Selling More Using Behavioral Economics
As a rule of thumb, most people…
Behavioral Economics helps us to understand how people make decisions. By using the tactics we learn in studying this, we can leave a better impression on our prospects. People see the sales representative using the behavioral economics version of selling as slower, more relaxed, enthusiastic, and helpful. As opposed to the old way where they see the rep as too fast, tense, business-like and focused only on selling.
In this Focus, I will use information from a LIMRA study called, Improving Sales Presentations. Subtitle, Using Choice Architecture to Influence Buying Decisions. So first a definition of choice architecture, for those of you who like me, may not be familiar with the term. Choice Architecture is the application of Behavioral Economic principles to help people make correct decisions without being influenced by potential biases. The study specifically looked at how to present products and advice to potential buyers of insurance.
The LIMRA study used Behavioral Economics research to uncover Seven Tactics that if incorporated into a sales presentation, should influence prospects’ willingness to buy. They compared sales presentations with and without these tactics to see if they improved the likelihood of buying. The seven tactics were:
- Personal Experiences to Overcome Optimism
- Avoid Ambiguity
- Heuristics or rules of thumb
- Present value
- Mental Accounts
The research findings said this. “Behavioral economics tactics invoke more feelings in prospects and make a better impression on prospects.” They give a 29% lift to a sales presentation. In other words, the client is 29% more likely to buy than when these are not used. So obviously learning how to use these seven tactics in your sales presentations should increase your effectiveness in very positive ways. And whether you are a newer rep or older veteran; unconscious competent or conscious competent, you can all benefit from learning these skills. What I will try to do over the next few weeks is to help interpret some of the findings into practical ideas. Now this won’t be the finished product, because the project team at LIMRA, which includes Joey Davenport and myself, has not worked on this as a group yet, but it will give you a sense of how to incorporate these tactics now.
Richard Thaler and Cass Sunstein coined the term “Choice Architecture” in their book Nudge, Improving Decisions about Health, Wealth and Happiness. The premises of choice architecture are:
People choose poorly when making financial decisions
The immediate context of decision making matters
We can improve people’s decisions by controlling the features that influence those decisions
Today I am going to give an overview of the next two tactics. Avoiding Ambiguity is first. People have a hard time making complex decisions. Did you ever stop to think that you may be preventing the buyer from making the decision to buy because you have overwhelmed them with information?
Maybe you remember sitting in a lecture hall in college thinking to yourself, what in the world is this professor talking about? Now in college they have a way to find out if you get it, that is called a final exam, but what does the consumer do? Rather than look stupid, they tell you they need to think about it. They stop returning calls, what seemed like a great interview because the prospect was shaking his/her head in agreement has gone bad. People do not like ambiguity. If we can’t figure things out it produces a fear response in us, and people who are fearful do not take action.
This is where your job is to present your solution in clear concise terms. Making it easy to understand. When faced with complex decisions we look for simple ways to decide. Too many options with too much information results in choice overload. In a previous issue I used this example. When you walk into an electronics store to buy a Television, what is the first thing you notice? All the TV’s are facing forward and they are all turned on. The store manager knows the consumer needs to see what it does. You never see a TV turned around with the back off to show you how it works. You always want to talk in simple clear terms describing what it does, not how it works.
Another important point is this, people are not looking for a simple product; rather they want a simple way to decide. You need to judge carefully the amount of information a client can handle. Err on the side of less and you will get more, sales that is. The following is a quote from a prospect in one of the focus groups used in the study.
I started to tune out. I started to sit there in a state of confusion. What are you talking about? with all the figures being thrown around it was like, “what am I buying or what are you trying to sell?” Prospects have a need to understand. Confusion, I believe, is seen as a method of deception. The more I feel I am being double-talked the less I trust you. If your product is as good as you say, why can’t I understand what you are saying? A good exercise for newer reps would be to sit with a close friend, spouse or parent and ask them to sit through a presentation. When it’s over ask them to explain what you just told them. The results may surprise you. Finally, as it pertains to ambiguity, do not go into more detail than the prospect can understand.
The next Behavioral Economics tactic is using Heuristics. The word heuristic comes from the Greek word “to find or discover”. It is an adjective for experienced-based techniques that help in problem solving, learning and discovery. A heuristic is a rule of thumb, an educated guess, an intuitive judgment or simply common sense. Common sense rules of thumb help people not only make decisions, they also help to make them feel good about their decisions. Heuristics give people an idea what others have done when dealing with the same subject, and we know people like to know others have made the same decisions.
As a financial rep you should be familiar and ready to use Rules of Thumbs his/her prospects. So for example, when asked how much money a person should save, you might say, “many experts feel that, in addition to maxing out your retirement plans such as 401K or IRA you should save at least 10% of you take home pay for other goals such as college, emergency fund, or a new home. That is if you start young. But if you are over forty and just starting to save you may need 30% or more” How about this one? How much house should I buy? Answer, “if you are buying a home and don’t want to feel stretched over hot coals for years to come, the home shouldn’t cost more than two-and-a –half times your gross income.”
A prospect might ask how much should I have when I retire? “Many experts suggest you have 20 times the expenses you’ll have but which won’t be covered by pension or social security payments.” The other rule of thumb is to assume you will need 70-100% of your income every year in retirement. Given rising medical cost and longer more active lifestyles in retirement.” Another question, How much life insurance should I own? “If you’re married with young kids or teenagers, you will need a policy that covers between 6 and 10 times family income and possibly more depending on family expenses and how much your surviving spouse can earn.”
I recently learned that the LIFE Foundation website is being used by some reps as a third party resource. Reps ask clients to go to that site and use the life insurance calculator to see how much they should own. Great idea to use third party rule of thumbs. And I might add that the Department of Justice used up to 20 times income to establish the benefit the government paid to families of 9/11 victims.
So enough for now on heuristics. There is a lot of conventional wisdom around financial matters, and you should be able to use it to reassure your clients that they are doing the right thing and are not alone in this thinking. More to come on Behavioral Economics and Choice Architecture, so please stay tuned.
I would love to hear your comments and thoughts around my project with LIMRA, The 21st Century Sales System or just how you like the concepts of Choice Architecture.
Good luck and God bless! Hoop