Using time to heal payment wounds

Ever noticed those print and billboard ads for expensive cars that tell you how little per week you have to pay to own the latest model?  Welcome to "duration neglect", our tendency to ignore the time period over which we would need to repay and concentrate instead on the size of the repayments.


Short-term bias
Lurking behind duration neglect is the behavioural principle of short term bias.  In effect, we can better understand the impacts of something in the short rather than longer term. That means I can more easily make an assessment of the impacts of the repayment on my financial circumstances in the coming weeks and months, but I can't readily comprehend the impact having to make the repayment every period over the term will have on my lifestyle.  Added to that, I can easily see the benefit the product I am buying will have, but I will be fuzzy on whether I'll still be enjoying it in two years time.

Big ticket items like cars and mortgages use duration neglect to great effect. For example, say I was going to buy a fancy car for $89,000.  Weekly repayments over 12 months would be $1,700.  Let's spread that out over 24 months instead. Wow, now only $856.  Seems obvious, but that doesn't mean every business is using this "duration neglect" to best frame their costs.

1. Soften the blow
As all shrewd business folk know, when a customer baulks at the price it is sensible practice to reduce its impact.  Whilst discounts are an obvious strategy, breaking the payments down into time periods is another useful tactic, for instance marketing the weekly or monthly value with greater prominence than the yearly value*.  Phone companies are masters at this. I mean, who would want to pay over $1,700 for an iPhone for two years? Much more tolerable to pay $72 a month.

Remember that having a conversation with a customer about what the total value means when you think of it over a daily, weekly or monthly period is different from actually marketing, contracting and structuring your payment terms this way.  The first is helping the customer contextualise the amount they will spend by using smaller units ("it's like two coffees a week"). The second is this plus a contractual arrangement that has implications for your business cash flow.

(*Please confirm your legal obligations as they relate to disclosure of the full value over the contract period.)

2. Consider the peak-end rule
The peak-end rule in behavioural economics effectively means that people judge the experience based on the highest/lowest point and the conclusion.  Now if they receive the goods immediately and pay the balance later, this will obviously be a high point. For that reason I'd suggest getting as much money at that point as possible, when excitement is at its peak.

But what if my customer is cash-strapped? Fair enough, and "buy now, pay later" can be a very effective inducement. In that case, better to have instalment options so the customer doesn't get slugged at the end.  Paying a big sum for a couch that now has stains and dog hair on it will hurt.

If they are layby-ing (paying by instalment) and receive goods at the end, you can consider making the final payment the largest to again couple it with the benefit of the product.

So the key lesson for businesses from duration neglect is to consider how best to discuss and structure your costs. Of course, I would also caution you to consider the financial circumstances of your customer and comply with your legal and ethical obligations.


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Persuading buyers with number psychology

We're in the season of mid-year sales, so here are a couple of pointers about representing discounts and prices to maximise your conversion.


1. How to best represent a discount range
Many businesses offer a range of discounts depending on the stock. Some might be marked down by 20%, others 50%, so is it better to say "20% to 50% off" or "up to 50% off"?

Here are a couple of examples from the local paper. Advertiser 1 is communicating the discount range whereas Advertiser 2 is using the upper limit only.

Advertiser 1 Range of dicsounts

Advertiser 2 Upper Discount only

According to Dr Flint McGlaughlin from Marketing Experiments, people tend to assume the first number represents the most common discount, so in the case of Advertiser 1, most people would believe that the majority of rugs are 25% off.  You are therefore better to follow Advertiser 2's technique and go with "up to xx% off".

2. Use decimals to elongate or diminish the number
To make a number look bigger, add decimals. To diminish the number, round off.

Sometimes you want the number to look big, for instance when offering a cash prize or promoting the amount of money you have donated.  Take an example from Advertiser 3 below who is touting a cash prize and therefore has added decimals to elongate the number, and compare it with Advertiser 4 who missed the opportunity and instead rounded the amount they have donated to the community.

Advertiser 3 Added decimals

Advertiser 4 Rounded number

When you want the number to look smaller, try rounding.  Flip through a real estate section to see examples like Advertiser 5 who has diminished the price and contrast this with Advertiser 6 who has not.  And finally, learn from Advertiser 7 who missed the chance to make the price seem small by adding unnecessary decimals, elongating the number.  Representing the price as $139 would have been more effective.

Advertiser 5 Rounded  number

Advertiser 6 Unrounded number

Advertiser 7 Added decimals

There are examples all around you of how numbers and discounts have been communicated.  Whilst we're only scratched the surface in this post, the lesson is that you cannot take the decision about how to represent a number for granted because it will have a significant impact on buying behaviour.  Be smart about your choices and you will maximise your marketing conversion.

PS Why not join the People Patterns mailing list?  Every month you'll receive a short wrap-up of top news from the behavioural sciences and other nuggets of goodness from me. Click here to sign-up.

Getting your bills paid: The persuasive power of a smiley face

Bills. We all get them and all businesses send them so let's look at what you can do to encourage on-time payment using the lessons of Behavioural Economics.  After all, I'm sure you've got better things to do than chase late paying customers?

1. Use social norming to persuade 
In the US a utility provider trialled a number of different strategies on utility bills to encourage a reduction in energy consumption.  First they included a comparison of your usage to that of your neighbourhood. People who had above-average consumption felt shamed enough to reign in their consumption - good news!  But those who had had below average consumption suddenly realised they could relax a bit, which saw their energy consumption rise toward the average.  Bad news.

What was happening here?  People are powerfully persuaded by what others are doing, both right and wrong.  Whilst this trial was effective in curbing the energy-hog behaviours, it didn't work with the lighter-users.

So the utility provider went back to the drawing board. Realising the influential power of what other's are doing, they tried another tactic. To the usage comparisons they added one small feature on the bills of the below-average energy users: a smiley face.  Those who were using less energy than their neighbours were now being acknowledged for their positive efforts, and through this, persuaded to continue.  Don't under-estimate the power of :)

When it comes to on-time bill payment, you can use the same logic.  Imagine a bar graph in the corner of your bill which compared average days to finalise the account along the lines of the following;

For notorious late payer XYZ Co this could help influence their behaviour towards the average.

On the other hand, so that early payer ABC Co doesn't get sloppy, you would include a reinforcing smiley face on their account.

2. Use on-time payment discount rather than late payment penalty

The telecommunications provider I am with threatens a $15 penalty for late payment.  My utilities provider on the other hand, offers me a 5% discount for paying on time.  Which do you think is more positively regarded by me as a customer?  The on-time discount offer is a much more constructive method of persuading people to pay their bills by the due date, and this is thanks to the impact of loss aversion.  In this case, it is painful to forgo the discount offered so I make sure I pay on-time. If I don't, I am to blame. In the late-fee example, I still may pay on time but that is because I hate the policy.  If I get charged the fee, the company is to blame.

Make your bills work harder so you don't have to

Chasing over due bills is a time sucking, painful task for businesses.  Using your billing paperwork to influence the bill payer will hopefully alleviate some of your pain. Happy billing.

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, visithttps://www.gofundraise.com.au/page/BriforICV Thank you!

Why free delivery can beat % off discount

Walking past a bedding retailer the other day and the sign on the pathway caught my attention as a nice little example of applied Behavioural Economics.  "Today only.  Free delivery".  Delivery costs around $40, so offering it as a free service is the equivalent of around a 10% discount on  a queen size mattress retailing for $400, but they chose to advertise the free service rather than reduced price.  Why?  Because 'free!' is much more behaviourally persuasive than a mere discount.

The online behemoth Amazon was one of the first to use this technique online.  Amazon offer free shipping for books over a certain value ($25), and what they find is people prefer to spend more to qualify for the free shipping than pay for the service.  In other words, people buy two books and spend more than $25 just to avoid paying a few dollars for shipping.

The behaviour behind this is loss aversion. We hate to lose and paying for a service like postage from which you gain little, is simply painful to our psyche.

Whilst the Amazon model is great for customers in the US, not so for us internationals!

Enter The Book Depository UK that offers free shipping anywhere in the world for any book.  Whilst the list price for the item is usually higher than Amazon, shipping is free.  By way of example, "Disrupt! Think the Unthinkable to Spark Transformation in Your Business" by Luke Williams is available on Amazon for $16.79 plus $9.81 shipping so the total is $26.31.  On The Book Depository the book is $24.74 inclusive of shipping.

The Book Depository has hooked into a key behavioural element here; we don't like to feel that we are paying for services related to the product.  Whilst I know that the higher listed price must cover the cost of shipping, to me the value of the purchase is in the book - the thing I am seeking to buy.  I feel better paying more for the item than I do for services that really have nothing to do with the product itself.  I will retain the book, I don't retain the delivery service.

And this is the genius of the free mattress delivery. I keep the mattress, I don't keep the delivery. Discount the element of your offer in which I see no ongoing benefit and I'll be a happy shopper.  So when you are next seeking to attract buyers to your shop, consider which elements of the product you are best to discount.  Scrapping annoying services costs might be a great place to start.

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, visithttps://www.gofundraise.com.au/page/BriforICV Thank you!

Tips for introducing a service fee

Debating whether you should introduce a fee of some kind to cover a service you provide? There are obvious financial advantages to your bottom line, but is it worth the negative reaction you may get from customers? Here are three behavioural principles that will help you consider your options.

Social contract

Charging for something shifts it from social to commercial transaction, and this means that the service will be viewed differently. In a case study profiled in “Predictably Irrational” by Dan Ariely, a childcare center imposed a fee on parents who were late in collecting their child. Sounds like a sensible idea, motivating those parents prone to tardiness to make more of an effort to get there on time.  But what happened? Tardiness became worse!  Why? Parents felt less guilty about being late because they were now “paying” for it.  The arrangement had shifted from a social to financial transaction, and expectations shifted in kind.  In your business, take note of how social norms are influencing the behaviour of your customers before you shift it to entitlement territory.

Adaptation

We adapt to something faster if we are not interrupted and reminded about it (think ‘quick like a Bandaid’).  By introducing a service fee you will be drawing attention to that service every time you charge for it.   If it’s great service, it can be a good move to charge every time so that you can showcase the value and prevent customers taking it for granted (adapting to it). But if your service is not that hot or not easily understood, better the charge is either infrequent (like annual) or deemphasised (don’t provide long-winded explanations on every bill) so that customers have a chance to forget about it after initially being annoyed. 

Loss aversion

The power of fees is often in what you do not charge.  “We’ll waive normal joining fees” or “We’ve scrapped fees” are popular techniques amongst banks and gyms because they placate our aversion to loss – we feel like winners because we’ve avoided the pain of a fee.  For the reason alone of customer motivation it is worth having some sort of fee that you can waive as you need.

From your own experience as a consumer it should come as no surprise that service fees are often resented.  The opportunity for your business is to know how and why you can use fees to influence customer outcomes and overcome potential resentment, and to proceed knowing that it’s not as simple as cost recovery.  Until next time, happy charging.

This article also appeared in Smartcompany.com.

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