3 business lessons from poking your tongue

Sticking my tongue out was all part of the plan.  It felt a bit uncomfortable, a bit rude, but it's once again driven home for me the importance to businesses of understanding behavioural economics.

I am fortunate enough to work with an employer who provides a range of health services, and this month was a Chinese Medicine 'Tongue and Pulse' check.  For those who haven't experienced this form of health assessment, effectively the tongue's colour, shape and texture can provide clues about the larger biological system.  It involves you poking your tongue out at the practitioner who then prescribes a course of holistic treatment.

Now not only can the Tongue poking experience, or more correctly, the opportunity provided by my employer to poke my tongue, illustrate some of the behavioural principles at play, but so too the promotion of a free Internet conference that passed my desk.  So here are three lessons about behavioural economics to apply to your business.

1. Free isn't without cost...to your customer
The 15 minute appointment was provided free to employees, and even right there, in my building. Further, it was being coordinated through a credible organisation so I had nothing to lose except 15 minutes, and the gain was a new experience that I could choose whether or not to pursue.  If you are trying to get a customer to try something new, it should go without saying that the gain should exceed any "loss", or perceived cost.  However in our excitement to wear the financial cost of delivering the "free" service to customers, we sometimes overlook the cost of free to them.  This can include time, money, status, power....anything that is important to that person.  Free + convenient + credible in this case encouraged me to make the booking. 

On the flip side of 'free', a brochure for The Internet Show was doing the rounds at work, touting 70 free educational seminars.  In this context, 'free' actually worked to denigrate the perceived quality of the conference and people flicked the brochure on to others without being stimulated to attend.  Fundamentally, the effort and time required to attend was greater than the chance of absorbing free content.

What could The Internet Show have done? Perhaps limited free tickets to the first, say 26 to register, thereby stimulating activity by tapping into our aversion to loss.  If I think something will be taken away or forfeited, it makes it harder to give up.  Otherwise, they could have provided something other than the content for free. For example, by promoting that the conference fee of $xyz would be waived for anyone who signed up by 9am or visited two exhibition booths would at least have distanced the connotations of 'free' from the perception of content quality.

2. Safety in numbers
We are a pack species, a herd, and typically like to go where others are (in a general sense, I'm not talking about a romantic beach getaway here).  When the Tongue message was circulated, it became a talking point. Are you going? Maybe. You?  We were seeking some reassurance that others thought the experience worthwhile.  In the booking system, it was encouraging to see that appointments had already gone.  If others think this is ok, I will too.  If you are setting up a booking system or trying to stimulate courage to try something new, let it be known how many have tried your service, and even book out appointments if that helps to create a sense of confidence.

The Internet Show on the other hand, had negative herding going on. The poor first impression aka thin slice with its emphasis on "free" and junky looking material, worked against this conference.  Can you turn a herd around?  Not easily would be the answer. But this is where marketing is central to identify early adopters, secure their advocacy and spread the word.  The speakers are the best place to start - getting them to use their networks and personal credibility to draw the crowd.  For your business, substitute speakers with product managers and the lesson is to get your product managers to shape the herd by lifting the profile of their products through media, speaking gigs, blogs. In a socially networked society, why not use it to shape product herds by using professional credibility?

3. Choice overload
By the conclusion of my Tongue assessment, my interest in Chinese Medicine was definitely piqued enough to seek out a local practitioner. To the search phase! I tried a range of directories and search engines, but have not yet landed on a practitioner I feel comfortable contacting. Why? The choice is overwhelming. Near work or home? Acupuncture or herbal specialist? Private health insurance or not? This directory service or that?  Choice overload is well documented, and can result too often in decision paralysis - it just gets too hard.  What would have helped? A list of practitioners provided by my initial Tongue assessor to streamline my choices.

The Internet Show fell into the choice overload trap as well. 70 seminars to select from across three content streams and two days.  I was exhausted going from one agenda to the other, and so will end up attending none. 

Keep it simple should be your mantra. Fewer choices mean better conversion.  Now, it doesn't necessarily mean paring back your product range, but it may mean communicating your range in a different way. Check out http://www.boutiques.com/ if you want to see how an online retailer has helped reduce choice by personalising the catalogue according to your tastes. 

So three illustrations of behavioural economics; free, herding and choice overload from something as simple as poking your tongue.  How have you reacted to free stuff in the past, and do you agree that we are herders?  I look forward to hearing.

Picture from http://www.infovisual.info/03/photo/tongue.html

Interest rates get a rise: A Behavioural Economics perspective

It's been two weeks since Americain won the Melbourne Cup and the Reserve Bank of Australia (RBA) raised the cash rate by 25 basis points.  In both cases the result was unexpected.  The Commonwealth Bank (CBA) responded by lifting variable rates by 43 basis points with the other "big banks" following a week later with increases between 39 and 42%.  Public outrage was followed by political outrage as both major parties muttered about how to regulate the power wielded by the big banks. But what does Behavioural Economics tell us about the reaction to interest rate increases above the RBA rate?

1. Pricing irrationality
Have you moved your home loan as a result of the interest rate policy change? Let's take a minute to consider the scale of what CBA did.  On an average $300k loan the increase of 43 basis points (CBA) vs 25 (RBA) is a difference of 18 cents per dollar.  Over 30 years this is $54,000 or $34 or week.  $54,000 must be worth consideration, right?

Remember when petrol was less than $1 a litre?  Not that long ago, but now that the psychological barrier has been broken, we find ourselves paying $1.29 and beyond on a regular basis. Where's the outrage now?  Around the same time, Woolworths and Coles introduced their petrol docket savers where you can knock off $0.04 per litre.  On a 40L tank that's $1.60.  100L tank, $4.   For around the price of a coffee the petrol savers have been an outrageous success for the grocers because they have changed behaviour in their favour - people shopping in their outlets so they can save on petrol.

$54,000 vs 4c a litre.  I'd hazard a guess and say that more people have changed their grocery shopping than changed banks.  Why? We have different scales of pricing in our minds due to the effects of priming and consideration of one activity (petrol) does not means reconsideration of another (mortgage).

2. Revenge
I'll take my loan elsewhere!  I won't put up with this treatment! Revenge is a powerful emotional reaction and Behavioural Economics has illustrated it can cause irrational responses.  In the example of interest rates the revenge would be withdrawal of your business and it would be irrational because of the financial detriment through exit fees and the inevitability of rate changes across all loan providers.

3. Adaptation
Dan Ariely covers Adaptation in "The Upside of Irrationality".  Pretty simply, we underestimate how quickly we become desensitized to change.  And that's why two weeks after the interest rate shift it has faded to the background and I imagine very few people are still contemplating a change of bank. Of course this is exactly what the banks prey on - we get used to the higher rates, we get used to the standard of service and we adapt to paying more for our mortgages.

An interesting aside with adaptation- we are more likely to adapt when the change is less frequent.  In this case, an annual interest rate hike would in theory be less inflammatory than the monthly expectation-teasing RBA announcement.

4. Identifiable victim
The concept here is that we respond to individual suffering rather than the suffering of masses.  World Vision apply this principle when they ask that you sponsor a child rather than support a community. What do interest rates have to so with this?  Two things - from the bank's perspective they treat us as a mass and so do not see the suffering of individuals for whom a rate rise is devastating. And from our perspective, we would probably cope better with the behaviour of banks if they presented themselves as individuals who are making decisions in the best interests of their community ie shareholders.  And given many of us are bank shareholders (through Superannuation and managed funds), personalising the benefit may soften the blow.

5. Self herding
This is not the first time the banks have exceeded the RBA's official increase.  Can you remember the dates of other changes?  I can't. Although I can remember I was outraged. And I can remember I didn't switch banks. What that leads to is repeatable behaviour - in other words, I remembered I was annoyed but didn't do anything.  Therefore this time I am more likely to follow the same (inert) path.  Self-herding suggests that we recall our actions, apply them to a more general principle, and then follow the same path when a a similar situation happens.  Again, the banks rely on the pattern of inertia when they increase rates - much like insurance companies and utilities providers who increase prices.

6. Priming
Priming is where our pricing expectations are set in relation to a particular context. In this case, the RBA has primed our expectations of what is a "fair" increase at 25 basis points.  When the banks move in line with this, people get on with life because there is no one really to blame.  It is only when the banks "price gouge" by moving beyond the RBA rate that it becomes a story. 

Where does all this leave us when it comes to interest rate increases beyond the official cash rate?  It's an understandable reaction to get angry when the banks breach our sense of fair play, but I think a large part of the issue is that we get mad at ourselves for not acting the last time it happened.  It's our irrational selves at play - expending more energy looking for discounted groceries than the best loan.  So before the next rate change there are a couple of things you can do - check which banks you have shareholdings with because it may ease the pain if you ultimately profit, and of course, if you are not satisfied with your bank, take action in anticipation of another inevitable rate increase.