What companies can learn from behavioural psychology

Not meaning to kick Uber when it’s down but, as it happens, the week before the company lost its London licence, it repeatedly failed to get me where I needed to go, with unhappy consequences. My three-year-old son and I were on our way to a children’s play that he had been excited about for days. I hardly ever use Uber, but it made sense to get a ride that day. We still had 45 minutes before the play, and the app said the journey would take 15 minutes tops.

I had to request a car four times without success, so we missed the play. Cue an upset said child, £24 for the tickets down the drain and a spoiled afternoon. To cut a long story short, the second time we couldn’t get to the pick-up point in time as it was on the other side of a busy thoroughfare and so I was charged £4 for missing the car. Then, as I was looking out for the third car, the driver cancelled. And then the fourth driver did the same. By that point, it was too late to request another ride, so I gave up and we took a trusty bus home.

When I spoke to an Uber customer agent a few days later, she responded with a stock “Uber drivers are independent contractors” answer. After some discussion, she offered me £5 credit “as a gesture of good will” and that was only after I asked why Uber drivers are compensated when passengers miss their ride but passengers get nothing when drivers cancel on them. The agent also agreed to refund the £4 cancellation fee.

The incident made me wonder why customer service from firms in general does not meet customers’ expectations in many instances.

Perhaps many companies don’t worry much about losing existing customers, knowing that new ones will replace them. But return buyers are actually more important for the bottom line. Research by a top management consultancy Bain & Company has shown that in industry after industry, the high costs of acquiring customers mean many of them are unprofitable in the first few years and that repeat buyers spend more in months 24-30 of their relationship with a firm than they do in the first six.

In addition, referrals by happy customers cut down on marketing expenses, as one of the Bain researchers, Fred Reichheld, has pointed out. “Your happiest customers will often pay a premium to keep doing business with you, even if they could save by switching to a competitor,” he wrote in a 2018 LinkedIn post.

Further insights can be drawn from the findings of behavioural psychology and behavioural economics over the past half a century. Monetary incentives, a traditional focus for economists, are far from the only driver of our spending decisions. Emotions and context play a big role too, and a little empathy can go a long way.

For example, according to another leading management consultancy, McKinsey & Company, a photo of a happy person has the same effect on demand for a bank’s mortgages as cutting the interest rate by 1 percentage point – say, from 5 per cent to 4 per cent.

Conversely, a negative emotion can override monetary incentives. Here is an example given recently by Russ Roberts, an economics researcher at Stanford University’s Hoover Institution, on his podcast EconTalk: “If I insult the guy who’s trying to buy my house, I’d be an idiot if I said, ‘Oh, it won’t matter because I’ll just lower the price and that will compensate for the insult.’ A lot of people, when you insult them, just say, ‘I’m not buying that house at any price.’”

Companies may think one bad experience out of many interactions will not put off a customer for good. But that is, in fact, a real risk – due to a cognitive bias called the peak-end rule. The bias means people tend to remember the most intense part of an experience, whether positive or negative, and the end of the experience, rather than remembering it as a whole.

The same applies to entire experiences. In a business context, people often remember those exceptional interactions with a company that are either perfect or terrible and forget everything in between. Customers also remember the last interaction best. This underlines the importance of handling complaints with particular care: they provide the opportunity not only to make amends but to make sure the customer’s last memory of the company is a positive one.

The customer may well share that memory in word-of-mouth recommendations or warnings or in online reviews, whose power should not be underestimated. We are social animals and are influenced by what other people do and say more than we realise. (For example, tax fraud has been found to fall when taxpayers are told that most people do not commit fraud.)

There is another relevant human trait: risk aversion. Broadly speaking, we are more sensitive to the possibility of a bad outcome than the possibility of a good one and so, when making decisions, we tend to play it safe. For companies, this means that one bad review – or one bad personal experience – can outweigh a number of positive ones.

Research into human behaviour has been embraced by leading marketers, consumer companies and consultancies, such as McKinsey. “There are significant economic benefits in going beyond simply improving products and services by paying equal attention to customer expectations and how customers perceive their treatment,” McKinsey wrote in a post titled ‘Putting behavioural psychology to work to improve the customer experience’.

In another take on the subject of customer service, the firm said earlier this year that the cost of pleasing one “difficult” customer is offset by a boost to revenues from a company’s reputation for excellent customer care.

That is also a useful reminder that, as consumers, we can help drive real change by leaving reviews not only when a company lets us down but also when it dazzles.