Four vital concepts of behavioural economics

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Your customers are humans and human behaviour is complicated.

Many psychological theories exist to help explain why people do what they do, and when those theories apply to how people behave as customers, they are called Behavioral Economics.

I have been studying Behavioral Economics for a few years now and applying those principles to Customer Experience. However, a colleague pointed out to me that sometimes I forget that everyone else hasn’t necessarily been as engrossed in the topic as me and when I talk about them, it’s a bit like drinking from a firehose for the audience.

My co-host (the aforementioned “colleague”), Professor Ryan Hamilton of Emory University shared a framework he calls the 4 Rs to help explain some of the basics of Behavioral Economics on a recent podcast. He says they are the four basic summaries of human behavior.

The 4 Rs represent the following four concepts:

Reference Points: People compare you to other Customer Experiences they have had.

Reasons: People need a reason to make a purchase, so they might be using a proxy reason that is related to their purchase but not necessarily the real reason.

Resources: People have a limited amount of cognitive reserves, and they don’t like to use them up, so they like for many buying decisions to be easy.

Replacement: People want to complete tasks, including decision-making, so if your experience is complex or the decision is difficult, they might substitute a different choice that is related that they can answer right away.

Let’s take a closer look at each.

#1: Reference Points

Understanding customers’ Reference Points are critical in Customer Experience. The idea of reference points is that customers could judge the same thing as excellent or unfortunate depending on what they use as a comparison. A reference point is a previous experience that serves as a standard for the customer; it is what they use to compare you.

A reference point can be a good or bad experience and affects the outcome of the customers’ perception of your experience for good or ill. For example, if you are staying in a hotel in a certain city and a friend of yours has stayed there also, and they say, “It’s like the Four Seasons Resort,” you now have a pretty high reference point. However, if your friend says, “Bring Clorox wipes,” your standard is considerably lower.

Let’s assume was a pleasant but middle-of-the-road experience. Depending on which reference point you have from your friend, your stay at the hotel will either be disappointing or a pleasant surprise.

We almost always have a reference point we use when we judge an experience, even if it isn’t from the same industry. One of our team members was disappointed when something she ordered online from a clothing site took two weeks to get to her. She was used to Amazon Prime’s two-day shipping timeline.  Amazon is not a clothing site (although it sells clothes, too), but she still used it as a Reference Point for her experience with the clothing site.

You have to know what your customers’ reference point is to help you meet their expectations or exceed them as the case may be. Figure out what the Reference Points may be that the customer is bringing into the experience so you can manage your experience appropriately.

#2: Reasons

When people make choices, they need reasons. People always have reasons they do what they do, but the reasons aren’t always the real reasons they do what they do. In a Customer Experience, Reasons addresses how people will tell you why they bought your product or service, whether it is the real reason or not.

When people do not know the real reason they bought a product or service, it is because it happens at a subconscious level. Our subconscious mind is always working on interpreting the world around us. In certain situations, it can make buying decisions for us and not share the reason with the conscious mind.

However, people are not content to have no reason why they did something. In that case, they might create a substitute reason that sounds good. You must give your customers legitimate reasons to buy your product or service. Otherwise, they are going to make up their own.

In our global Customer Experience consultancy, we use the Emotional Signature® to help organizations discover what the “real reasons” are to buy their product or service. The Emotional Signature measures the emotional engagement you have with your customers.

The Emotional Signature product also shows you which emotions drive more business for your brand. Once you have that information, you can design your experience to evoke that emotion from end-to-end and at the same time, give your customer a good reason to buy.

#3: Resources

People have limited amounts of attention, time and patience at any given time. We also want to conserve them all as much as possible, and especially when we are customers.

When people have used up their resources, they feel tired. People make decisions differently when they are tired. Furthermore, they want fast and easy experiences. When they don’t get them, it can have adverse effects on their assessment of your experience.

For example, if you have a multi-step account setup process for a first-time customer on your website, and they are setting up an account at the end of a long day, you can expect them to be more frustrated than a person who is setting up an account first thing in the morning.

Why? People are more frustrated with your experience when they did it at night because they didn’t have the resources available that it requires.

When you are trying to anticipate how people are going to make decisions, consider their resources. Are they going to be in a situation where they have loads of attention, time, and patience available? Are there time or emotional factors that can compromise their resources? Once you have an idea of your customers’ resources during the experience, you can anticipate their needs in your Customer Experience design. You can get inside their head.

If you want to know more about resources, you might listen to a previous podcast called, “Are You Making Intuitive or Rational Decisions?” We talk in more detail about why the amount of our resources we have available affects how we make decisions.  

#4: Replacement

People like to get things done, and that includes making a decision. When a buying decision is confusing or if a person doesn’t have all the information but wants to make a decision anyway, they might replace the decision with a different one that is easier to answer.

Heuristics are shortcuts in thinking. They help us make decisions in these situations. There are many different heuristics that we use in our decision-making that range from the Popularity heuristic, which is choosing the option most other people wanted, to the Availability heuristic, which is where you search your memory of examples to help you predict the future. We replace the actual decision with these shortcuts so we can complete the task.

Another substitution is using a more straightforward question to answer as a replacement for the problem we face. Professor Hamilton’s favorite example is choosing a political candidate in a tight race. If you cannot decide based on merit, you might instead choose based on which candidate you would want to have a drink with at the pub.

Are your customers swapping out the decisions in your experience for more straightforward choices? If so, how can you help them choose you in those cases?

One way you can manage replacement in your customers’ decision-making is to build a strong brand reputation. Often the brand image can be the replacement question. For example, if you are comparing phones between an Android and an iPhone, it can be difficult to manage the decision-making process at a features and benefit level. However, since Apple has done such an outstanding job branding, I buy the iPhone straightaway because I know that if Apple put it out, it’s going to be excellent, like all their other products.

If you want to hear about how you can apply these concepts to your Customer Experience, please listen to the podcast.

People are complicated. So are the concepts in Behavioral Economics. However, understanding why people do what they do is crucial to creating an excellent Customer Experience.

I recommend getting familiar with Professor Hamilton’s framework 4 Rs of Behavioral Economics. If you understand these four concepts, you will have a basic understanding of Behavioral Economics and a great start to your improved Customer Experience journey.

If you want to benchmark your organization’s performance in the new world of Behavioral Economics against other companies, take our short questionnaire.  Once you submit, we compare your answers against what we know about the market and send you a free personalized report about where your organization is today.

Hear the rest of the conversation on “4 Easy ways to Get Started Using Behavioral Economics” on The Intuitive Customer Podcast. These informative podcasts are designed to expand on the psychological ideas behind understanding customer behavior. To listen in, please click here.

If you enjoyed this post, you might be interested in the following blogs and podcasts:

How Do Customers Decide If Their Experience is Good or Bad? [Podcast]

How We Make Decisions—Prospect Theory

Why Customers Make Strange Decisions

About Colin Shaw

Colin Shaw

 Colin Shaw is founder & CEO of Beyond Philosophy, one of worlds first organizations devoted to customer experience. Colin is an international author of six best-selling books. Beyond Philosophy has a proven track record. They provide consulting, specialised research & training from Sarasota, Florida and London, England. Follow Colin Shaw on Twitter @ColinShaw_CX

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