At a business travel summit, I had a conversation on how customer behavior and decision-making have changed in the business travel industry, which sparked the idea for this article exploring the wider application of these insights to any industry.
In 2009 the American economist Richard Thaler and law professor Cass Sunstein wrote a book together. It was called hashtag#Nudge, and it described how behavioral economics was completely different from the traditional study of economics - instead of behavior always being rational, sometimes consumer choices can be influenced.
The book was very influential. The British Prime Minister at the time, David Cameron, created a ‘Nudge Unit’ inside his government to use behavioral economics to help the public make better choices.
But what is behavioral economics, and why does this concept of ‘nudging’ people into making better decisions matter for executives planning how to deliver a better customer experience?
Nudging is a simple concept. There are a few basic methods that can be deployed:
Behavioral economics combines insights from psychology, sociology, and neuroscience to understand how people make economic decisions. Traditional economics assumes that individuals make rational decisions based on their self-interest, but behavioral economics recognizes that individuals are subject to cognitive biases and emotional factors that can influence their decision-making.
People - your customers - make decisions that are influenced by emotions and social pressure, not just rational logic. So how can we apply some of the principles of behavioral economics to improve customer experience? Here are a few examples of how it can work:
Personalization. Companies can use customer data to personalize their offerings to individual customers. By tailoring products and services to individual preferences and behaviors, companies can improve customer experience and satisfaction. You almost certainly have the data already. The question is how are you using what you know about your customers to personalize each future interaction?
Social proof. By highlighting how many other customers have made a certain choice or are satisfied with a certain product, companies can influence customers to make similar decisions. A typical example is FOMO - fear of missing out. If a customer is thinking of booking a flight or hotel, but hesitating before payment, the travel company can show how popular travel on those dates is or indicate that there are only a few spaces left.
Gamification. Companies can use gamification to make customer experiences more engaging and fun. Adding game-like elements, such as challenges, rewards, and competition, can increase customer engagement and satisfaction. The Genius loyalty plan on Booking.com is a good example. The more that a customer uses the site, the more benefits and discounts they earn, which encourages the customer to keep using the site.
Transparency. Companies can use transparency to build trust with customers. By being open and honest about their pricing, policies, and practices, companies can improve customer trust and loyalty. This can be at odds with the social proof practices - when hotels say there is just one room left, they need to be telling the truth or customers will stop believing anything else the brand says.
There are many important biases that humans possess that can make a big difference when a company is presenting information to a customer. For example, we find it easier to accept information that supports our existing beliefs. We are more likely to act on negative information rather than positive. We are more accepting of advice from people we believe are similar to us.
Your customers naturally have these biases, and unless they have studied or read about behavioral economics, they are unlikely to even be aware of them. These biases can be seen every day on the TV news - why is it almost always bad news, rather than positive and uplifting stories? Why do social networks develop into “belief bubbles” where most of the people you are connected to share similar views?
Across all the different elements of behavioral economics and nudge theory, there are many ways that companies of all industries can benefit. This can be in the interest of both the company and the customer too. Look at how healthcare companies are using smartphone health monitors to reward customers with cash bonuses for healthy behavior.
Would a cash bonus, or free coffee, from your health insurance company encourage you to take a long walk? Would you recycle more products if there was an incentive you wanted to earn?
Proactive communication can also be seen as a form of nudging where the communication from a company to a customer prevents a potential issue. Last year, SAS - Scandinavian Airlines contacted customers who were booked on flights that would possibly be impacted by a strike.
Before waiting for confirmation of the strike, the airline already warned their customers of a possible problem and offered an immediate option to rebook their travel on another date.
Nudging customers doesn’t need to be an expensive initiative. Often it can simply involve reorganizing how options are presented to the customer. However, it can have a huge effect on how the customer responds to your products. In an uncertain economic climate, there is one thing I think we can all be certain of, more customers are going to experience more nudges in the near future
Jonas Berggren joined Transcom in 2020 as Head Of Business Development Northern Europe. Prior to this, Jonas was the co-founder and partner of Feedback Lab by Differ. Earlier in his career, Jonas held the position of CEO at Teleperformance Nordic.