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The Nudge blog sat down (electronically) with John Kenny, Senior Vice President of Strategic Planning in Draftfcb’s Chicago office, to explore whether behavioral economics is just a fad in marketing or a legitimate tool to help the industry perform better. Starting with the Institute of Decision Making, Draftfcb has been one of the leaders in thinking about how to incorporate the discipline of behavioral economics with the practice, and business, of modern advertising and marketing. Recently, Kenny has put together a set of video lessons that serve as a guide to using behavioral economics in their work. The interactive guide, called “Marketing to Crazy People,” can be found here.

Nudge Blog: Behavioral economists have long looked at marketers and advertisers as people who have been applying behavioral principles for years. With the rise of behavioral economics as a recognized discipline, how would you say marketers and advertisers look at the work behavioral economists do?

John Kenny: Your point about marketers having used behavioral principles for years is a critical one. Most marketers are looking at behavioral economics as something that will transform what they do, but in truth it helps them understand better what the best creatives have always understood, albeit unwittingly: That people are not rational. The best creative has always been built on that insight, and is inevitably more creative, more breakthrough, more persuasive and more effective. Behavioral economics helps us understand why great creative works. That’s a huge competitive advantage, but it’s a mistake to see it as changing what we do. It’s more about making us more effective at what we do.

NB: The term behavioral economics has been floating around the industry for a couple years now, and more marketers are familiar with books like Nudge. Is behavioral economics just going to be a fad? If it’s here to stay, what is the next step for behavioral economics in your industry?

JK: If anything, behavioral economics impact will only grow in the future, because it works hand in glove with the growing centrality of digital solutions in marketing. You can’t understand the success of digital platforms like Amazon, Facebook, Farmville, Nike Plus, and Groupon if you don’t understand behavioral economic principles like social proof, the impact of variable intermittent social rewards, feedback loops, and scarcity. Behavioral economics will increasingly be providing the behavioral insight that drives digital strategy.

NB: It can be easy to think about the relationship between behavioral economists and advertisers and marketers as a one-way street. Do you think marketing professionals can offer insights and lessons to behavioral economists?

JK: Where we’ve seen it work as a two-way street is when we invite academics into the marketing process. What they tell us is three fold. First, marketers give behavioral economists access to huge behavioral databases that scream for behavioral analysis. Second, marketers can give academics great opportunity to test their insights. Public policy is a tough place to try something new, whereas marketers will inevitably have far more license. Finally we find ourselves invited to give a lot of presentations at universities by academics. Marketing is a great way of introducing students to the pervasiveness of behavioral economics in the messaging that surrounds them every day, and get them interested in the field.

NB: Draftfcb launched the Institute of Decision Making in June 2010. Can you give us an update on its work over the past year? What’s on tap for the fall?

JK: When we started the Institute, our goal was to build bridges between academics and our clients, and that’s been a huge success. Now, coming off that, our focus in the coming months will be ensuring that behavioral economics is not see as a separate skill set, but one that all departments in the agency are familiar with, and that our planners see as a core skill set.

NB: What behavioral economics concepts have you found to be most relevant or powerful in your work? What value do you think BE brings to your work?

JK: When we first started applying behavioral economics to marketing problems, initially we thought it would be most appropriate in developing offers, but very quickly we realized that it was applicable to nearly every marketing problem, from driving engagement, consideration, conversion and loyalty, so it’s hard to single out one principle as more useful than others. Right now, one of the areas I most excited about is working with our mobile marketing practice and combining the opportunities available with mobile technology with our “addiction to now.” But come back in 6 months and I’ll probably be raving about another principle.

NB: How have you incorporated BE into some of Draftfcb’s campaigns? Any favorite examples?

JK: Three favorites come to mind: Probably the first time I realized that behavioral economics could drive big creative ideas, was when one of our creative teams brought us an idea for a client’s free WiFi offer, called “free WiFi in places you’d actually want to go” built off the insight that people will go to crazy lengths to get something for free, a key behavioral economic insight, but one that we hadn’t considered until one of the creative teams brought it up.

Within the digital space, one of my favorite applications has been in the area of couponing, which is typically very rational. But what we’ve been finding is that by making couponing social, people will eagerly share a coupon with friends even if it sacrifice a coupon’s face value.

(Note: Draftfcb combined a standard financial discount coupon with a lottery prize that had a social component. The marketers found that the lottery component made people far more willing to use and share the coupon, even though sharing it reduced any single person’s odds of winning.)

However, if I had a favorite, it would be the negative social proof leveraged in the campaign “Your Mom Hates Dead Space 2.” For guys the best way to persuade them that a video game is cool is to tell them their mom hates it. Really simple insight, but that’s the power of behavioral economics

NB: What has been the reaction to introducing BE concepts into pitches from chief marketing officers?

JK: Some are very interested, but ultimately what the care about is the work. Is it insightful? Breakthrough? Does it shift their business? That’s all that matters, the work. The fact that we are increasingly getting that work from starting in behavioral economics is interesting to them, but secondary. In marketing no one ever asks to check out the bibliography.

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Courtesy of computer security provider Lavasoft (spotted by a sharp behavioral graduate student at Booth).

Yes, you can click the grayed-out button on the left and “update” to the free software.

 

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The problem with this sign is that the best yard sale goodies were probably available “yesterday.” You’re down to the dregs today. Better to post a sign that is fuzzy with time and refers only to “today.”

Hat tip to photographer Mary Ann Henningsen.

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It ain’t complicated, reports Farnam Street.

So how does (Joe Girard), who sells one car at a time to everyday customers, go on to become one of the most successful sales people in history? Girard offers a simple answer: “People want a fair deal from someone they like.”

When questioned about what he does to get people to like him, he says “I tell them that I like them.”

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The NYT reports that only 49 percent of CVS ExtraBucks rebate coupons (free money!) are redeemed by customers. CVS wants this number to go up so it is launching “a humorous effort” to discourage “money trashers” from throwing away their ExtraBucks, which are printed at the bottom of their CVS receipts.

Does CVS really need to spend money on this kind of a campaign? The problem seems to be primarily about the placement of the ExtraBucks coupon, the coupon’s graphic design, and the ease with which someone can separate the coupon from the receipt itself (currently, the receipt has no perforation like some of the coupons you would find in weekly circulars). ExtraBucks accrue to ExtraCare customers who have already signed up for the program and swipe their card at the scanner every time they make a purchase in order to get the discount. Lack of awareness hardly seems to be the problem.

The Times reports that the marketing campaign is being rolled out alongside a coupon redesign that uses larger print and a “more eye-catching design.” Early results are “encouraging,” according to CVS, which says it noticed an increase of 5 percent in redemptions.

Now that the two are being rolled out together, disentangling which piece is responsible for the uptick redemption won’t be possible. This seems like a clear case where smart experimental design could help CVS assess the cost effectiveness of 1) A “money trasher” marketing campaign, 2) Various choice architecture changes to the delivery of ExtraBucks, and 3) A combination of a marketing campaign and choice architecture changes. Based on this current strategy, it’s doubtful CVS will be able to say much about the various tactics with any certainty. Too bad.

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Straight Talk, the pre-paid cell phone company, plays up the good feeling you’re going to get from a saving a few bucks on a cell phone plan (even if it’s not going to affect your total wealth much). It ain’t going to be this good, though.

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Speaking to a group of Northwestern University marketing students, Yum! Brands Chief Public Affairs Officer Jonathan Blum shared the story of recent Taco Bell promotion flop that shows the difficulty the chain has had turning social media into a viable business model. Said Blum: “We haven’t even been able to give away the food, never mind figure out how to sell it online.”

Over the course of a year, the number of friends on Taco Bell’s Facebook page rocketed from 500,000 to 6 million fans. Sounds great. Then, in the middle of an ongoing unflattering lawsuit about the quality of its beef, Taco Bell decided to offer those 6 million fans a free taco — no strings attached. They didn’t need to buy anything. They were already Facebook fans, which means they had already paid the very minor costs of “liking” Taco Bell. It was an offer from a company that Blum says wanted to tell its fans, hey, come and get a free taco.

Two hundred thousand people did. Almost 97 percent on passed on free grub they supposedly “liked.”

Cases like that explain why the bulk of Taco Bell’s marketing budget goes to television (and some radio) ads. Social media remains a small part of the budget because the company hasn’t figured out how, in Blum’s words, to use it to “make the cash register ring.”

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Financial service professionals are some of the few people who want their typical customers to take the long view of consumption.

They want their rich customers, however, to take the REALLY long view.

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Among economists, Pay-as-you-Drive (PAYD) automobile insurance has been an intriguing idea for a number of years. The idea is straightforward: Drive more, pay more. Proponents say PAYD can lower the social costs of driving—think carbon emissions and traffic congestion—by leading people to shoulder the true burden.

On the industry side, Progressive has been one of the most aggressive innovators with PAYD insurance. It first began offering a voluntary PAYD program called MyRate in six states in 2008. Three years later, thanks to inexpensive, if not quite cheap wireless technology, the idea is now available nationwide through an initiative called Snapshot. Progressive gives a discount to policyholders based on information about their driving habits collected over a month-long period. Drivers put a sophisticated little tracking device in their cars for six months. At the end of the first month, certain “good drivers” may be eligible for a discount of up to 30 percent based on that “snapshot” of driving behavior. (At the end of the six months, Progressive uses all the data to calculate a renewal rate.)

As Steven Levitt notes, the interesting part of PAYD insurance programs, which are voluntary, has always been how to structure the incentives for participation. The concern is that only low-mileage drivers will sign up.

The clearest winners are (low-mileage users), who can drive the same distance they used to drive and pay less. What’s less obvious is whether Progressive will be a winner; there are, in fact, a couple of situations in which Progressive could lose out. If all (PAYD) accomplishes is to give Progressive’s low-mileage customers the rate cut they deserve, then Progressive is doing little more than lowering its own revenues. It could, of course, try to compensate by raising rates on all its high-mileage (drivers), but then there’s nothing to stop (them) from buying…insurance elsewhere. (Of course, losing its riskiest customers to other companies might also prove profitable for Progressive.)

Where Snapshot is most likely to give Progressive an edge is if it can help the company better forecast the future liabilities it will be on the hook for. That means better predicting accidents. To do that, however, Progressive needs to get all kinds of drivers, not just low-mileage users, to try it and feed the data back to home base. To appeal to all drivers, Progressive has had to move beyond traditional economics and consider behavioral economics as well.

To encourage customers to test out Snapshot, Progressive draws from the lessons of overconfidence and loss aversion. Humans are overconfident creatures, especially when it comes to driving. Ninety three percent of people think they are above average drivers. Even among bad drivers, accidents are not the modal driving experience, and there’s always someone else to blame for them.

Snapshot is primarily a program about usage, but it’s sold as a program about “good driving.”

On its web site, Progressive doesn’t shy away from calling Snapshot “usage-based insurance.” But its media advertisements headlined by cheery customer service rep “Flo,” refer to driving behavior more generally. “Just plug it in and it keeps track of your good driving habits,” Flo explains. “So the better you drive, the more you save.”

What makes a good driver? The speed you drive at and the locations you drive to and from are not part of the equation. Taking speed off the table eases some customer fears since speeding is the most salient mark of good (or bad) driving. Taking driving location off the table eases fears of those who worry about privacy and whether Progressive is tracking their every move. The device doesn’t have a GPS.

Instead, “good driving” depends on 1) Time of day you drive, 2) Number of miles you drive, and 3) How hard you brake (“bad drivers” brake hard). What’s common about all three items? Drivers have very little control over them. When and how far your drive depends largely on where you live and work, which are both quite sticky in the short term. And how hard you brake is primarily an automatic reaction built up over years of commuting. For any single braking experience you can push the pedal more smoothly, but maintaining that consistency over an entire month if you are a hard braker is a bit like trying not to blink for a minute.

According to the Wall Street Journal, a Progressive executive admitted that one of these items predicts accident potential as well as all the usual demographic markers like age, gender and marital status. Although the executive didn’t say which one, the peak time for accidents is between midnight and 4 a.m. If there is one habit worth trying to change over your month with Snapshot, it could be the itch to party. At least think about taking a taxi or hitching a ride with your friend.

Progressive doesn’t think overconfidence, by itself, is enough to get people to try out Snapshot. So it has to remove any risk of losses by promising drivers they won’t pay any more for insurance than they are paying now. Freed of potential losses, overconfidence can kick in, prompting “good” and “bad” drivers to give it a shot and see what kind of a discount they get. After all, they can’t be penalized for any “bad” behaviors. But since Snapshot is about “good” and “bad” driving risk, not “good” and “bad” driving skill, Progressive doesn’t even care if you are involved in an accident while using the device since your risk profile is determined by calculations based on driving patterns. (Theoretically, you could be involved in a minor fender bender with Snapshot and Progressive would never know.)

In essence, Progressive doesn’t want a snapshot of your driving habits. It wants a snapshot of its overall customer base, assuming that base looks a lot like the overall car insurance market. It wants Snapshot to work less like a camera and more like a random sample. From that perspective, the success of economists’ preferred auto insurance depends on whether some non-economists can get the behavioral economics of offering the product just right.

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Unsubscribing from email newsletters, special offers, daily deals, and so forth is (assuming you remember to do it) typically as impersonal a task as signing up for them was in the first place. Check a couple boxes, make sure your email address is correct, and move on. Those who have unsubscribed from Groupon have noticed a completely different experience, which humanizes the process, activates guilt and regret in the unsubscriber, and — most important — gives that person a new reason and an immediate chance to resubscribe. It’s all captured quite nicely in the video below, in which Groupon employee “Derrick” is punished for losing you, the Groupon customer.

Careful observers of Groupon will notice that the “Derrick” is Groupon CEO Andrew Mason. Less known is that the man who throws coffee on Derrick is Groupon’s Chief Marketing Officer, the Nudgeblog believes. The Nudge blog has been told by a pair of Groupon employees that the video has been quite successful in getting unsubscribers to resubscribe. It’s easy to see why.

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