Nudge theory | Incorporate Nudging in Marketing with behavioural economics

Nudge theory economist from the Boothe School of Business recently won the much deserved Nobel prize for economics, in this case behavioral economics. I was so fired up this Oct 9th, when the award was announced; I believe must have woken up half of Boothe at 5.30 AM EST.

At the core of behavioral economics is the idea that we are not always rational beings. Our decisions are driven by a range of factors beneath our subconscious (desires, habits, social norms) and these factors are consistent, predictable and can be understood.This principal can be used to influence consumer decision making. It’s often called “nudging” which involves an effective little help to adopt a desired behavior either consciously or subconsciously. This is achieved by leveraging subconscious drivers (such as framing, loss aversion and reciprocity) and making a certain behavior easier than an alternative path.Fintech and insurtech products which show a degree of distinction and nuance are terrific candidates for Nudging.

Here are two typical retail examples of nudge theory at work:

  • Shoppers who came across a tasting booth with a limited selection (6 jams) were
    substantially more likely to purchase a jar of jam versus those who had visited a booth with
    a wide selection (24 jams). When there are too many unfamiliar options, consumer confidence in their selection is diminished, and thus they avoid making a decision altogether.
  • The addition of a small sign that read “no more than 12 cans per customer” actually doubled the amount of soup shoppers bought, by effectively “anchoring” their decision process. Anchoring occurs when individuals use an initial piece of information to make subsequent judgments. Once an anchor is set, other judgments are made by adjusting away from that anchor.

Both of these examples did not involve strongly enticing or cajoling people into changing their behavior, they simply made a desired behavior “easier” than an alternative choice.

It’s important to keep in mind 3 principals when applying nudging to marketing:

  1. Nudging compliments rather than replaces traditional marketing. Marketing creates the desire while nudging facilitates the follow-through.
  2. Nudging involves creating new habits as many human behaviors are a function of our ingrained habits. Therefore, nudging is best suited to category-level behavior (adopting a new product) not brand preference (which brand of salad dressing should I buy?). Fintech and insurtech products which show a degree of distinction and nuance are terrific candidates for Nudging
  3. Nudging works most effectively when it is used for good, creating a “win-win” situation for both companies and individuals. (ex. nudging people to eat more fresh produce through a series of large green arrows on the floor, making a trail to the produce section.)

Where can nudging be used most effectively? First with regards to digital adoption as this area provides benefits of convenience and cost to both consumers and marketers. (ex. Use a digital app to buy insurance rather than going through a broker.) This is a change many people want to make but need help with. Another area is in the shopping aisle to drive incremental purchases and to nudge consumers to consider additional product categories. Lastly nudging can be used to educate marketers and hopefully make it part of the marketing toolbox.

In summary, nudging holds the potential to shift the marketing paradigm. In this increasingly competitive world, consumers can’t be influenced through claims, features and benefits alone. Nudging may make marketing more effective as it shifts the focus towards creating new habits rather than constantly fighting for brand share.

 

Inspired by: Anne Stephenson, Partner, Explorer Research

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