How Behavioral Economics Can Land New Clients
As an accomplished practitioner in a quantitative field, your plan to add new clients is to create a value proposition that will appeal to your prospective clients’ rationality.
You want to articulate what the client stands to gain by working with you and point out the unique advantages they will enjoy over their competition by working with you. And you also bring your price as low as possible to get to an easy “yes.”
This may seem like a perfect plan, until your friend the behavioral economist takes a look at it. She points out that due to loss aversion, your prospects will likely be more motivated to avoid losses than to secure gains.
So, you decide you’d be better off articulating what the prospect stands to lose by not hiring you, than what the prospect stands to gain by hiring you. She advises that due to social norming, your prospects will likely be more influenced by what their competitors are doing than by what their competitors are not doing. As such, articulating unique advantages may unintentionally hurt your cause.
She then explains that due to prestige pricing, lowering your fees may unconsciously signal lower quality. Moreover, that lower price may actually hurt your chances of winning the new client.
If this feedback strikes you as completely irrational, you’re absolutely right. But before you write off any new friendships with behavioral economists in the future, you may want to consider that irrationality is the entire point.
Welcome to Behavioral Economics
You see, you made a choice (consciously or not) when putting together your sales pitch by assuming your prospects are rational. They’re not, they’re human. This is behavioral economics, the study of how people actually behave.
That description may seem absurdly simple until you consider that classical economics is the study of how people should behave, at least if driven by rational self-interest. While it may be impossible to overstate the importance of classical economics, we also must admit that anticipating only perfect rationality is hardly an effective way to predict human behavior.
The good news is that irrationality does not mean the same thing as unpredictability. There are a host of unconscious influences – cognitive tendencies, environmental factors and emotions, to name a few – that make irrationality fairly predictable.
Loss Aversion and Social Proof
We can use our knowledge of those factors in order to gain a better understanding of what actually influences decisions and behavior. For example, research indicates that human beings are twice as motivated to avoid loss than to secure gains (aka “loss aversion”).
Put another way, a $20 loss produces feelings that are twice as powerful as the feelings produced by a $20 gain. Therefore, if we are trying to motivate action (such as retaining a new accounting firm), we will likely be more effective by emphasizing what a client stands to lose than by what the client stands to gain.
A long history of research and experimentation indicates that people are disproportionately influenced by what other people are saying and doing (aka “social proof”). It is not safe to assume that a message like “75 percent of people don’t get enough exercise,” will lead a person to exercise more. In fact, it may lead a person to exercise less, due to thoughts like, “If other people are doing it, so should I.”
Conversely, highlighting the uniqueness of an approach may trigger unintended consequences. Therefore, when courting a new client, it may be better to emphasize how other firms are benefiting from your services, rather than emphasizing the benefits from the uniqueness of that choice.
Perhaps nothing is more counterintuitive than prestige pricing. One of the fundamental truths of economic theory is that as price goes down, demand goes up. And yet, experiments have demonstrated how the opposite can be true – increasing price increases perception of value, thereby driving demand higher. So, it is a mistake to assume automatically that lowering price improves the prospect of landing a new client.
These are just a few of the principles of behavioral economics, which covers an incredibly broad spectrum of unconscious influences and techniques to leverage these influences in service of helping people make better choices for themselves. When we think about strategies to achieve anything, including client growth, we have to be both aware of the unconscious factors that will influence decisions and ready to adjust our approaches based on that awareness.
The good news is that self-educating on the subject is well within reach. Books like Nudge and Influence can help business leaders grasp the subject matter and begin to develop approaches to incorporate that knowledge. Alternatively, behavioral economics is a rapidly growing field, with skilled practitioners increasing in availability.
Whether self-directed or guided by outside expertise, the incorporation of behavioral economics into your firm’s growth strategy is a wonderful way to become a more data-driven organization. After all, the field is entirely about abandoning guesses, assumptions and intuition, and instead relying on statistical analysis and peer-reviewed research to guide operating strategy. What could be more data-driven than that?