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Behavioural economics: the key to understanding and changing customers’ behaviour

Do companies truly understand why customers behave the way they do? When you ask business leaders, more often than not the answer is ‘no’. This has made behavioural economics one of the hottest topics in the last few years. 
Unlike classic economics, behavioural economics suggests that we make many of our decisions without going through a rational reasoning process. Some scholars argue that our decisions and judgements can be based up to 70 per cent on our emotions and only 30 per cent on reasoning.

The use of behavioural economics by leading companies and regulators has become a growing trend in the recent years. In this blog we discuss how basic principles of human behaviour have been used in the energy sector to influence customers’ behaviour, and how these behaviours can be leveraged further to encourage smarter consumption. 

In 2012, the government initiated a programme to roll out smart meters in the UK to give customers more control over their energy usage. The roll-out is expected to see 50 million gas and electricity meters installed in 27 million homes by 2020, aiming to reduce domestic energy consumption and carbon emissions. This is a major undertaking for energy providers, but one that offers a massive opportunity to engage customers and rebuild trust, if combined with an understanding of human behaviour.

In the US, some 150 million smart meters have already been installed and although some customers used the basic information provided by these meters to cut their energy use, the initial programme has not reported significant progress.

But why is telling customers about the ‘whens and hows’ of their energy consumption not enough to change consumption behaviour?

The answer lies in a basic human tendency. We rarely pay attention to, or are attracted by, absolute terms - we can’t judge a situation unless we see it in context.

To encourage customers to change their consumption behaviour, a new set of energy solutions has been introduced that can provide information on the energy usage of neighbours, giving customers a benchmark that fulfils their tendency to focus on relative values. In the US, introducing this solution has resulted in a 1.5 to 3.5 percent reduction of energy usage per home, much more successful than providing customers with no comparison data[1].

New generations of energy solutions go beyond comparisons and use Cloud-based energy disaggregation to enable customers to see the amount of energy that each home appliance consumes. Gamification is also used to simulate a reward system – a behavioural technique used for changing habits - to facilitate changing consumption behaviours. The question is whether this can make a bigger difference and drive long-term behaviour change and customer engagement?

Going back to the principles of behavioural economics, we believe Cloud-based solutions can have a more significant impact on changing customers’ consumption behaviour. Providing customers with accurate, real-time and granular data and a simulation of rewards can help customers change their behaviour and overcome some of the common behavioural biases that make us resist changing our behaviour.   
Here are a couple of examples of such behavioural biases - do the following thoughts sound familiar?
 “We must have more home appliances or more people in our household compared to our neighbours… that’s probably why we use more energy” – This is an example of a self-serving bias - people tend to evaluate ambiguous information in a way beneficial to their interests.

Or

“I always use the washing machine during off-peak time and switch off the heating when we are not home” – This is an example of an egocentric bias - recalling the past in a self-serving manner, e.g. remembering a caught fish as bigger than it really was.

These common human reactions, plus a rather interesting aspect of relativity - that we not only make comparisons, but we have a higher tendency to compare things that are easily comparable, make me believe that the new generation of energy solutions can have a deeper impact in changing our consumption behaviours by telling us exactly how much more energy we use on the washing machine or our heating compared to that of our neighbours.

It will come as a surprise to customers if their energy provider helps them to reduce their bills and will open a new window of opportunity to rebuild trust and engage with them. Suddenly your utility company is not a faceless commodity provider anymore and can become a part of your daily life by guiding you with targeted and meaningful recommendations. 

With the obligation on  energy providers to complete the roll-out between 2015 and 2020, it is time for energy companies to start thinking and planning on how to best utilise this opportunity to rebuild trust and re-engage customers.  

 
 
[1] www.bidgely.com

Back to February 2015

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