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Behavioral economics and customer engagement

Blog overview
10/09/2020
behavioral economics, sales optimization
behavioral economics, customer engagement

Customer engagement – more satisfied, loyal, and profitable customers – is one of the central challenges we face at all customer interfaces, from sales to aftersales. Behavioral economics helps to improve your customer engagement.

Goals of customer engagement

Customer engagement has three key objectives:

#1 Convince

Customers should be convinced that the services and benefits offered best meet their needs.

#2 Bind

Successful companies bind their customers not just through actual added value, but also emotionally. And this is done in such a way that the customers develop an intrinsic interest in the customer relationship, which – for example – makes customers willing to accept price increases. For example, Apple was able to increase prices, even at the height of the Corona crisis.

#3 Maintain

The goal of all convincing and bonding efforts is to win over customers who decide to purchase additional services and products offered by the company. And to keep the customer from switching to another provider.

Why behavioral economics?

Even if behavioral economics is mainly applied in pricing and selling because it focuses on (purchase) decisions, it is still worth applying the findings of behavioral economics to customer engagement. Because behavioral economics, first of all, eliminates some widespread misunderstandings of customer loyalty research:

#1 Convince

Customers are not necessarily convinced by being offered as many benefits and services as possible. Quite the opposite, customers hate the feeling of paying for services they don’t even need. A loyal newspaper subscriber is more likely to cancel the subscription if the unread pile of newspapers gets bigger and bigger. Sometimes less is more.
Read more about this in our blog article “The relevance of irrelevant offer elements for your portfolio” (example #4).

#2 Bind

Customers are not necessarily loyal to a company if the company acts rationally. For example, suppliers who offer their customers raw materials at rising prices by auction provide a rational solution from an objective point of view. However, this solution is perceived as exploitative and extortionate because it ignores past efforts to establish customer relationships.

#3 Maintain

Even dissatisfied customers change suppliers much less often than one would expect. This, of course, does not mean that you should accept dissatisfaction or even consciously encourage it. But it shows how important habit is for customer loyalty, and that you, as a company, have the best chance of gaining loyal customers if you establish consistent habits.

Using behavioral economics to gain more satisfied, loyal, and profitable customers

Behavioral economics provides a set of recommendations to convince, bind, and maintain customers. This primarily includes one thing: the management of expectation: The Prospect theory is one of the most important concepts of behavioral economics. It shows that satisfaction and dissatisfaction mainly depend on the expectations of a customer. Therefore, it is important to know a customer’s expectations to satisfy them. However, it is even more important to actively shape his expectations.

Using the example of goodwill, this means: Whether a car owner is reimbursed 50% or 80% of the cost of engine damage outside the warranty period has almost no influence on his satisfaction. The decisive factor is whether the reimbursement meets his expectations. And the workshop can actively influence what he expects: A mechanic who promises full coverage of costs and then goes back to 80% will disappoint the customer. However, if he announces that he will commit to 50% and then positively surprises the customer with 80%, the customer will be thrilled.