WHY BEHAVIORAL ECONOMICS FOR
CUSTOMER EXPERIENCE?
UNDERSTANDING BEHAVIOR AND
STRUCTURING CHOICES TO MAXIMIZE VALUE
OF THE CUSTOMER EXPERIENCE ECOSYSTEM
by Dave Nash, Paul Hagen and contributions by Andrea Liu
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WHY BEHAVIORAL ECONOMICS FOR
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Companies fail when they assume that customers make rational
decisions or perceive their experiences logically. Behavioral
economists offer insights into how individuals (e.g. customers) make
decisions and perceive their interactions—cornerstones of the
customer experience. Behavioral economics relaxes the strict
classical economic assumptions and allows for factors such as
emotion, cultural influence and poor judgment. Delivering successful
customer experiences requires companies to design with these
imperfections in mind in order to maximize the overall value of the
customer experience ecosystem.
Behavioral economics can not only provide further insight into the
less than completely rational behavior of customers; it can also help
improve customer experience, reduce customer effort, incentivize
profit- maximizing behaviors and enhance long-term customer
lifetime value.
This article looks at examples of behavioral techniques and the
research from some of the world’s leading economic minds that
support the benefits of these approaches in a customer experience
setting.
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WHAT IS BEHAVIORAL ECONOMICS?
West Monroe Partners defines “behavioral economics” as “the combination of microeconomic concepts,
principles and measures along with concepts, principles and experimental methods developed by behavior
analysts.” Behavioral economists, offer insight into how customers really make decisions – especially
purchase decisions based upon the choices available to them and not simply based on how they should
rationally make decisions.
Behavioral economics differs from classical economics in that it relaxes strict assumptions regarding rational
thoughts and choices to allow for factors such as emotion, poor judgment, and various cultural influences.
Simply stated, behavioral economics employs psychological approaches to decision making in addition to
purely economic considerations. The psychological component is important because:
 Customers do not necessarily create well‐defined preferences in advance.
 Customers construct preferences as needed and may be influenced by social or environmental cues.
 Customers have limited information‐processing capabilities and difficulty making complex decisions.
Understanding that customers are not always rational decision‐makers acting in their own best interest is
critical for businesses that wish to attract and retain customers in today’s competitive marketplace.
Delivering successful customer experiences requires companies to design with these imperfections in mind.
In particular, businesses would benefit from knowing and applying several types of behavioral techniques,
detailed in the following section.
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BEHAVIORAL ECONOMICS TECHNIQUES THAT CAN INFLUENCE CUSTOMER
EXPERIENCE
In our 2012 whitepaper, “An Effortless Customer Experience is a Critical Enabler for Competitive
Differentiation,” West Monroe Partners developed a Brief History of Customer Experience chart which
shows the innovation drivers of customer experience over the past 50 years. We now update that chart to
incorporate the usage of behavioral economics techniques in customer experience design as we believe it
will play a key role in the present decade.
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As noted in the chart above, we believe some of the applicable behavioral economics techniques that can be
employed to improve the customer experience include the following:
Choice Architecture. Some behavioral economists believe institutions and business can “nudge” customers
toward making certain decisions by designing more user‐friendly “choice architectures” or buying
experiences. Choice architecture refers to the structure and presentation of services, products or
experiences in order to influence customer decisions.
Choice architecture can be used not only to improve the customer experience itself but also as a way to
increase customer purchases. Consumption and spending are the results of the mental processing that
occurs while making choices. Marketers must manage the precursors of choice by creating opportunities
and removing barriers. Furthermore, marketers can reinforce consequences of choice by creating the most
appealing cost‐benefit bundle in order to alter long‐term behavior and customer value. They can achieve
this by optimizing various types of choice architecture as well as various social marketing techniques.
Normative, Descriptive & Prescriptive Decision Making. “Normative” decisions are those that customers
should make based on the rational optimization and forward‐looking processes involved. Classical
economics assume this type of normative approach. “Descriptive” decisions are those customers do make,
considering the rational boundaries of consumer decision making and limited cognitive capacity, which can
result in a myopic view. “Prescriptive” decisions include those that firms incentivize customers to make by
removing biases, making repairs, and taking preventative measures, thereby facilitating simpler and more
focused decision‐making by customers. Companies can better influence purchasing decisions by employing a
choice architecture that applies prescriptive techniques to online and other touch point customer decision
making. In this context, choice architecture relates to designing the environment, content and context in
which customers make buying decisions – be it mobile phone, laptop or in a traditional brick‐and‐mortar
location.
Option Optimization. Consumers are often overwhelmed and encounter analysis paralysis when confronted
with an excessive number of options. When this happens and a choice is made, the consumer is generally
less satisfied with their selection relative to other customers. Contributing factors to this dissatisfaction may
include opportunity cost (i.e., difficulty evaluating value received versus value foregone) and/or raised
expectations (i.e., comparison of multiple options has raised doubts about the choice). Companies must
provide an optimal number of available choices to encourage investigation and purchase while also
minimizing the negative factors arising from offering excessive options.
Social Norms. Similarly, research by Dr. Robert Cialdini of Arizona State University, author of the best‐selling
Influence: The Psychology of Persuasion, shows that incorporating social norms into messages can
predictably affect human behavior by influencing customers to act in accordance with those norms. Firms
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with a social or environmental message already use this approach to help influence decision making. For
example, Whole Foods product and brand messaging focuses not simply on quality of the products (and
certainly not on the price), but rather the holistic social/environmental impacts of the business. Whole
Foods is also very explicit in defining the reasons why their customers should care about those impacts – as
opposed to allowing them to compare price, quality, or other variables.
Positive/Negative Framing. Choice presentation or “framing” can have a profound effect on the propensity
to purchase. Customers are generally passive decision makers, and effective use of framing can help firms
incentivize profit‐maximizing behaviors. Framing can include the timeframe for realizing a benefit.
Customers are more influenced by products that offer near‐term benefits (a.k.a. instant gratification) – so
companies should construct value propositions accordingly. Additionally, including a frame of reference
helps to give a customer context about his/her decision that encourages satisfaction with the decision
made—at least given all factors involved. By configuring offerings, retailers can influence a customer’s
current and future decision.
Loss Aversion. Professor Richard Thaler of the University of Chicago Booth School of Business (“Anomalies:
Risk Aversion”, Journal of Economic Principles, 2001) has shown that people are much more influenced by
aversion to loss than by potential gain. Loss aversion leads to inertia – a strong desire to stay with the
current situation. Consumers are willing to pay a premium to avoid risk, and as such, eliminating the
perceived probability of loss can dramatically increase purchase propensity. Potential loss or risk in the
purchase decision generally takes several forms – potential pricing loss (where customers think the price
may go down or where a lower price might be available), potential satisfaction loss (where there is a
plethora of choices), and potential process loss (where customers do not understand the steps in the
purchase process).
Sequence Effects. According to behavioral scientists, when people recall an experience, they don’t
remember every single moment of it (unless the experience was short and traumatic). Instead, they recall a
few significant moments vividly and gloss over the others—in other words they remember snapshots, not
movies. They carry away an overall assessment of the experience that’s based on three factors: the trend in
the sequence of pain or pleasure, the high and low points and the ending.
Not surprisingly, people prefer a sequence of experiences that improve over time. When gambling, they
prefer to lose $10 first and then win $5 rather than win $5 and then lose $10. There is also evidence that
people pay attention to the rate of improvement in a sequence—clearly preferring ones that improve faster.
And, most intriguing, the ending matters enormously. A terrible ending usually dominates a person’s
recollection of an experience. So when constructing customer experiences ensure that the concluding
experience is an exceptional one so as to leave a lasting and indelible impression in the customer’s mind.
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Duration Effects. Psychologists and cognitive scientists have poured enormous effort into unraveling the
mysteries of how people process time. When do they pay attention to the passage of time, and how do they
estimate its duration? Although much of the mystery still remains, one finding verified repeatedly is that
people who are mentally engaged in a task don’t notice how long it takes. Another is that, when prompted
to pay attention to the passage of time, people overestimate the time elapsed. A third finding is that
increasing the number of segments in an encounter lengthens its perceived duration. In designing purchase
or service experiences (especially those that will require significant effort and time such as filling out an
online mortgage application) it is helpful to communicate clear expectations, time needed, and streamline
the process so as to reduce customer perception of actual time and effort involved.
HOW WEST MONROE PARTNERS CAN HELP
West Monroe Partners works with its clients to leverage behavioral economics techniques to improve the
customer experience and optimize customer lifetime value according to our formula.
In looking at customer lifetime value (CLVj), behavioral economic techniques and especially choice
architecture can be used in a multi‐channel environment to minimize acquisition costs (‐A) by allowing
customers to make more efficient decisions, maximize relationship duration (1 ‐ cjt)t by reducing customer
effort and improving customer loyalty, and maximize revenue (R) and profitability (R‐C) by increasing cross
and up‐selling products and services and migrating customers to lower costs to serve channels. Thus, this
resulting overall value and value flow of the customer experience ecosystem between firm and customer
can be optimized by using various behavioral economic techniques in a customer experience environment.
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Value Flow of the Customer Experience Ecosystem
Behavioral Economics in Customer Experience Case Study: Alliant Credit Union
Alliant Credit Union is the fifth largest credit union in the nation with over $8 billion in assets and 280,000
members. West Monroe Partners worked with Alliant to help develop its Member Engagement strategy. As
part of its vision to become ‘friendly, efficient, and personalized’ with members Alliant is leveraging
behavioral economics techniques such a prescriptive and descriptive norms, choice optimization, and
accounting for cognitive biases to improve the member experience and increase member engagement.
CONCLUSION
Considering behavioral economics and leveraging the techniques described herein can help companies
improve the customer experience by noting that customers oftentimes respond to “non‐rational” factors
such as emotion, poor judgment, or cultural norms that influence decision making. In fact, companies in a
broad range of service industries—including banking, retail investment management, P&C insurance, health
insurance, unregulated utilities, and retail—can realize significant economic benefits from applying
behavioral economics, ranging from reduced churn to greater cross‐selling to additional customer referrals
to reduced cost to serve. Behavioral economics can also help companies to maximize the overall value of
the customer experience ecosystem – by reducing multi‐channel customer effort and helping to optimize
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overall customer lifetime value.
For more information please contact:
Dave Nash, Director‐Customer Experience: Customer Strategy & Insights [email protected]
Paul Hagen, Senior Principal –Customer Experience & Innovation Strategy [email protected]
REFERENCES:
Thaler, Richard and Cass Sunstein, Nudge: Improving Decisions About Health, Wealth and Happiness, Yale University Press,
2008
Tversky, Amos, and Daniel Kahneman. “The Framing of Decisions and the Psychology of Choice.” Science. 1981, Vol. 211, No.
4481, 453‐458.
Iyengar, Sheena S. and Mark R. Lepper. “When Choice is Demotivating: Can One Desire Too Much of a Good Thing?” Journal
of Personality and Social Psychology. 2000, Vol. 79, No. 6
Blattberg, Robert, Gary Getz, and Jacquelyn Thomas. Customer Equity: Building and Managing Relationships as Valuable
Assets. Harvard Business School Publishing Co., 2001.
Peppers, Don and Martha Rogers. Enterprise One to One. Currency Books, 1997.
Ariely, Dan, Predictably Irrational: The Hidden Forces that Shape Our Decisions, Harper Collins, 2010