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By Elena Bergmann, Associate Consultant, BJSS
After being thrown into the deep end by Covid-19, retailers are finally coming up for air. It is expected that retail will grow at 3.9% in the UK in 2021, which means companies need to start strategizing for their recovery. However, retail has profoundly changed in ways that would have been unimaginable just over a year ago. What will the future look like? Following the skyrocketing levels of eCommerce over the last 18 months, will customers continue shopping online or flock in-store now that restrictions are easing? Will consumers alter their shopping frequency and choice of products?
There are no easy answers to any of these questions, but they all have one thing in common: they are highly dependent on customer behaviour. Retailers cannot expect customers to go back to how they were pre-pandemic, nor can they assume consumers will continue adopting their pandemic behaviour. Retailers, therefore, need to design adaptive strategies centred around predictable facets of human decision making.
In this article, I will explain a few core concepts in behavioural science and neuroscience, illustrate how they are applicable to retail through real-world examples, and make the case that behavioural insights are no longer a nice-to-have – in fact, the future of retail will be built on a profound understanding of how consumers think.
Humans aren't rational - so neither are customers
Economic principles assume that humans are rational. Many companies build their strategies on these principles. But here is the issue: humans are anything but rational. And making assumptions about customer behaviour can be very costly if gotten wrong.
Humans make about 35,000 decisions every day. This can easily lead to cognitive overload, which hinders decision making and often results in irrational behaviour. Suppose we add to the equation a yearlong pandemic, with all the uncertainty and psychological pressure that comes with it, and it should not come as a surprise that the average customer might not be acting rationally right now.
To understand this irrationality, we can look to psychologist Daniel Kahneman’s notion of two different thinking systems. System 1 can be described as intuitive and automatic, while System 2 requires a sense of deliberation and effort. System 1 is highly influenced by our environment and other people's actions, and it is anchored in our experience and habits – it is ‘irrational’ in the true sense of the word.
Even though we might think we mostly make decisions deliberately (or rationally), System 1 accounts for 98% of everything we do. Considering the 35,000 decisions we make per day, we should be grateful for that! System 1 is a biological survival mechanism. Since the brain uses about 20% of our overall energy consumption, it makes sense from an evolutionary perspective to automate specific tasks. This means that, ironically, being irrational helps us survive. Awareness of this fundamental fact will help retailers better target and reach customers.
understanding the human brain to understand the customer
Before companies try to influence customer behaviour, it is essential to understand a few more basics of the human brain. Three essential principles to look at are:
1. If given a choice, the brain will always choose the path of least mental effort
The path of least mental effort often means not doing anything, which is leveraged by default. An impactful example is organ donation: there are countries in which citizens are automatically registered as donors with the option to opt-out and other countries where you must actively opt in to be a donor. The former countries have a significantly higher number of registered organ donors.
2. The above results in the brain being pattern-seeking
The brain seeks patterns because anything that breaks a pattern requires effort and valuable energy, which our bodies seek to preserve. It’s for this reason that, no matter which Aldi supermarket you visit, the layout will be very familiar. This caters to the pattern-seeking brain and reduces customers' distress. Low effort levels lead to higher satisfaction and, often enough, to an overall increased basket size.
3. Our brain is rewarded more for anticipating something enjoyable than for doing it
The brain is constantly seeking reward, released in form of dopamine. Yet dopamine is released in anticipation of pleasure more than during actual pleasure, which means we are quite bad at affective forecasting or predicting one’s future emotional state. Gyms have long understood how to exploit this phenomenon by selling 12-month memberships in advance. In January, customers are excited about their fitness journey and lots of dopamine is released when signing the contract. But we all know how this story ends. The exciting, anticipated future becomes the present and dopamine levels drop off.
With these fundamental concepts explained, let’s look now at how Pret a Manger's coffee subscription service leverages several psychological insights to nudge customer behaviour. Using this example and others, I will illustrate how behavioural science can support retailers in recovering from the pandemic.
pret a manger: behavioural science brought to life be a cofee subscription
Unnaturally high levels of uncertainty during the pandemic have impacted customer spending and will have long-term effects on consumption habits. For example, the coffee break, once part of the daily routine of many office workers, was brought to an abrupt end by national lockdowns and the shift to remote working. Last summer, in a bid to reintroduce the coffee break and encourage customers to return to old habits, Pret a Manger launched its coffee subscription service – £20 a month for virtually unlimited Barista-made drinks.
This strategy leveraged multiple behavioural principles:
First, it offers a path of low mental effort. After setting up an account, customers just need to present their barcode when walking into any Pret a Manger store to receive their drink of choice. No payment is required, no effort is needed.
Secondly, the first month of the subscription is free, which takes advantage of a principle called the power of free. Humans are naturally drawn to free products or services and assign them greater value than they would have otherwise.
And lastly, the subscription auto-renews after the first free month, which plays into people’s inertia bias (our preference for the status quo) and our tendency towards loss aversion (where we place disproportionate value on keeping things rather than gaining them). Once we feel like we have owned a Pret membership for a certain amount of time, we feel pain by losing it - even if it was free.
An opportunity for retailers' post-pandemic recovery
As the Pret a Manger example illustrates, retailers can encourage customers to elevate their spending levels by leveraging concepts found in behavioural science. Another phenomenon that businesses could draw upon is present bias. Related to the affective forecasting I mentioned earlier, present bias means humans prefer smaller, immediate rewards over more significant rewards in the future (famously illustrated by an experiment in which kids were offered one marshmallow immediately or two if they waited a few minutes).
Klarna is an excellent example of this. Its slogan – “shop now, pay later” – cleverly frames the immediate reward while the unpleasant part (paying) is postponed.
And, as we emerge from pandemic restrictions, businesses can seek to rebuild consumer confidence in physical retail using social proof – the underlying human instinct to follow what others are doing. Retailers can include specific statistics in their messaging – for example, a newsletter saying that 70% of customers are back in store reassures the brain that it is safe to return to in-person shopping. An amplifying factor for the need for social validation is uncertainty, so now is the ideal time to leverage it.
Retailers should also replace the off-the-shelf communication materials introduced during the pandemic, like the standard pieces of A4 paper demonstrating how to wash hands that appeared over each public sink basically overnight. We have all now seen a different version of signs commanding us to wear a face mask and keep our distance, and every queue has been guided by lines on the floor. Over many months our brains have built strong associations between these signs and a very challenging, restrictive time. While retailers need to maintain the general messaging, it is worth switching up the communication design, include their own branding, and use colours psychology to turn negative associations and a restricted mindset into safety reassurance (40 different versions of the shade of blue used in Google search results were tested to see which colour drove the most clicks - it is assumed that this optimisation brings over $200m additional annual revenue).
A way forward for an industry in flux
It will continue to be a challenging time for retail as the industry works out what the future of instore shopping looks like in the future. And while many underestimate the importance of behavioural economics, I believe the concepts I’ve presented in this article illustrate how the behavioural insights can be applied to build customer engagement and form positive associations between consumers and retailers.
The retail industry is beginning to wake up and appreciate the importance of behavioural science. In fact, I assume that in-house behavioural insights teams will become the industry norm sooner rather than later. At a time when there is still so much uncertainty, behavioural science could be the key to survival.