest later, or in stages over time
• Pre-fill any data you already have so the customer doesn’t have to provide it
• Offer installation or set up services at a competitive price (or free if viable)
• Work towards offering one click purchasing if possible

And next time we’ll tell you all about how to reduce the pain of paying!
 
Until next time,
Clarissa and Dave

The post Transition costs may be hurting your sales funnel appeared first on Nudge By Design.

Siting (or endowing) the House Plan

My husband and I have been looking at building a new house and our weekends have been swallowed up trawling through display home after display home across our city. What has become very obvious to me from these weekend marathons is that the display home sales teams are the ultimate Jedi Masters of Endowment.

The endowment effect is a powerful bias whereby people value things they feel ownership over much more than the same item or offering if they don’t own it.

And don’t these guys know how to use it!

Their primary objective is to visually place the beautiful house you’ve just walked through onto your own block of land as quickly as humanly possible. In fact, some sales people will look up your block of land on publicly available websites to start the process off before they’ve even asked for your name, and mere moments after you’ve met. And they’ll also kindly prod you to think about designating rooms to each of your children, and working out where you can have that little morning coffee nook in the sunshine. Can you feel that gorgeous morning sun from your East facing deck on your face yet?

These Jedi Masters know that the more they can get you to connect or feel ownership (or a sense of endowment) over this new home, the more you are likely to be willing to pay for it.

Of course they want this to happen BEFORE any more firm discussions on pricing. That’s because they know that you’ll be prepared to pay more if you feel that sense of ownership or ‘endowment’. That’s just as well because usually the beautiful house you walked through has all the ‘premium’ inclusions that end up doubling what they call the ‘base price’ – and that’s before adding the cost of anything outside the four walls. Who needs a driveway or a letterbox anyway?

Try or play before you buy are other examples of endowment effect methods.

Aside from display homes, there are a myriad of examples of companies leveraging the endowment effect. For example, some car companies allow people to take their cars for weekend test drives; and some mattress companies let you take the mattress home for 100 days to try them out. Apple stores let you play for as long as you want with their products in the Apple stores. That’s right – they want you to feel some sort of ownership over their product or service – so that you will pay more for it. That’s the ultimate goal of these endowment effect techniques.

The endowment effect happens because we are programmed to avoid loss.

One key explanation behind the endowment effect is our natural bias towards loss aversion. We are twice as likely to avoid a loss than to work for the same gain. This is because in our early days it was much more important to avoid being caught by a predator, than to be preparing for a period of famine that may or may not happen in the future. So we react much more strongly to the potential of losing something; in this case ownership over something (even just psychological ownership), and therefore give it higher value.

Once you own a mug it becomes twice as valuable.

The most famous example of the Endowment Effect is the coffee mug experiment by three economists called Richard Thaler, Daniel Kahneman and Jack Knetsch – three economists at Cornell back in the 1990s. In the experiment they gave a group of students a coffee mug and another group nothing at all. They then asked each person to set a price on the coffee mugs.

Those that “owned” a mug set an average sales price of $5.25; those that didn’t own a mug set buy prices of between $2.25 and $2.75. The mere act of owning the mugs led the “owners” to more than double the price.

This experiment was a great example of how it is much harder to give up something we own (avoid loss) than to buy something new (gain).

“Freemium” products are designed around the Endowment Effect.

Another common use of the endowment effect is by software providers such as Thinkific, an online learning platform that we at Nudge By Design use for our online courses. Thinkific, like many providers, gives you access to what’s called a Freemium product – a basic version of the software that you can use for free to set up basic online courses. Once you start customising your learning site however, some of the features that you end up wanting to use are not available on the free package and you’re encouraged to upgrade to a paid version. This also is linked to the behavioural science principle of the sunk cost fallacy: people are more likely to plough ahead with a project or purchase when they’ve previously invested resources like time, money or effort – they’ve already sunk effort into it, so it’s harder to walk away. The sunk cost fallacy is related to the Endowment Effect.

How to apply the endowment effect to your product or service

One way to leverage the endowment effect is to give your prospective customers a sense of ownership by giving them something they can own or feel they own right away.

Some ideas:

• A product test drive – in store, or let them take it home for a period
• A free coupon or free balance or trial period to start using your services
• Allow customers to personalise products or services – for example choose a name, or picture or colour
• Provide checkout basket reminders – it’s almost yours
• Offer a bidding system like ebay or auction
• Low entry cost into a category where the customers need ongoing supplies e.g. coffee machine with capsules, printer and ink
• Help visualise the product or service experience e.g. virtual walkthroughs, virtual change rooms

As your customers start to feel a sense of ownership over your giveaway – usually more than it actually deserves – they’re more likely to convert into paying customers.

In our case, despite being armed with deep knowledge about the endowment effect, my husband and I are finding it harder to walk away once we’ve seen a beautiful house plan on our block of land and can imagine the outlook from the bright, open plan kitchen into the perfectly manicured side yard.

The plan is really just a piece of paper, but feels more like a Jedi Mind Trick!

The post The Jedi Masters of Endowment appeared first on Nudge By Design.

Beware of the power of the anchor if you’re negotiating, whether it’s your salary, or the price of a product or service.

An anchor is a reference point that your mind will use to make decisions and is often the first ‘offer’ that’s voiced or read. It’s called an anchor because it will weigh you down. It will tether you to a particular reference point, like a boat is tethered to a spot in the ocean. Even if you rationally know that the offer is way out of the range it should be, it will still subconsciously have influence over you.

Car salesmen are the masters of the anchor

Car salesmen are well known for using anchors to start negotiations. They usually start with asking for a higher price, so that when they eventually reduce the price during negotiations, you’ll feel like you are getting a better deal. The original, higher price is the anchor and subconsciously you will set your expectations around that initial price point.

We have this anchoring bias to help us make decisions more quickly, but it can unfortunately also lead to poor decisions.

How to overcome (or use) the anchoring bias

One way to overcome the anchoring bias is to make the first offer yourself – you set the anchor, rather than your negotiating partner. If you’re afraid of pricing yourself or your product out of the market, you can always go with a broader range rather than a single figure.

If you don’t get in first, it’s really important to recognise the anchor and defuse it! This means you let the other party know that the offer is unacceptable to you – be firm about this – and then you need to very quickly make a counter proposal. Try not to repeat the anchor at all as this can unfortunately help it stick further in your mind.

You can of course also leverage the power of the anchor to get a better price for your own product or service. Get in first with the offer, or set a higher initial price to help anchor your prospects. But be wary of overusing this technique. If your customers get used to always getting a discount on the advertised price, the effect will lose its shine pretty quickly and can box you into a continual discounting cycle – so use it sparingly!

The post Don’t let that anchor weigh you down appeared first on Nudge By Design.

It’s hard to get people to save for retirement today, but much easier to get their commitment to save tomorrow.

Could the principles of America’s 20-year-old Save More Tomorrow program, which nearly quadrupled retirement savings, help rebuild the super balances of struggling Australians post-COVID?

In Australia the Government has enabled superannuation fund members who have lost their jobs or had their working hours reduced to access up to AUD$20,000 of their superannuation now (rather than on retirement), in order to help them get through the current economic climate in the country.

To date Australians have withdrawn over $40 billion from the retirement system as part of this early access option. Super funds (naturally) and some politicians are concerned about the future retirement incomes of these members; in particular because they are skewed to the young. These young people may now miss out on Albert Einstein’s 8^th wonder of the world – compound interest – on the money they’ve withdrawn. But could an American program that started 20 years ago serve as a guide to get the retirement savings of these people back on track?

The Save More Tomorrow program (SMarT) from famous behavioural economists Richard Thaler and Shlomo Benartzi, focussed on nudging Americans to save more for retirement using behavioural science techniques or ‘nudges’.

Knowing that human beings have a present bias and knowing how hard it is for us to give up something we already have, the program focussed on getting its customers to commit to giving up a small % of a potential future pay rise instead. It’s much easier to give up something you don’t already have; something that’s a little way off on the horizon. 

This idea hooks into our good intentions while accounting for our present bias and lack of self-control. Many financial products are built on this idea of buy now, pay later!

The SMarT program also considered our laziness and status quo bias and made sure that the model was opt out, rather than opt in. Participants had to do something to opt out of the program, but were defaulted into the program when signing up for the 401k plan. This was at the ideal time in terms of when they would have had the best intentions to save.

The program was phenomenally successful with the four year study showing*:

• 78% of those offered the SMarT plan joined
• 80% of these stayed in the program for the four years
• Most importantly – the average saving rates for SMarT program participants increased from 3.5% to 13.6% over 40 months.

So could we replicate these techniques to encourage super fund members here in Australia (who have dipped into their super accounts this year) to commit to higher super contributions once they are back in stable employment and back on their feet financially? A period of higher ‘catch up’ contributions if you will.

For example, a commitment that 6 months after returning to previous working hours, their voluntary contribution rate is increased by 0.5%? And maybe another 0.5% in the following year? Could we make the model opt out? And, could this go beyond nudging to being a condition of release should there be further rounds of early super access legislated by the Government? To get another round of early access, people may be asked to commit to higher contributions for a period of time down the track – of course only once they are financially in a position to do so.

There would be a few logistical challenges for super funds no doubt, in particular those that have limited relationships with their customers’ employers. These employers would be instrumental in making it happen and there would definitely be some execution effort involved.

But looking after the most vulnerable members in society, and not making them choose between poverty now and poverty in retirement, should be a core goal of Government, super funds and employers alike.

* https://www.jstor.org/stable/10.1086/380085 

The post Living in Tomorrowland appeared first on Nudge By Design.

A case study in the superannuation industry …..

Marketers generally love the idea of social proof – the theory that people look to the actions of their peers to make decisions in situations where they are uncertain of how to act. Our natural urge to ‘follow the herd’ can be a very strong motivator to both action and inaction, and marketers often leverage this to help us along the purchase funnel. This is via techniques such as customer testimonials, ratings and reviews, expert endorsements and sharing numbers about the large number of customers that have already bought the product.

Why does it happen?

The herd mentality is an evolutionary bias that’s designed to protect us – alone we died, so we were pre-programmed to follow the herd. In many cases it’s a good thing. For example, when we are faced with lots of choices, or some ambiguity, being provided information about the choices others are making will generally help us make decisions without overwhelming our tired brains.

The pitfalls of normalising undesirable behaviour

But in some cases we also have a tendency to follow the herd, even when we know the behaviour is wrong. An often cited example of this effect is the impact of social proof on the theft of petrified wood in an Arizona forest. 

In the quest to reduce the theft of 200 million-year-old petrified wood, experiments were conducted, including with signs that said “Many past visitors have removed the petrified wood from the park, changing the state of the Petrified Forest”.

Instead of reducing theft, theft actually increased from 2% to 8% following the installation of these signs. The behaviour of taking petrified wood from the forest was unfortunately normalised as a result of these signs.

Our natural urge to ‘follow the group’ is so strong, experiments have shown that murder and suicide rates are tightly correlated to publicised, similar events. 

This has led some countries to impose reporting restrictions on cases of suicide for example.

Superannuation, investment switching and social proof

Some superannuation funds in Australia (similar to pension funds in the UK or 401k plans in the USA) recently had a brush with the downside of social proof. When share markets started to tank in March this year as a result of large uncertainty around the Coronavirus pandemic, a segment of super fund customers wanted to avoid large losses and quickly moved to switch their share assets into more conservative cash assets. For many super fund customers this was the wrong decision as it meant they locked in their losses to date, and may in fact have had a long enough period of time before needing to access these funds for the share market to likely recover – had they stuck with their original investments. This irrational behaviour is driven by our bias towards avoiding losses, but that’s another behavioural science principle for another day.

Unfortunately while this was happening, some super funds were very vocal about being ‘inundated’ with calls and emails from their customers about wanting to switch to more conservative assets. Some funds even publicly acknowledged the flight to cash assets in press interviews. These types of communications would have normalised that outlook and behaviour and no doubt led to more poor investment switches than would have been likely otherwise. It’s a serve of social proof reinforcing loss averting drivers of behaviour – a double whammy. And the rational argument of waiting out the volatility unfortunately loses its impact in the throes of an emotional response.

What funds should have done instead – and some in fact did – is continually highlight that most customers were in fact sticking with their current investments and riding out the share market volatility.

So while social proof can be an invaluable tool in a marketer’s arsenal, it can also backfire if you unintentionally normalise the wrong or undesirable behaviours. Perhaps just like with suicide reporting, more super funds could have sanitised the details of what their customers were doing rather than shouting it from the rooftops.

The post When Social Proof goes wrong appeared first on Nudge By Design.

Slipped into a few bad consumption habits in these crazy times? Reduce mindless consumption using decision points & transaction costs

Are you one of the 29% of parents in Australia that increased their alcohol consumption during the COVID-19 lockdown? Behavioral Science can help you!

According to Behavioral Economists Thaler and Shefrin, we all have the ‘farsighted planner’ and the ‘myopic (or shortsighted) doer’ in us. We may start out thinking reasonably rationally and “planning” our consumption with some consideration of what’s best for us in the long term – well, some of us are better at this than others!

But once we start consuming we all generally move into automatic “doing” mode, with not much thought to the long term health impacts.

That’s why once you open a big bottle of wine, you may often just keep drinking until the bottle is empty. If you add in decision points or transaction costs, you’re likely to consume far less wine however.

Decision Points

Let’s assume you buy two half size bottles instead of one large bottle of wine. When you’ve finished the first small bottle, there’s a decision point to open – or not to open – the second small bottle. This decision point kicks your brain back from automatic consumption mode into planning mode. Your more rational brain kicks in and you’re far less likely to continue consuming wine, compared to when you have a large open bottle.

Transaction Costs

If you store the wine bottles as far away from your place of consumption as possible, there’s a transaction cost in getting that next bottle. You have to leave your cosy couch or desk, possibly get additional layers of clothes on to head to the cellar or shed, or even the corner shop. Again, the mere act of this additional cost (or effort) is likely to trigger you to re-consider whether you really want an additional bottle of wine. And this keeps you in the more rational planning mode.

It doesn’t just work for wine

The good news is that of course this works not only for wine, chocolate or other food and beverage vices! You can also get your customers, citizens or employees to behave more rationally by using decision points or transaction costs in their consumption journeys.

For example:

• If you want your customers to spend less and save more, adding in decision points or transaction costs into their spending journey will reduce their overall spend.
• If you want your citizens to consume less energy, defaulting their appliances to be turned off automatically after a period of time (e.g. an air conditioner that’s turned off every hour or two), will reduce energy consumption because the customer needs to first decide to, and then physically go to turn the appliance back on.

Unfortunately decision points and transaction costs are far less likely to help you with home schooling your children though….

Until next time,

Clarissa and Dave

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