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Saving to Keep Up With the Joneses

In the Wall Street Journal, Carolyn T. Geer highlights recent surveys of investors by entities including T. Rowe Price and ING.

The Question: Does the knowledge that your friends and neighbors are saving more than you cause you to boost your savings?

The Answer: It works, but the effectiveness varies very much with the approach.

The “Lake Wobegon Effect”

People have a natural desire to avoid being average and ordinary. This phenomenon is known as the “Lake Wobegon Effect,” named after a fictional town created by writer and radio host Garrison Keillor, where:

All the women are strong, all the men are good looking, and all the children are above average.

The question is for financial consumers is: Will consumers be more inclined to maximize their 401(k) contributions or increase their insurance coverage amounts if provided peer comparisons?

What the Studies Show

Matt Fellowes, founder and chief executive of HelloWallet, which works with employers to provide financial guidance to their employees via the Web and mobile devices, confirms that peer comparison is one way that economists and others are attempting to modify financial behavior. He believes that cluing investors in on their peers’ financial decisions can influence the decisions they make about their own money, if you show them convincingly that what they’re doing doesn’t meet the norm, but “it doesn’t work for everyone. It’s not a silver bullet.”

According to an ING study of U.S. consumers:

  • More than half of respondents say they would be motivated to save more for retirement if their sagings didn’t measure up to those of their peers.
  • Yet one-third say they would not be motivated to save morel.

Why the mixed results? Apparently, the approach can be quite effective if done right, but the wrong approach can also be demotivating. Stanford University economist John Beshears and colleagues say that when some employees are told of their co-workers’ higher savings rates, they are actually less driven to save. But the companies that have studied the effect also say that the approach can be fine-tuned to avoid demotivation, which I will explain below.

Marketing Applications

Web-Based Tools: ING has created a free, Web-based tool that lets investors measure themselves against others on a range of saving, spending and personal-finance matters called INGCompareMe.com. Deb Dupont, director of the ING Retirement Research Institute, conducted a test market of the concept with employees of several of its retirement-plan customers, that yielded the following results, which were promising enough to launch the tool:
  • 21% increased their contributions or joined a plan.
  • HelloWallet members showed similar results, according to Matt Fellowes.

The Right Approach: Two Important Variables

The right approach needs to take into consideration two important variables:
1. Don’t Demotivate: Fellowes explains that you must be careful not to use “shock and awe” tactics that demotivate consumers:

We’ve tried: ‘You are $5 million behind on your retirement savings! What is your problem?’ But emotionally what happens is people shut down and move on.

2. Don’t Set The Bar Too Low: One problem with peer comparisons that reference  average workers is that it can set the bar too low.

To strike the perfect balance, “HelloWallet has reframed the issue for consumers as follows:

You are making $5,000 a month now. In retirement, you’re only going to be making $2,000 a month, based on your current savings rate. On average your peers will be making $4,000, but the very best savers among them will be making $7,000.

This highlights what the best, most financially healthy people in a peer group are doing and provides a more realistic target, while piggybacking on the natural desire to avoid being ordinary.

Assisting Complex Financial Product Decisions

Having applied this approach in product comparisons, I have found that the approach can be a valuable aid in helping consumers make complex financial products. In particular, I find that when presenting consumers with their choices, it is even more helpful to include not only a comparison to average consumers but a “best practice” comparison. For example, employers considering an employee benefit program can be shown what kinds of benefit plans their most successful competitors are adopting. Individual consumers considering a plan of insurance can be shown what kinds of options successful peers have chosen.

Choice Architecture: Marketers and sales professionals can improve the effectiveness of their approaches by making use of an effect known in behavioral economics as “choice architecture.”

Marketers and sales professional should be aware of certain behavioral tendencies that tend to impede decision making involving complex insurance and other financial products.  Consumers are reluctant to make a switch to a different insurance carrier or among different plans when the choices are complex – something known as status quo bias. Inertia, or the tendency not to change, is especially significant when choices are complex.

Other studies show that by reframing the choices for the consumer, you can help guide decision making for consumers facing complex decisions in selecting better plan options.

Implications For Financial Marketers

The implications for companies in crowded markets such as insurance and investment products and services are great. It can mean steering consumer toward decisions that will ultimately save them and the company money and improve consumer outcomes.

Companies like Progressive Insurance, for instance, use comparison shopping tools to differentiate themselves in a crowded field as a more consumer-oriented and trustworthy choice. Their “name your own price” message conveys that the consumer can save time comparison shopping through the use of their online tools. Their perky spokesman, Flo, and her price gun personify consumer values such as friendly, good spirited personal service and a personal touch. This is all intended to break down consumer resistance to switching companies, and has generated incredible recognition.

The response to these advertisements demonstrates that the message can generate strong brand associations with core consumer values that can be illustrated in sensory terms.  But an important question remains – how to turn brand recognition and leads into conversions?

In other words, once the consumer reaches out to their local agency or makes an online query, how can the sales professional better parlay this into a consistent consumer experience that results in conversions to more profitable product lines and cross selling opportunities/share of wallet.

This is where choice architecture can be vital. In providing comparisons with other carriers, the sales professional has invaluable opportunities to more effectively clue in consumers on their peers’ financial decisions and influence their buying decisions.

Related Articles:

For more information about how behavioral economics can help guide consumers’ buying decisions, with research results from Sibson Consulting, reference my related articles below.

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