What do these pairs of countries NOT have in common?
Belgium and the Netherlands; Sweden and Denmark; France and the UK. Overall, the countries in each pair would seem to be rather similar. Yet when it comes to organ donations, the first country in each pair has close to a 100 per cent sign-up rate, while the second country has sign-up rates well under 30 per cent.
The explanation is rather simple, and has nothing to do with any cultural differences. The first country automatically signs their citizens up for organ donations, and everyone must make a conscious decision to opt out of the programme. The second country has no automatic programme, and requires citizens to make a conscious decision to opt in.
So most people follow what was automatically set up for them. Economists call this the “Default Bias” (also known as the Status Quo Bias).
Let’s look at this in a different way. What would you say are the most important decisions everyone makes in their lifetime? Who to marry might be one. What university to go to; what first job to take; what house to buy might be others. What about religion? Choosing how and who to worship might be considered a critical lifetime decision. Yet over 90 per cent of people in the world follow the religion of their parents, the religion they were brought up in.
Since this is a column on business strategy, how can we use organ donations or religion to help us sell more?
If we understand the concept of default bias, we can use this to influence people. Let’s say a company wants its employees to sign up for an investment or health programme. If the company requires employees to opt in, most will not do so. But if the company automatically enrols its employees in the programme, then offers them the opportunity to opt out, many people will stay in.
Full-service airlines did this for years. They charged one price that included meals, movies, pillows, assigned seats. People paid for all these options whether or not they wanted them. Then budget airlines came along and said, “You don’t have to pay for these things if you don’t want them.” But now, even budget airlines are following the default bias strategy. Although you don’t have to buy a meal, pay for baggage, or buy insurance, on the websites of most budget airlines the default is for a meal, medium-sized baggage and insurance. You have to make a conscious decision to opt out of these choices.
However, this can be taken too far. One Asian budget airline requires you to reject the insurance option three times before you are allowed to proceed.
Some computer companies follow this strategy. Rather than asking you to sign up for an extended warranty programme, it is included automatically in the price and you have to make the decision not to sign up for it if you want to save money.
Another psychological tool for businesses is called the “Compromise Effect”. Studies tell us that when faced with two choices, consumers will often choose the cheaper one. When faced with three choices, consumers will often choose the middle option.
So if you are selling a product or service, and you offer two options, your customers will think the more feature-laden option is too costly, and choose the cheaper one. But if you offer the same two options and then a third, more expensive, option consumers will reject that, and go for the middle option (which previously they had rejected as too expensive).
Fast food companies do this. Years ago, the largest soft-drink size in an American McDonald’s was 21 ounces, which most people thought was too much. Most people opted for 16 ounces. Today, 21 ounces is labelled as “Medium” (there are 16-, 32- and even 42-ounce options) and most people choose the medium 21-ounce.
Many high-end restaurants follow this strategy. They know that most people are embarrassed to order the cheapest wine on the menu, so they charge their highest mark-up (highest profit) on the second-cheapest wine on the list, which is the default option for many people.
Some marketers might find the use of the default bias and compromise effect disturbing. In many ways, it is manipulative. But all businesses, if they are to succeed, must understand their customer, their habits and practices. When a customer is understood, it is the right of every business to do what it can to encourage sales, and using the behavioural learning of a customer, while it may appear manipulative, can also be considered smart business thinking.
The default bias can be summarised this way: “If you want someone to take an action, don’t require an action from them.”
The compromise effect can be thought of as, “By offering a choice, you can encourage the customer to choose your preference.”
This column is not encouraging its readers to use the above concepts. However, understanding them can be one step in creating a successful business strategy.
Eric Rosenkranz (www.ethree-asia.com) runs a strategic advisory in Southeast Asia assisting existing companies as well as start-ups to develop their long-term strategy and achieve success in their business. He can be reached at email@example.com.