news

Everyone needs a nudge once in a while

We’ve now reached the time in our Growth Track program to work with our Think Forward Initiative start-ups to learn about nudging and financial decision making.
Posted on February 14, 2020

We know that business success comes down to helping our customers find a solution to a problem, and that solution being the product you’re offering the customer. However, consumers often rely on quick and simple short-cuts to make decisions, rather than relying on thorough thinking. These short-cuts can be helpful, but also bring the risk of making sub-optimal financial decisions. That is why it is so important to help your consumers make the better decisions using your product, and nudging could be a great way to help you accomplish this.

But what is nudging? And how can it help you and your business?

Nudging has been around since the mid-1990s, but it became well known in 2008 with the book: Nudge: Improving Decisions about Health, Wealth and Happiness, written by Richard Thaler & Cass Sunstein. Put simply, a nudge is a slight change in the customers environment making a choice option more attractive, without changing the choice.

‘’By knowing how people think, we can make it easier for them to choose what is best for them, their families and society,” by Richard Thaler and Cass Sunstein.

To help you better understand how to nudge customers to improve your business or start-up, we sat down with Laura Straeter, leading TFI behavioural economist, who shared five tips on how to apply nudging to your business.

Tip 1- Know your customer

Before you even start thinking about using nudges to improve your business, you have to first define what exactly you would like your customers to do differently. What behaviour would you like to see? We typically call this behaviour a target behaviour. To design an effective nudge, you have to think of a target behaviour that is specific, measurable (so that you can see if the nudge worked), and tailored to a specific customer group.

A good example would be: “Increase the pension saving rate by 10% among current customers under the age of 30.”

Tip 2: Drivers and barriers

Why aren’t your customers already doing what you would like them to do? To understand that, you have to discover the drivers and barriers behind their actions. Let’s imagine that you would really love to grow old in good financial health, being able to enjoy great holidays when you retire or being able to take your grandchildren for a fun day out. However, your retirement is still far away and you want to get the most out of your life now, spending money on fun activities with your friends: festivals, holidays, nights out. Whatever the reason is, a nudge that fits your barrier—e.g. committing to set aside part of your future salary raise, so that you don’t feel that you are missing out on today’s experiences—could fix that.

Tip 3: Quick wins you can a/b test

If you are new to the world of nudging, start with the quick wins. Pick a nudge that is easy to implement but potentially very powerful (e.g. setting a default option) and always test it. Make sure that you introduce the nudge only to half of your customers (a/b test); the other half will be your control group, allowing you to see if the nudge really worked. A nudge might be successful in some situations but fail at other occasions.

Tip 4: Think ethically

Most importantly, there are important ethical considerations you should be aware of when using nudges. As nudges can alter people’s behaviour without them even noticing, it is very important to not misuse this technique. When you implement a nudge it should always be in the benefit of your customer. Similarly you should never mislead or misinform customers. For example, don’t tell that 80% of your customers have selected a specific option if in reality it is only 15%. Essentially, your nudges should help your users to be the person they aspire to be. So don’t fall for the dark side of nudging – sludging! Next to that, whatever you do should be in the customers’ best interest—as defined by themselves.

Tip 5: Nudging is not the solution to all change

Nudging can be very influential, a simple change to the way choices are presented can have a big impact. Think about organ donations, those countries who have an opt-out system, have much higher number of organ donors than countries who have an opt-in system. But nudging is not the solution to everything. Simply said, a simple cue or trigger might not always do the trick. But don’t panic, behavioural science has more interventions to offer. You could also train customers, educate them, or create an strong emotional and symbolic connection to the desired behaviour. For example, if you want your customers to start investing – telling how many other customers have opened an account might not do the trick.

Next month, we’ll focus on scaling challenges in teams and operations. Stay tuned for our next article.

The Growth Track is a five-month program that works with start-ups who are impacting the lives of people in the areas of smart spending, good saving, generating income and financial decision making. It supports start-ups’ growth needs and helps them to scale faster.