Don't underestimate the impact of fees on consumer behaviour

Imagine you are at an ATM withdrawing cash. Before you do, a message comes up reminding you that there will be a $2 fee for accessing your money through an ATM that is not part of your bank's network.  Do you proceed or do you cancel the transaction?

If you were an economist with the Reserve Bank of Australia (RBA), you would have predicted that most would proceed with the transaction. After all, it's only $2.  We lose that behind the couch.

Well, much to the chagrin of RBA financial wizards, they didn't count on the impact of consumer 'irrationality'.  Instead of consumers banking like they had in the past, when the fee for a foreign ATM withdrawal was buried in terms and conditions and you only found out when you looked at your account statement, consumers have turned away from using these ATMs. 

What can you learn from the behavioural economics of ATM fees?

Red rag to a bull
People are more likely to adapt to a new price if they are not constantly reminded of it - it's like a red rag to a bull.  In this case, there was no choice for the ATM owners - the communication of the fee was mandatory, but in your business you may have more flexibility.  If you can, parcel the fee in with the price point and/or change once and not every time the customer pays.

I'm buying the good not the service
In previous posts I've talked about delivery fees.  For instance, order through Amazon and you pay less for the book but get hit with shipping.  Order through Book Depository and you pay more for the book but shipping is 'free' (ie included).  

People hate service fees so much because they decouple the value of the good from the service in getting it to them. Why? Because you retain the product not the service. Your opportunity is to gain  advantage by offering to wipe the cost of service (ie offer "free delivery" or "free installation") because 'free' is extremely persuasive and 'free' on a hated cost of service even more so.

Choose your number 
Was the fact that the fee is $2 the issue?  I think it did have something to do with it.  A lower fee structure, say 50 cents or 90 cents and more customers would have proceeded with their transactions  because dollars and cents are psychologically different.  If I told you that you are entitled to a $2 discount after you've purchased $30 worth of groceries does that hold more or less appeal than me offering you 4 cents off a litre of petrol (which works out about $2 a tank if you are lucky)?  Judging by our slavish devotion to petrol vouchers, 4 cents is extremely persuasive.  As a business you therefore need to consider the number context of the fee or discount you are using.

The big lesson out of the RBA experience is that people's irrationality should not be underestimated. Where something looks inconsequential on paper, it can have dramatic behavioural impacts. Your job is to make sure irrationality works in your favour, and behavioural economics is your guide to knowing how. 

To find out more about what happened with $2 ATM fees, read Peter Martin's article "Banks' $2 fee has big effect"in The Age. 

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(Image from http://www.bikyamasr.com/69294/india-launches-first-talking-atm-for-blind/)

Middle ground: How businesses should deal with our love of the middle

Do you tend to select wine from the middle of the list?  Order a meal that is neither too expensive nor cheap? Donate amounts that are somewhere between the highest and lowest? As consumers we most typically avoid extremes when selecting from a list of items, preferring instead to cluster around the middle.   Some recent research reported in Research Digest has added additional scientific weight to this behaviour, known as "Center Stage Effect".


In the most recent study, researchers Rodway, Schepman, and Lambert found a preference for the middle across both horizontal (moving left to right) and vertical (top to bottom) displays.  From this you can take two immediate actions for your website and/or printed collateral such as menus or product brochures.


1. Be smart about the sequence of items
Knowing that most people will select from the middle rather than first or last items, consider how you position items with the best margin.  Listing your highest margin wine as the cheapest will mean you are probably leaving money on the table because most customers will avoid the wine for fear of being thought a cheap skate.  Likewise, your most expensive wine should not necessarily be the one with greatest margin because volume will be low.  


Contrast a wine list on the left (image 1) that does not use price sequencing to influence purchase,  and image 2 on the right that does.  Image 2 takes better advantage of the Center Stage Effect.

2. Be smart about how you style the display of items 
You have a choice to work with or against the Center Stage Effect according to your business objectives. If it is to your advantage to encourage the customer to avoid extremes, style the middle of your list to capture visual attention. If however you want to counteract the Effect, you will need to visually style the list to drag attention away from the middle.


Image 3 provides additional visual cues to persuade the customer's choice for the middle option whereas image 4 pulls attention away from the center by styling the left-most laptop differently to the others.  

3. Visual emphasis given to middle option 

4. Item on left distinguished through styling 

With knowledge of the Center Stage Effect you can make deliberate choices about how you influence your customers, making it work in your favour.  With that, I'll exit stage left.


Interested in finding out more?  Email me at bri@peoplepatterns.com.au for an obligation free chat about your business.




Rodway, P., Schepman, A., and Lambert, J. (2012). Preferring the One in the Middle: Further Evidence for the Centre-stage Effect. Applied Cognitive Psychology, 26 (2), 215-222 DOI: 10.1002/acp.1812 cited in http://bps-research-digest.blogspot.com.au/2012/04/people-prefer-middle-option.html 

Why privacy concerns are overblown

How uncomfortable would you feel if I told you I know how many children you have, where you live, and even what your car registration is?  Would you be more or less concerned if I told you I got this information without the use of technology?

Stick family stickers

Say hello to "stick family" car stickers, with which people proudly drive to and from their home and work without a second thought about their privacy.  This serves as a powerful illustration of how we contextualise our decision making, and why 'privacy' may in fact not be as big a deal for consumers as some surveys would have us believe.

Privacy attitude surveys don't reflect behaviour

With lazy regularity, news services carry stories about the privacy fears consumers hold.  Surveys like the one reported in Mashable delight in telling us how concerned we all are; 

"According to a new survey from Consumer Reports, 71% of respondents reported they are “very concerned” about companies that sell their information unbeknownst to users."

And how we try to thwart attempts to gain information about us. 

"eMarketer reports that 88% of people have intentionally left website registration information blank or inserted false information."  

And my response?  Of course.  Asking a consumer whether they are concerned about their personal information is like asking whether they like to breathe.  (Not great for the 29%).  Asking them the extent to which these concerns impact their decisions would be better.  Better still, observing what the consumer had disclosed willingly but perhaps unwittingly as they travel through life on and offline would be the only way of really gauging their attitude towards privacy.  

Intended behaviour is a poor predictor of actual behaviour.  Is privacy important to you?  Yes.  Do you have a stick family sticker on your car? Yes.  Does this pose a risk to your privacy? Well, I never really thought about it like that.  

Privacy is contextual

As a business, you have responsibilities morally and legally to protect consumer privacy.  That's not what this is about. The lesson from the stickers is that people contextualise the importance of privacy, and its relative importance is malleable.  If you get consumers claiming that privacy is their biggest concern in dealing with you despite your policies being compliant and accessible, and having appropriately communicated your privacy assurances, then I'd suggest the problem isn't your privacy management, it's your product.  If your offer is sufficiently compelling, privacy concerns melt away as people grab for their credit card. To see what I mean, just ask for a show of hands of those who have actually read the Apple terms and conditions.  

How Behavioural Economics can help

Behavioural Economics provides a framework of behavioural tendencies - how we tend to behave given particular influences and biases - and as such can be applied by businesses seeking to close the gap between intended and actual behaviour.  

For instance, Behavioural Economics tells us that we are enormously influenced by social norms (my neighbours have a stick family sticker), hate cognitive dissonance and will explain our behaviour in a rationalised way (of course the sticker isn't a privacy issue because I park in the garage), and view ourselves as being internally consistent even though we change our positions, decisions and behaviours throughout the day (I gave false personal information to that website so they wouldn't know about my family/I drove my car with the sticker to the shops today).

So to gain most insight into the behavioural tendencies of your market, don't rely on simply asking them because you will likely get an unconsciously misleading answer.  Instead, get ahead by knowing what they are likely to do by tapping into the playbook of Behavioural Economics.  

Interested in finding out more?  Email me at bri@peoplepatterns.com.au.

PS If you like my blog, join other kind people who have supported my fundraising trek of the Larapinta trail.  It feels good to give, so jump in at https://www.gofundraise.com.au/page/BriforICV Thank you!

Car image from http://www.customlabels4u.com/decals-stickfamily.shtml

The sweaty business of behavioural change

Imagine you are watching a focus group.  The topic is hygiene and in particular, how your gym can get people to wipe their sweat off the equipment. Low adherence to the policy has been causing complaints and some health issues around the club.  The discussion goes as expected with everyone agreeing they would feel revolted if they unknowingly use a machine that has not been wiped down, and all agreeing that they, of course, always wipe theirs off as long as it was easy to do so.  You watch as the group brainstorms some signs that can be placed to remind people of the policy and also where and how many hygiene-spray stations should be positioned in the gym. A few months after you've implemented the findings of the focus group and behaviour hasn't changed. Why?  

Awareness is not enough

This is the scenario my local gym is facing. Despite signs on every piece of gym equipment reminding clients to "Take your sweat home", "You have a towel - use it", and "Please wipe your sweat off",  and despite multiple convenient hygiene stations I reckon about one in seven people actually takes heed (and that one is, of course, virtuous me for a reason I'll come to).

So what's happening here?  Sure we all get grossed out by a stranger's sweaty trail, but when it comes to our own behaviour, could it be we don't think our sweat is offensive enough to mop up?

Give those doctors a hand

In a case well documented by Stephen Dubner and Steven Levitt of Freakonomics fame, Cedars-Sinai Medical Centre in the US decided to tackle a slightly more important issue of hygiene; hand-washing by doctors.  Did the medical staff know the importance of washing their hands? Of course.  But almost 4/10 failed to.   And this was contributing to bacterial infections sometimes leading to patient death.  So why were the doctors not washing their hands?  Ego was thought to play a big role.  The sense that "it's not my germs that harm people - it's those of my colleagues".  And before we shrug ego off as symptom of the profession, I think that's the same factor at play in the gym. 

Cedars-Sinai's aim was to get compliance up from 65% to 90% to meet required standards. They made some progress by running an awareness campaign by email and posters, providing bottles of disinfectant, and awarding spot coffee vouchers to those who washed their hands and this got them to 8/10.  For my gym, having staff parade the equipment and reward compliant clients might help, but seems like a lot of effort!

Why Cedars-Sinai Medical Centre has become a favourite case study is what they did next which saw compliance rocket to almost 100%.  One day after a typical lunch, a number of doctors were asked to take a culture of their palm, pressing it into a petri dish.  The results were striking, with the hidden to the eye bacteria seen vividly crawling around the flesh. Revolting. In a moment of brilliance the hospital then used one of these provocative petri images as a screen saver and watched as compliance rates soared.  Suddenly there was indisputable proof that it is you, me and everyone that carries germs, and simple actions can rid our hands of their bacterial dangers.  (And yes, this is why I am so vigilant when it comes to wiping off sweat.)

What it took for behavioural change

In the case of Cedars-Sinai Medical Centre, developing an awareness campaign was not enough.  And for my gym, whilst it is great to promote the expectation of hygiene on posters, it is not enough in itself to change people who intend-but-don't to intend-and-do.  As Dan and Chip Health cover in their book "Switch: How to Change When Change is Hard", use of negative emotion (like disgust) is great when people know intellectually they need to change. 

Cedars-Sinai made the issue personally confronting, overcoming the tendency we have through what is known as the Fundamental Attribution Error to rationalise our own behaviour due to the situation (I don't have time to wash my hands, I need to get on the bike before someone takes it) but judge the behaviour of others on the basis of character (I can't believe they are so irresponsible, how can they be so lazy?).   Cedars-Sinai levelled the playing field by demonstrating that all are equally impacted by germs. 

The lessons from Behavioural Economics

Let's look back to our focus group.  After the experience of the gym, we now know that there is a gap between what people say they'll do and what they actually will.  So what are some tips from Behavioural Economics that all businesses can use to help close this gap?

Vividness - a surprising and evocative image - like a hand in a petri dish - can shock us into new thinking.  Imagine if the gym had posters of bacteria on un-sanitised equipment?  Would it risk putting people off? Not if they are committed to exercise, and it would definitely get people to cleanse their machines before and after exercise.  

Herding - it is difficult to go against the herd because you risk being socially shunned. Even amongst a group of gym strangers, the more people you see wiping their machines, the more likely others are to.  Just like night clubs who pay cool people to show up, the gym could enrol and reward some clients for modelling correct behaviour.

Heuristics - we operate by rules of thumb, and are most likely to accept a new behaviour (wiping down) if it is connected to an existing one (exercising).  Imagine if the machine would not give you your work-out results unless you wipe it down first?  Or you needed to swipe a card to start the equipment, but the swipe card would only activate if it had been swiped first at a hygiene station?

Changing behaviour at the gym, at the hospital, in your line of work is tough, but it's also the reason why we are in business. After all, business is about moving people from an intended to actual purchase.  Here's the big tip; spend more time on what influences the actual behaviour and less on what people say they will do and you'll see your results flow. Happy changing.

PS If you like my blog, I'd love you to consider supporting my fundraising trek of the Larapinta trail. Every bit helps so to find out more, visit https://www.gofundraise.com.au/page/BriforICV  Thank you!

 Image from http://talktowarren.wordpress.com/tag/patient-safety/

Converting browsers to buyers: Lessons from a food charity

What's the cost of your favourite meal?  $10? $25? That is the question posed by WeFeedBack as part of a clever online App that turns charitable intention into donating behaviour and which serves as a great case study for businesses wanting to turn browsers into buyers.

Meet the WeFeedBack Calculator App 

The WeFeedBack App is part of the World Food Programme's global effort to encourage donations to feed hungry and malnourished children, but instead of simply asking you to donate an amount you pluck out of thin air, they take you through a simple but evocative calculation.  Note the cost of your favourite food (say $10 for a focaccia) x the number of serves (eg 3 a week) = $30. The calculator then tells you how many children could be fed by a donation of the same value (in this example, 100).  Suddenly a donation of $30 seems embarrassingly affordable, easing my focaccia addled-conscience by offering great value for my contribution.

So let's look at the behavioural principles at play here.

• Framing - the App is contextualising one number ($30) with another larger number (100), serving to diminish the scale of the donated amount. In other words, $30 seems trivial because my brain has processed a bigger number as part of the same process.  (You see this all the time in retail where the Recommended Retail Price is left on the tag during a sale to influence your sense that the mark-down offers great value)
• Loss aversion - the App minimises any sense of loss I feel at donating money by amplifying the value generated. $30 to feed 100 kids? No downside there.  Further, it gets around the sense of sacrifice I might feel otherwise if it was asking me to forgo my focaccia. Instead, it is asking me to match the value of my favourite food, not stop buying it.
• IKEA effect - just like we value the bookcase we assembled more than one in which we played no role, we are more likely to donate through this calculator App than one in which we had no involvement in 'building' the donated value. The App involves us on a very personal basis by asking for our favourite food, not just presenting a table of commonly consumed foods.  

Lessons for business

Just as the World Food Programme is working to convert intention (give to charity) to behaviour (actually donating), businesses endeavour to convert browsers to buyers.  So what would a business version of this App look like, using similar behavioural principles?

Imagine you are a gym and trying to sell annual memberships. What if you asked people to calculate;

• The number of visits to the doctor or other health professional they had last year (say 7) by the average value of these visits (say $65).  Suddenly the calculator tells them they have spent $455 on "sickness".  Contrast this with what they would be spending on "wellness" aka gym membership a week (say $500 membership is less than $10 a week). You have framed the $10 in the context of $455 and started to build a convincing case.

How about car insurance?

• What about asking them to calculate the time spent every day in their car (say 30 minute commute x twice a day x 5 days + 3 hours on weekends = 8 hours a week).  Wow.  You spend the equivalent of 1 full work day in your car - surely it's worth insuring a day of your life?  

You get the idea. Draw a personally relevant example (my favourite food, my doctor's visits, my time in the car) and extrapolate its value to contextualise what you are asking them to spend. Get them to engage in the (must be simple) calculation to heighten their sense of ownership in the process, and make magnify their benefits to close the deal. Happy conversion.

How private labels are lulling us into higher prices

There has been quite a bit of press lately about the rise of private labels (house brands) in Australian supermarkets like Coles and Woolworths, and speculation about what this means for brand manufacturers.  An IBISWorld prediction cited in The Age has house brands growing from 23 to 30 per cent share of the $70 billion grocery market in the next five years, and companies like Heinz, De Bortoli and Goodman Fielder are publicly lamenting the dominance of house brands.  As most of us visit a supermarket every week, I thought it was worth examining private labels from a behavioural perspective to understand why we are shifting our consumption to house brands. 

How do private labels work from a behavioural perspective?
Private labels are behaviourally persuasive for a few reasons;

• Rules of thumb - in order to deal with the level of stimulation and choices available to us, we operate on auto pilot a lot of the time, using rules of thumb to guide our decision making. Private labels simplify our shopping experience because they create one simple rule - "buy this brand because it is good value".
• Self-herding - private label branding stretches across multiple product categories. The effect is that if I purchase and am satisfied with one category, I will be more prone to repeat my decision for that and extended categories rather than having to trial an alternative brand.  It's worth noting the risk for the private labels here - a poor experience of one category can poison all others. 
• Relativity - to understand whether something is good value, we compare it with similar items.  Our tendency is to stay away from the extremities - too expensive or too cheap - and settle for something that is somewhere closer to the middle.  Amongst others Woolworths have "Woolworths Select" and "Homebrand" and Coles have "Coles" and "Smartbuy"house brands.  This enables them to use one of their brands as their loss leader, leave the supplier's brand as the most expensive and their second brand as the attractive option in the middle. 

How our behaviour is changing the supermarket industry
By influencing individuals, private labels are changing the market in a couple of ways;

• Short-term bias - we are strongly swayed by the immediate rather than long term, and this has significant consequences for the supermarket industry and why brand suppliers are so worried.  We shoppers are buying for now - selecting items that meet our requirements in terms of utility and budget, and house brands are more than ever meeting this brief.  The risk with this behaviour is that through our actions, in this case buying house brands, we are slowly driving brand suppliers out of the market.  We are being lulled into a future of diminished choice, diminished competition and ultimately, higher prices.
• Drop in the bucket effect - along with our short-term bias, it is hard for us to contemplate how our individual purchase decisions can impact the whole supermarket industry.  We think that our actions are simply drops in the bucket that cannot have a broader implication, and this plays right into the hands of the supermarkets who know that engaging an individual is their path to engaging the mass.  

Lessons for other businesses
The rise of private labels clearly shows that shopper behaviour can be changed and new habits formed.  House brands have gone from being a dirty little secret in your pantry to a sign of 'smart' buying.  For all businesses it means that there are opportunities for growth by understanding how to influence consumer behaviour, and what better rule book than the field of behavioural economics to change the game?  See you at the check out.


(Image from http://www.foodmag.com.au/news/demand-for-private-labels-set-to-double-in-2025--r)

Getting ripped not ripped off at the gym: Price anchoring at work

I walked away.  Her best offer was $16.50 a week for gym membership, better than the $18 I was already spending as a casual member, and yet I turned down the offer. Why? 

Pricing psychology is such an important part of every business and behavioural economics can go along way towards understanding why customers react to deals the way they do.  Here are eight lessons from how my gym botched the deal.

Over the past few months the gym had sent me text messages offering $18 a week memberships, the same price as my weekly Zumba class.  This was their attempt at winning me over by saying "you may as well because that's what you're spending anyway".  Why didn't it work? Commitment to 12 months. Lesson 1. Don't ask your customer for a commitment without rewarding them beyond what a 'casual' customer would receive.  And because the offer was texted to my phone, any other benefits of membership (better change rooms for instance) were not explained.  If using this strategy, parcel the benefits with the price in each and every communication. A text saying "Unlimited Zumba plus full access to pool, yoga + sauna no add cost" might have been better.

So now $18 was anchored as my membership price expectation.  Lesson 2. Whatever deal your customer first sees is vital because it is the offer against which all others will be judged.  This of course can work very well for a savvy business because it sets an upper limit against which you can offer discounts. 

The other important aspect here is that $18 anchored the price in context.  The $18 for gym membership was seen as relatively expensive and yet I have spent more on that in yogurt in the last 2 weeks. When I was later comparing a cheaper deal to that anchored price, I was judging them relative to gym prices only, not other lifestyle costs. Lesson 3. Take the opportunity to broaden your customer's frame of reference with other price anchors to influence how your pricing is perceived.  And the other anchors don't even have to be relevant! Duke University's Dan Ariely has demonstrated that numbers as random as the last four digits of a social security number can influence the price people are willing to pay for wine. My gym could have cited average costs per week of Internet, train travel or something else just to broaden the context in which I was judging the value of the membership.

The gym next texted me a deal for $16 per week.  Hmmm, that was getting more like it; I would be saving on my Zumba!   Note how I thought about it as saving money rather than spending less money; this is the concept of sunk cost where people fixate on the incremental change (saving $2) rather than the outlay (paying $16).  Lesson 4. Sunk cost is extremely powerful because your customer's mind will be busy calculating the differential value rather than worrying about the actual cost. 

But another week elapsed before I took action and the offer reverted to $18. So I now had an upper price anchor of $18 and a lower price anchor of $16.  This is another useful technique for savvy businesses because you can help your customer understand that the deals are not forever, and they need to act when one crops up.  The concept at play here is loss aversion, where it hurts to lose a potential discount.  Lesson 5. Sequencing favourable and less favourable deals can help drive take up.  Petrol pricing is typical of this behaviour where we rush to buy petrol at its low ebb during a particular day of the week.

So then it came to my next offer. A rep from the gym called me and offered $13 per week.  Well, that was too good to refuse.  I had rejected $18, so this saved me $5, and I had missed out on the great value $16 offer, so I was ready to sign. And the fact that a rep called me rather than texted probably didn't hurt either because it distinguished the deal from others.  Lesson 6. Make sure killer offers cut through as special and close the deal.

Having arranged to meet the rep at a specific time and had that confirmed by him via text that day, I was a bit confused when told he had gone home for the day.  Lesson 7. Customers hate being bounced and it can jolt them from a future focus (I'm going to me a gym member) to current focus (if this is how they treat prospective customers...). Confirming an appointment only to sub in a colleague who does not have full background information gets your customer in a negative frame of mind when you want them to be thinking "yes!".

Fifteen minutes later his colleague met with me with the latest offer.  Here's how our conversation went;

• Gym rep - "For a commitment-free membership we can offer $22 a week. Otherwise, you can take our special deal of $16.50 per week for 12 months"  (Note nice use of anchoring at higher casual rate before mentioning contract rate)
• Me with puzzled expression - "I'm confused. Your colleague offered me $13"
• Gym rep - "I'm sorry, that deal has expired"
• Me - "I wasn't told it would expire, and had arranged with your colleague to sign up for that"
• Gym rep - "As I say, that deal expired and the best I can offer is $16.50."
• Me - "Ummm. Can I think about it?" (when confused, delay)
• Gym rep - "Well unfortunately I can only offer that price tonight"  (Nice pressure. Tapping into my loss aversion") 
• Me -"I'm going to have to think about it" (preparedness to walk away because I felt that I has been lured to sign through misleading representations, but also because I had previously 'walked away' from $16 by not acting on that deal, so I knew I could live without it.)

 So I walked away. 

The gym almost had me, and had used different anchoring techniques to finally get me to a position of commitment. Spooking me with a more expensive deal was a mistake they could have easily avoided by clarifying the deadline for the $13 offer.  

However, the most surprising part of this is that had they come back and offered me a deal somewhere between $16.50 and $13 I would have signed.  Whilst $14 or $15 was more than their best deal, I could have worn the fact that that offer was for a limited time and I was still doing better than $16.50.  What's going on here?  Think back to sunk cost. By turning up ready to sign, I had psychologically 'spent' $13, so anything that was closer to my end of the pricing spectrum ($13) than the gym's ($16.50), was acceptable. Lesson 8. Just because you've anchored the price low doesn't mean you necessarily have to go there to win the business.

In actual fact they called and honoured the $13 deal so I am now a paid up, committed member. Fair to say there were some bumps and turns in how the local gym influenced my decision to do business with them, and it didn't need to be so clumsy. I trust you will be able to apply these eight lessons to engage your potential customers.

1. Don't ask your customer for a commitment without rewarding them beyond what a 'casual' customer would
2. Whatever deal your customer first sees is vital because it is the offer against which all others will be judged
3. Take the opportunity to broaden your customer's frame of reference with other price anchors to influence how your pricing is perceived 
4. Sunk cost is extremely powerful because your customer's mind will be busy calculating the differential value rather than worrying about the actual cost 
5. Sequencing favourable and less favourable deals can help drive take up
6. Make sure killer offers cut through as special and close the deal
7. Customers hate being bounced and it can jolt them from a future focus to current focus
8. Just because you've anchored the price low doesn't mean you necessarily have to go there to win the business

Image from Foster City, and no it's not me!