Idioms, proverbs, sayings. Human beings tend to come up with and popularize sayings, like metaphors, to make sense of common themes we see in life. Like, “the early bird gets the worm” being a metaphor for the benefits of being an early adopter.
At HMI, we like these kinds of phrases because they help to simplify a complex theory that we use every day in our programs: behavioral economics. In this article, I’m going to explain a few key behavioral economics principles that are near and dear to our hearts, how the help you grow your business, and some real-world examples. All while tying each one to a common idiom, saying, or proverb. Let’s jump in.
First, What Is Behavioral Economics?
Think of behavioral econ as if you’re an architect building a house. You know that you need to put a load-bearing support beam in a certain part of a house or else it will be prone to damage and collapse. Think of your go-to-market strategy the same way. Behavioral economics is the science behind getting people to more effectively buy or sell.
The University of Chicago defines behavioral economics as a theory that “combines elements of economics and psychology to understand how and why people behave the way they do in the real world.”
To go even further, the Incentive Research Foundation (IRF) defines it as such, “Applied behavioral science helps organizations gain a better understanding of their employees, customers, and other stakeholders. This understanding goes well past traditional economic notions of rational behavior and into the powerful realm of how emotions influence peoples’ thinking, behaviors, and decisions.”
Okay, great. Why should I care? We care because this theory and its accompanying principles are proven and tested methods of motivation and incentivizing behavior. So, if we understand behavioral economics, we understand why people act the way they do. If we get that, then we can build better strategies around loyalty, incentives, and motivation.
Behavioral econ is made up generally of principles, different parts of the whole. Separately, they help us focus on certain aspect of behavior, but together, they give us a whole picture of why. Here are a few (we’ll get into these specifically in a minute, I promise):
- Cognitive Ease
- Loss Aversion
- And many more, here from Wise Marketer. And here from the IRF.
They say that the average human makes 35,000 decisions every day. How many of those are influenced by people with the knowledge of behavioral economics? The classic example is sales and marketing. But sales and marketing are just two examples of how this get employed. Some companies build their entire product line on principles from behavioral econ. behavioral econ. You’ll see a few of these in this article.
So, we understand what and why, so let’s dive into a few principles as promised.
Behavioral Economics Principle #1: Anchoring
Proverb: “You never get a second chance at a first impression.”
Examples: This can happen with almost anything, but here are a few non-business and business related.
- Do you get mail from Capital One or Discover or American Express with those offers to earn 50,000 bonus points upon enrollment for their credit cards? This is an example of Anchoring. By giving you a free set of points up front, you immediately get a taste of what it’s like to be a high roller with this card. From that point on you strive to earn that much with them again.
- Say a first-time customer goes to your online store and purchases a few pieces they need to complete a job. Delivery says 3 days. Great! But then their order gets delayed a week, and they needed that material sooner. Their Anchoring bias is going to tell them that you can’t handle online orders, even if this one time was just a supply chain issue.
Definition: Anchoring is the bias that causes us to rely too heavily on the first piece of information we are given about a topic.
Business/Incentive Case: Anchoring can have a really positive or negative effect on how your first-time customers view your company and its capabilities to serve them. Paying extra close attention to new customer acquisition can negate bad first impressions.
When launching an incentive loyalty program, having an easy way to earn points early can create an Anchor in a participant’s mind, making them feel that it’s easy to earn and thus solidifying their engagement with the program.
Any negotiation has Anchoring built into it. No one wants to say the first number because that sets the stage for the rest of the conversation.
Principle #2: Cognitive Ease
Acronym/Saying: K.I.S.S or Keep It Simple, Stupid
Examples: Simply put, something that is simple is usually better.
- How many times have you opened up an email or an instruction manual, seen the length and complexity and just shut it? Don’t tell me you haven’t skipped the instructions because you thought you could just figure it out yourself.
- Ikea has a few staple differentiators, but one of its best is the fact that their products are *relatively* easy to build compared to the competition. Just last night, I put the shelves of a new entertainment system on backwards because they didn’t label things as easily as I wanted them to. I had to take the entire thing apart to fix it. Ikea’s instructions are simple and easy to follow. Remind me I said that when I order from them next time.
Definition: Cognitive Ease is the measure of how easy it is for our brains to process information.
Business/Incentive Case: Keeping Cognitive Ease in mind is a good idea for any part of your business. If it’s difficult to buy or sell your product, the threshold for purchase will usually be much higher. If you sell complex products, it’s a good idea to provide training that makes it easier to understand.
For an incentive loyalty program, two of the biggest hurdles are enrollment and engagement. There should be as few obstacles to these two conversions as possible. If your program is bogged down with a lot of rules to enroll or to earn, then it’s destined to fail.
Ask yourself, “are things easy because I think they are? Is an outsider without my knowledge going to think the same?”
Principle #3: Framing
Idiom: “You can catch more flies with honey than you can with vinegar.”
Examples: In other words, it’s in how you say things as much as what you say.
- In my spare time, I’ve been shopping around for some nostalgic memorabilia. Classic sites to find this stuff are Etsy, eBay, or Mercari. I finally found one piece I wanted on Mercari but moments after I found it, I got an email from Mercari saying “We found some other items you might like.” The body of the email said, “We’re sorry, the item you found has been bought. But here are a few other items you might find interesting.” Although I was disappointed, I appreciated that Mercari would go out of their way to frame some bad news with some good news on some other possible things I’d like.
- Blueland is a company built on framing. The company sells plastic-free cleaning products. All of their products and shipping comes in either glass or cardboard. Its products are all built into the context of you doing good for the planet by buying their products. For those of us who care to make an impact, this kind of framing in their marketing is really moving.
Definition: Framing is the act of adjusting context of a message to make recipients more receptive to it.
Business/Incentive Case: Framing is probably one of the most important things to track while communicating, whether it’s with your employees, stakeholders, or customers. While open communication is always a good thing, it’s important to frame things in a way that is easily understood, more impactful, and can reduce friction.
Complicated product launches can flop if they’re not communicated correctly to the right audience. An incentive program can fail if it seems like earning is too difficult. Even if there are hoops to jump through, framing your communication around those hoops can help you to better convey them.
Principle #4: Loss Aversion
Saying: “A bird in the hand is worth two in the bush.” Acronym: “FOMO”
Examples: Think fads, limited time offers, free trials.
- QVC’s entire business model is on built on Loss Aversion. With prices constantly fluctuating, missing out on deals is emphasized to the fullest on their TV spots so that we “Don’t miss these phenomenal savings!”
- FitBit uses this effect quite often, both in the fad-like demand for their watches and in the way they created their workout program. Creating an easy way for friends and family to compete with one another, sharing their goals and workout results, etc., makes it easy to feel left out if you don’t have a one. Additionally, when you’re on a 5-day streak, the thought of losing that streak alone might motivate you to get back to the gym on that 6th day, even if it is a Saturday.
Definition: Loss Aversion covers a lot of financial and behavioral concepts, but generally, we split Loss Aversion up into two aspects: not wanting to lose things and not wanting to miss things. Think of Loss Aversion as the urge for people to want to hold onto what they have rather than risk a larger gain and lose it OR people not wanting to miss out experiences, capital gains, and other opportunities.
Business/Incentive Case: While creating an international product fad like FitBit or QVC might not be as feasible in the B2B space, you can still garner a sense of FOMO and Loss Aversion within an incentive program.
In an incentive program, for instance, you can create give-back programs that reward your performers up front. If they don’t hit their goal for the month or quarter, they may have to give back their reward. That kind of Loss Aversion could have a powerful impact on your outcomes. Additionally, group incentive travel is the ultimate reward. Having a trip that’s offered to your best performers can create a fear of missing out if they’re not on that trip.
These are just four of the many principles that govern behavioral economics. We may explore a few more in the future, but we like to live by these in particular. They help us ground our programs into principles that we know move the needle, and they help our clients understand just why the things they will do will work.
At the end of the day, you will need to experiment to understand what works for you and your audience. To get started, we recommend reading the IRF’s piece on Applying Behavioral Science. It’s a great source to help you keep things ethical while experimenting with this theory.
If you have any interest in learning more about behavioral economics, check out the podcast Behavioral Grooves. It’s a wealth of information on why we do what we do. Or book a meeting with one of our specialists.