For several years now, I’ve been talking about how behavioral economics provides a perspective that can help companies better understand their customers. I just came across two great examples that show how companies used behavioral economics principles to increase their profits:
Example #1: A newspaper had increased the cost of its subscriptions and they were getting calls from readers who wanted to cancel. They retrained their call center employees to use behavioral economics techniques and were able to triple their retention rate. In a typical call, where the subscriber said they weren’t utilizing the subscription and didn’t have time because they have kids, the call center rep would say:
“There are many people like you – who are very busy and have kids to take care of – use our offers on the ‘Times Plus’ to save money on cinema tickets or meals out and some exclusive events that we run and I wouldn’t want you to miss out on that if you canceled today.”
The above approach uses two behavioral economics mechanisms. Social norming – “there are many people like you” – people tend to want to do what most people are doing. It’s a mental shortcut: rather than having to evaluate the pros and cons of every action we take, it’s easier (and usually safe) to just do what most people are doing. And the second mechanism is loss aversion – “I wouldn’t want you to miss out on…” The pain of losing is greater than the pleasure of gaining, so people hesitate to give up an existing benefit.
Example #2: An auto insurance company found it could raise rates and increase profits by conducting online research where they showed participants quotes for ten different insurance companies and asked them to select they one they would buy. They varied the quotes and found that where their price was in relation to the other quotes was more important than the price itself. Based on the findings, they were able to calculate the price that would provide them with the maximum profit.
Most companies can benefit from the above two approaches: find out what your customers think “most people do” in your category. Discover what people worry they might lose by not using your product. And conduct a pricing exercise like in the example above to find your optimal price points.
We would be glad to help glean these insights from your customers and prospects. Just give me a call at 818-752-7210 or email info at bureauwest.com.
Sources: “The Maddest Men of All,” Freakonomics Radio Podcast, 2/26/15; “Beyond Academia: How Psychology Has Been Adopted in Advertising and Communications,” The Behavioral Economics Guide 2014; “The Power of Rank: Behavioural Insights into Product Pricing,” The Behavioral Economics Guide 2014; Bureau West research