Behavioral insights to reduce cost of billing + cool tip on confidence from a Harvard professor

Behavioral insights to reduce cost of billing

Cost of billing and customer care in general is a big problem for service providers (utilities, telcos, banks, councils etc.). Behavioral insights can help. Read on to learn how! (note - this is a copy of the essay I submitted as part of online course on irrationality with Dan Ariely - so format is slightly unusual). Useful tip today is about building confidence (which is simple and actually works!) - link is towards the end of the post :)

We all have to deal with paying the bills - we regularly dole out our cash for gas and electricity we consume, our mobile phone, internet access, TV, some sort of local taxes (council tax in the UK), rent or mortgage, credit card debts and more (alas). While we obviously experience pain - on the other side, receiving our money corporations are not just happy. In fact making us pay, and dealing with questions can be quite costly. Moreover, the costs are varying greatly with the behaviour of customers – and fall in 4 buckets: informing, getting payment, dealing with complaints, dealing with late payments / debt.


In the first bucket there are costs to inform us that we need to pay (all those paper bills which have to be printed and delivered) – which can be reduced to zero with bills by email. Getting payment can be costly if done by a debit card over the phone, by cash at a branch / payment terminal / state bank (as typical in Russia and many other emerging markets) – to zero cost if paid by direct debit or equivalent schemes. A lot of calls arise when people have questions about their bills or disagreement with the amount (usually the company is still right- but explaining it tends to take a lot of the time of call centre agents, and can really harm customers). Finally going after non-payers is costly as requires sending reminders, making calls and potentially even sending debt collectors. All in all, customer care is worth billon of dollars, and also is one of the main factors of customer satisfaction in service industries.


Let’s explore in more details the first 2 aspects. The essence is that there is a preferred low-cost option, like e-bills and direct debit – and customer behaviour need to be altered so that they use this option (if such options are not available, for example in some emerging markets, one need to develop them to be behaviour-friendly – but this is another story). The main tools can be the power of default, loss aversion, and probabilistic reward.

There is some research which can be helpfully applied here. First of all, we know that putting an option as default can lead to dramatic differences in outcomes, as was shown for organ donation rates by Johnson and Goldstein (Johnson, E., & Goldstein, D. (2003). Do defaults save lives? Science, 302(5649), 1338-1339.). . Prospect theory, developed by Kahneman and Tversky and confirmed by a number of experiments, tells us that people will prefer avoiding losses of $100 to making a gain of $100. (Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011). Closely related to it is the endowment effect – in an experiment by Dan Ariely students who got their tickets to an important Duke Basketball game (though a painful process requiring camping by the booth and a lottery) were ready to sell it for app. $2000, while potential buyers (who went through the same painful camping, but were not successful in the lottery) were ready to pay only a few hundred (Dan Ariely, Predictably Irrational).

Direct debit and e-billing should be a strongly suggested default. It should be default for all new customers, getting in through all channels. Companies should also consider automatic enrolment at least for e-billing, like in Save More Tomorrow Program – for the customers they know email addresses of. Finally, at each touch point the customer should be given the choice to become an e-care customer, with default that they would switch. For example, when a customer calls in to pay his bill by credit card the agent should say – “we are switching you to a direct debit customer – please provide you direct debit details, instead of your bank card”.

An extra boost this method can get if loss aversion is employed. A utility company should inform customers that they have already got a £50 pounds discount / voucher to a grocery store / gift - and to claim it they need to switch to direct debit and e-billing. Alternatively, saying that price will go up, unless customers switch will also trigger loss aversion.

Finally, using probabilistic rewards can be a great way to entice people to switch. Giving people a chance to get a non-trivial amount of money (or a valuable prize, like and iPad) will make the issue salient and keep it salient long enough to make the switch. In fact this what tried for council tax in a few London boroughs, with great success (investments paid back within 3 months). (UK Government Behavioral Insights Team. Applying behavioural insights to reduce fraud, error and debt.)

And of couse the link on improving confidence. Fake it! It actually works ;)

https://www.youtube.com/watch?v=Ks-_Mh1QhMc

References

Johnson, E., & Goldstein, D. (2003). Do defaults save lives? Science, 302(5649), 1338-1339

Ariely, Dan, Predictably Irrational, HarperCollins, 2008.

Kahneman, Daniel. Thinking, Fast and Slow. New York: Farrar, Straus and Giroux, 2011

UK Government Behavioral Insights Team. Applying behavioural insights to reduce fraud, error and debt. Available at

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/60539/BIT_FraudErrorDebt_accessible.pdf

Behavioural insights for office improvement

Over the past month I ran a call for ideas in our office, on how we can reduce costs and work smarter. Some very cool behavioural insights application came up! Practical tip – how to change your habits!

We received a lot of suggestions – and the majority required people to change their behaviour. As they were coming from colleagues as opposed to the management very few were relying on heavy-handed traditional measures – like banning flying by the business class, restricting choice of dinner options or making people pay for their phones. Instead, most were, well, nudges – changes in communications and environment to influence choices, but without imposing significant costs for making the “wrong” choice. Smack on for this blog!

Some suggestions are specific to the organisation I work in, but a good share can be applied universally. Here are 3 of my favourites

1. Inform people about their telecom expenses, comparing them with their peers. Once a month people will be getting a “bill” comparing them with an “average” user from their peer group, and also to the “best practice user”. If they are below average they would also get a sad smiley L. The basic psychological principle behind this idea is “social proof” – people do what others are doing. It was brilliantly demonstrated by the UK Nudge Unit to reduce late payments of taxes; and also by an American utility “oPower”. (http://economicspsychologypolicy.blogspot.co.uk/2013/03/nudge-database_3441.html - see points 5 and 11)

2. Introduce “office miles” system for booking flights. Many times people do not have an incentive to look at the costs of the flight they are booking – and optimise for personal rewards (i.e. points). The idea is to introduce “office miles” for booking cheapest possible flight, and then reward people with token signs of appreciation.

3. Clearly mark the path to stairs. Having a sign indicating the way to the stairs, like footsteps on the floor, will make the option of using stairs more salient. The signs themselves can be done in behavioural-friendly way and follow the cue – action – reward principle of habit formation. Sign will be the cue, climbing up or down the stairs could be action, and you can place a smiley face (or some nice quote) on the inside of the staircase door, to reward the person!

And the tip of the post is exactly on changing your habits. Follow cue-action-reward. Your running shoes by your bed can be a cue, jogging the action, and getting tasty glass of vegetable juice the reward. If you want to know more about it – highly recommend book “The power of habit”

The first step

First step

Ok, so I am taking the plunge – and here is my first blog post in English. It is a deeply important personal choice for me – and in a way my response to what is happening in my home country. While living in Moscow, London or Boston, I used to think that my countrymen’s problems are what gave me energy and drive. I used to dream of bringing the best of the world to the people and organisations of Russia; I fantasized about helping to build a world-class tech company, or bringing progressive policies to the government, or inspiring people through a social movement – all in Russia.

Events in the last couple of years made me doubt. The protests, which were a sign that there are hundreds of thousands of likeminded people, willing to risk for a bigger goal, petered out. The state is getting ever more oppressive and backward, the elites are ever more hypocritical and corrupt, and people are ever more brainwashed and intolerant. Last week’s aggression in Crimea, and especially the overwhelming support of it in society is a sign of the times. The future is bleak, and with the current regime any bringing progressive thinking is an uphill battle.

And this is my response. I am starting this blog in English. I will care about problems I come across. I will try to bring the best of the world to the world. I will fantasize about helping to build a world-class tech company, or bringing progressive policies to governments, or inspiring people through a social movement wherever there is a need and an opportunity (which is pretty much everywhere).

I still think that the majority of my readers will be Russian – and thankfully all my closest friends back home and people who matter most me can also follow me in English.  

So what I will blog about? Mostly about positive psychology, social psychology and behavioural economics, which lately became a huge personal interest. I will reflect on what I read, learnt and experienced – from how to make yourself meditate every day (and why it is a great thing) to how can governments change policies to make people healthier. Details will become clearer as we go.

I will also aspire to offer something very practical and actionable every post. For today it is an advice to enrol to a course “Beginner’s guide to irrational behaviour” by one of the brightest stars in the field, Dan Arielly. Just to give you an idea how cool his research is: he measured effect of emotions on judgement by asking student same questions in a normal state, and when they are highly sexually aroused. You can sign up for a 6 weeks course for free on Coursera.  https://www.coursera.org/course/behavioralecon

A journey of thousand miles starts with a single step. For the journey!

Cheers

Kirill