5 Cognitive Biases Customer Service Pros Need to Know
Originally Published by The Capterra Customer Service Software Blog
A recent episode the NPR economics podcast Freakonomics tells a customer service story. The Maddest Men of All shows how world-renowned advertising firm Ogilvy & Mather uses behavioral economics to help clients sell.
In the episode, the host talks to the Times and Sunday Times about their problem. After they raised their subscription prices, people began calling to cancel. Their call center was supposed to keep customers without having to resort to cash incentives, but they were underperforming.
The episode contains a training call where an agent, Juliette, practices using tricks from behavioral economics to subtly push a caller into retaining their subscription.
A 2014 Gallup report described how 10 companies which applied principles of behavioral economics outperformed peers by 85% in sales growth and by more than 25% in gross margin. The paper goes on to claim that applied behavioral economics is the next wave of metrics to revolutionize business. “We believe that the next big institution of data will be found in developing new sets of leadership initiatives and metrics around behavioral economics because the gains to be found are much larger than in any other area and because this potential is largely untapped.”
So how can brands use what behavioral economists have learned to provide the kind of interactions which turn unhappy campers into loyal customers?
The first thing to do is recognize the existence, and power, of cognitive biases. Here’s Rory Sutherland, Vice Chairman of Ogilvy & Mather in the U.K.
The problem with economics is that it’s designed for the perfectly rational, perfectly informed person possessed of infinite calculating ability. It isn’t really designed for the human brain as it is currently evolved.
Behavioral economics doesn’t just take irrationality into account. It zooms in on it, making it the focus of study. For example, In Nudge, Richard Thaler examines the difference between making retirement savings account enrollment opt-in versus opt-out. A traditional economist might assume that enrollment for plans offer essentially free money would be at or nearly 100%. But instead, after three months of employment, opt-in participation rates were barely 20%, increasing to 65% after thirty-six months. But changing the program to opt-out brought participation up to 90%.
But saving money isn’t all, or even most, of what behavioral economics is used for. It’s also used to nudge people into spending money. Calls to the Times using one or more behavioral economics techniques were three times more likely to be successful. The vast majority, 80%, of calls using one or more techniques resulted in a customer staying on or a successful sale.
Howard Lax at CustomerThink calls the connection between creating customer loyalty and behavioral economics “obvious.” Lax wants to see ideas move beyond delivering “some idealized ‘best product at the best price.’” In fact, the best product is one which, in delivery, wows customers by “exceeding their expectations on those things they most value, while satisfying their expectations on their more basic needs.”
Here are some cognitive biases revealed by behavioral economics which customer service centers can use to improve their sales and customer retention.
Status Quo
Defaults are powerful. It’s why car rental agencies include insurance unless you specifically decline it. A large national European railroad raked in an additional annual $40 million exploiting people’s preference for the status quo. They made passengers uncheck a box on the online booking form to avoid paying two Euros for seat reservations with ticket purchases. The percentage of tickets which included reservations went from 9% to 47%.
Choosing the right options can make a massive difference for companies. For this reason Harvard Business Review created a decision tree for setting defaults for customers.
The first step in setting defaults is to make sure you do no harm. For example, Maxi-Cosi set the default for their car seats to be uncomfortable for an older child. The reason was that the alternative setting could endanger a newborn. Especially as most people purchase the car seat for newborns, the choice was clear.
If only the right choice for default had been as clear for TurboTax. Instead, developers purposely left out a feature that earlier versions included. Many loyal customers discovered in the middle of tax preparation that, thanks to the missing feature, they would have to pay more to get an upgrade that included the necessary forms for them to complete their return. A two-Euro seat reservation this wasn’t. TurboTax had to issue an apology, along with refunds and upgrades to win back customers.
Take care to set mutually beneficial defaults for your customers. And regularly test them against different defaults.
Social Norming
So how did Juliette use behavioral economics to keep the caller as a customer? First, she appealed to his desire for social norming by saying “many people like you” to hint that he’d be outside what’s normal for his peer group if he cancels. Most people are at the very least hesitant to put themselves outside the norm.
Social norming is one of the most popular, and easily exploited, cognitive biases.
McDonald’s used to put how many customers they’d served on their restaurant signs. And if you find a landing page without social norming, you know you’re dealing with an amateur.
For customer service, phrases such as “Most people want” or “Customers like you prefer” can help assure people they’re on the right track.
Loss Aversion
Later in the call, Juliette played on the would-be canceler’s loss aversion with the phrase “I wouldn’t want you to miss out.” As Freakonomics host Stephen Dubner explains, “We generally experience more pain with loss than we experience pleasure with a commensurate gain. Meaning: we hate to give up what we have even if what we have isn’t all that valuable to us.”
McKinsey found the same trick worked for an Italian telecom company. Originally, the script for canceled plans offered callers 100 free calls if they kept their plan. The company reworded it to say “We have already credited your account with 100 calls — how could you use those?” Because customers did not want to give up free talk time they felt they already owned, the acceptance rate increased.
To take advantage of this bias, simply state what it will cost customers or potential customers to make a choice other than the one you’re guiding them toward. You’ll get best results if you do this with a matter-of-fact tone. Pleading or threatening will be read as manipulative and aren’t necessary, since people already don’t want to miss out.
For example, the aforementioned European railroad could test a pop-up after a customer unchecked the seat reservations box which simply asked, “Are you sure you want to lose your seat reservation?” with “Yes” and “Cancel” options.
Choice Overload
Ironically, people are more likely to make a choice when they are presented with fewer options. Grocery store shoppers who could choose to taste 24 jams were five times less likely to make a purchase than the shoppers who were offered only 6.
More choices increase the cognitive load of finding a preferred option. More choices also highlight the desirable features available in every other product, imbuing each choice with a “negative halo.”
Reducing the number of options makes people likelier not only to reach a decision, but also to feel more satisfied with their choice. Test conversion rates with fewer options to see if they increase. If you’re really savvy, measure whether customers are happier with their purchases and more likely to buy again when they have fewer options.
Anchoring
One might not have guessed that experienced German judges would hand down longer sentences to shoplifters after seeing a high number rolled on a pair of dice.
Danny Kahneman might not have thought so either, but he thought to test it out. For his effort, he won the Nobel Prize for experiments revealing common flaws in thinking such as the anchoring effect.
Smart marketers can use new numbers to nudge consumers to make new decisions. Like the jewelry made famous in Influence: The Psychology of Persuasion. Before departing for a buying trip, a jewelry store owner left a note for her sales manager to halve the price of a set of turquoise jewelry which wasn’t selling. Luckily, the manager misread the note and doubled the prices, which resulted in the entire set selling out. The new, higher price first got buyers to notice the jewelry, which they hadn’t before. It also put the jewelry in a new, higher quality category in buyers’ minds.
McKinsey recommends marketers offer a few clearly inferior, and superior, options. Many restaurants sell disproportionately more of the second-most-expensive and second-cheapest bottles of wine. Of course adding options is tricky, and can cause choice overload. Test more choices against fewer. And make sure the different choices are priced differently to take full advantage of the anchoring effect.
Conclusion
Understanding how and why people act the way they do is vital to customer service. The data bears out that tailoring customer service practices according to the insights provided by behavioral economics results in customers staying customers longer and spending more.
