Snake oil that works? How Simply Energy and Hardhat are harnessing behavioural economics to hack ‘reptile brain’ decision-making
For the last 18 months, Andrea Bernard, General Manager, Marketing and Sales at Simply Energy has been harnessing behavioural economics to unlock growth and make the challenger brand “the king of the tier two” energy suppliers. She says all marketers should take a look at heuristics, the shortcuts humans use to make decisions that they rationalise only later. Hardhat co-founder, Dan Monheit, breaks down the 12 heuristic hacks brand marketers can use to power post-Covid growth – while making themselves more interesting at dinner parties.
“If you ask any customer why they choose their energy company, it's because they're the cheapest. [By applying behavioural economics] we started to understand was that it wasn't necessarily price, it was the uncertainty around that price. Removing price uncertainty [via a tracker app] was actually way more impactful to satisfaction and loyalty and reducing the number of people that called us when they got their bill, than reducing the overall price of energy.”
What you need to know:
- Nobel-winning behavioural economist Daniel Kahneman’s work suggests our brains function at two speeds, using two different systems to make decisions.
- The quick, instinctive part usually wins, with the rational, slower system then justifying those decisions, if not correcting them.
- Hardhat’s Dan Monheit suggests the “reptilian brain” makes the quick decisions, only for the “PR department” prefrontal cortex to later rationalise them.
- Understanding the biases within quick decision-making can unlock significant wins for brands.
- These can be broken down into heuristics, the shortcuts the brain uses to make decisions on the fly, and the biases inherent to them.
- Simply Energy has applied behavioural economics to move away from purely price-point differentiation by understanding the ‘zero risk bias’ heuristic, as well as ‘social proof’, ‘loss aversion’ and ‘the mere exposure effect’ heuristics more broadly in its marketing.
- Otherwise, “we would just be doing more of the same – and we all know that if we keep doing the same thing and expect a different outcome, we're a bit nuts”. – Andrea Bernard, GM Marketing and Sales, Simply Energy
- “This is deep, foundational knowledge for any marketer, 300 million years in the making.” – Hardhat co-founder, Dan Monheit
“Most of the time our decisions are influenced by bias and emotion and the context within which we're making the decision. Once you understand that is how the majority of our decisions are made, we can start building brands, campaigns and ideas around it.”
Now look what you made me do
We don’t make rational decisions because our reptilian brain, 300 million years in the making, usually beats the staid, rational, prefrontal cortex, suggests Hardhat co-founder Dan Monheit. That means marketers need to be more reptile – or at least understand how the brain makes decisions first and justifies them later, and crucially, what influences decision-making.
One way to do that is to get to grips with behavioural economics and heuristics – the brain hacks Monheit thinks marketers should harness to create short-cuts to post-Covid growth.
And it’s apparently not just Carboniferous period snake oil: Even tapping into the basics is paying off, according to Andrea Bernard, General Manager, Marketing and Sales at Simply Energy.
Bernard and Monheit think marketers must better understand how the reptile brain influences the way we make decisions – or go the way of the dinosaurs.
Heuristics and the two-tiered brain
According to Psychology Today, a heuristic is a “mental shortcut that allows an individual to make a decision, pass judgment, or solve a problem quickly and with minimal mental effort … [but] can also be costly when they lead individuals to miss critical information or act on unjust biases”.
Suffice to say those shortcuts do not necessarily equate to logical, rational decision-making – and are often quite the opposite.
From the late sixties, behavioural economists Daniel Kahneman and Amos Tversky dived deep into heuristics in human decision-making, Kahneman later winning the Nobel Prize in Economic Sciences for their work on cognitive biases.
Kahneman’s 2011 book Thinking, Fast and Slow, summarises much of that research, outlining how the brain uses two ‘systems’ to make decisions: System 1 is fast, intuitive, and emotional; System 2 is slower, more deliberative, and more logical.
Recognising how the two systems interact can make play a significant role in marketing success or failure, argues Hardhat’s Monheit, and should be “foundational” for marketers.
In a nutshell: “Most of the time our decisions are influenced by bias and emotion and the context within which we're making the decision,” says Monheit.
“Once you understand that is how the majority of our decisions are made, we can start building brands, campaigns and ideas around it.”
Post-Covid, he says marketers are tapping in to behavioural economics in greater numbers.
Snake oil or reptile brain?
While Kahneman stuck with a two tiered decision-making system, others have described the ‘fast’ decision making part of our brain as the ‘reptilian’ or lizard brain. Monheit offers a brief summation of that view:
“We've got a part in our brain called the prefrontal cortex, the big chunk up front which takes up around 12 to 15 per cent of our brain. From an evolutionary perspective, it is the newest part - and it only really exists in humans,” says Monheit. “It’s the part of our brain that does all of the logical, rational, long-term thinking and planning - and we believe as humans that's probably how we make all of our decisions,” he says.
“But there’s another part at the back of our brains called our reptilian brain. It’s about 300 million years in the making, the most primal part of our brain.” That part drives all our instinctive wants and needs, “fear, greed, lust, desire to reproduce, desire for status” says Monheit. “As it turns out, like in most animals, that is the thing making most of our decisions.”
As such, the lizard brain is still running the show, suggests Monheit. It’s just developed a pre-frontal “PR department, making wonderful, logical, rational stories to explain the thing that our reptilian brain impulsively and invisibly decided. So, yes, you bought the sports car for the fuel efficiency; yes, you bought that designer handbag because of the way it fits your laptop…”
“It’s odd, because we have almost dedicated our careers to influencing choice and we spend a lot of time thinking about how other things work. We’re interested in how programmatic works, how attribution modelling works. But we don't really ask how people work, how people make decisions.”
Marketers buying into behavioural economics?
Lizard brain or otherwise, Monheit has long been a proponent of behavioural economics. But he says it seems to have struck a deeper chord post-Covid, with brands much keener to explore how they can influence decision-making.
“It’s odd, because we have almost dedicated our careers to influencing choice and we spend a lot of time thinking about how other things work,” says Monheit. “We’re interested in how programmatic works, how attribution modelling works. But we don't really ask how people work - and how do people make the decisions that they make.”
And yet, he says, there are decades worth of peer-reviewed behavioural economics research to draw upon.
“There is hard evidence that demonstrates consistent biases that humans are prone to that as an industry we've largely ignored until the last 10 years.”
While there are “between two and three hundred” heuristics, Monheit says he spends most of his time thinking about 15-20. One of those is 'temporal discounting', the idea that we discount the value of something the further into the future it is, and are therefore more likely to trade it in for something more immediate.
“So, I know that Future Dan objectively, rationally wants a comfortable retirement and a six-pack,” explains Monheit. “But I also know that Today Dan wants new sneakers and a donut. So Today Dan usually wins. And this is really hard for brands and for whole categories that are selling future benefits, whether that's higher education or superannuation. You realise that people are wired to massively over-index immediate gains, which makes sense evolutionarily - because tomorrow was never a given.”
Marketers in slow-burn categories must therefore “think about how you promote your product in a way that's motivating in the short-term, not just in five, 10, 30, 40, 50 years from now,” Monheit suggests.
“I'd say to marketers that they've got to look at [behavioural economics] now, because they actually need to take what they already know and add a bit of flavour over the top. Not just understand how to market well, but why what works, works.”
The 12 heuristics for post-Covid growth
Monheit thinks there are a hardcore of “highly relevant” heuristics in a post-Covid world:
- The choice paradox: “The idea that we love having choices but are quickly overwhelmed when we have too many options to pick from”.
- The licensing effect: “Our innate desire to balance our virtuous and our indulgent selves. So if you've been to gym this morning, you're probably more susceptible to having a burger for lunch because you feel like you've justified it,” says Monheit. “The licensing effect actually explains a lot of very poor decision-making.”
- Effort bias: “Our natural inclination to assign more value to something if we feel that more effort has gone into it. So a painting that took 17 hours is going to be perceived as more valuable than the same painting if we thought it took four hours.”
- Zero risk bias: “The idea that any reduction in risk is good, but the complete elimination of risk is disproportionately good and something people will pay a premium for.”
- The halo effect: “Our tendency to take a first or a prominent aspect of somebody's personality and apply it to their whole being. We see brands use this in some really interesting ways with sponsorships and endorsement deals.”
- Projection bias: “The idea that our current self thinks it knows what our future self wants, but actually has no idea. Which is why we want wine today and end up signing up for weekly wine deliveries for the next five years.”
- Scarcity bias: “This is fairly common, the idea that just the perception that something is limited in time or quantity or availability makes us value it and want to pay for it more.”
- The peak-end rule: “Shows us that we remember experiences not by the average of how we felt through the experience, but by the peak emotional experiences, whether they were high or low and how we felt at the end,” says Monheit. “So this is all about designing experiences that have a couple of deliberate fifteen out of ten moments instead of trying to make everything a smooth nine out of ten, which is largely forgettable.”
- Temporal discounting: “Which we already covered, but it's all about the short term.
- Social proof: “Our natural desire to want to be with the group. Safety in numbers made sense for us historically and even today, we would much rather stand outside a full restaurant and wait for a table than cross the street and eat at an empty one.”
- Loss aversion: “Our natural desire to feel losses significantly more than we would feel the equivalent gains. Lots of research has demonstrated that the emotional toll of a loss is about twice as much as the equivalent gain. So if you'd lost one hundred dollars in the street, you would need to find two hundred dollars to come out emotionally even.”
- Mere exposure effect: “What it says on the tin; that the mere exposure to a repeated stimulus over and over again can cause us to ultimately favour that.”
The marketer’s view
Andrea Bernard is General Manager, Marketing and Sales at Simply Energy. While backed by €60bn French utility Engie, it’s a challenger brand bidding to take market share off the likes of tier one suppliers Energy Australia, Origin Energy and AGL – where Bernard spent four and a half years prior to her current role.
Applying behavioural economic insights has helped the brand to become “the king of the tier two” energy suppliers while making its “marketing, pricing and sales efforts work much harder”, says Bernard. “We don't have the luxury of massive budgets, so we're sort of taking it to the big guys with small dollars, but big ideas.”
Zero risk bias applied
The first challenge to solve is getting past price as the key differentiator. “If you ask any customer about why they choose their energy company, it's because they're the cheapest or they get the best deal,” says Bernard.
“But actually, what we started to understand was that it wasn't necessarily the price, it was the uncertainty around that price.”
So Simply Energy developed its 'Tracker app', which tells customers how much they have spent on energy that week. “They can also choose to receive that each week via email, and removing that uncertainty was actually way more impactful to satisfaction and loyalty and reducing the number of people that called us when they got their bill, than actually reducing the overall price of energy,” says Bernard.
“Don’t get me wrong, price is super important, but if we had just stuck with focusing on price point out front, we would still only be playing in that space,” she adds. “And that's just a race to the bottom for any industry, but certainly in the energy category.”
Simply Energy has also applied zero risk bias to its business-to-business accounts in funding solar panels for businesses via an instrument called a power purchase agreement, or PPA. Commonly used in Europe and the US, PPAs mean businesses get solar panels on their roofs for no upfront costs and then start to pay them back from the savings on their energy bills – de-risking their investment.
“That [approach] has really taken capital outlay off the list for B2B customers and has certainly helped us roll out solar much more broadly,” says Bernard. “It's landed for some of our competitors, too, because it is such a good idea.”
Embed heuristics, be smarter at dinner parties
More broadly, Simply Energy uses social proof when it is entering new markets, (e.g. ‘hundreds of thousands of happy Australian households use Simply Energy’) and loss aversion insights within its digital marketing, says Bernard. “And honestly, 'the mere exposure effect' is just a good name for something that all marketers have probably been doing a long time. But it's really important for us to understand how that effect actually helps make our sponsorship dollars work harder.”
Without delving deeper into behavioural economics and heuristics, Bernard thinks Simply Energy “would just have been doing more of the same – and we all know that if we keep doing the same thing and expect a different outcome, we're a bit nuts”, she says. “Growth is hard when you start to get big. So our growth is really now coming from smart moves, rather than just doing the same as we've always done.”
She thinks other marketers could do worse than tap into the lizard brain and dive deeper into behavioural economics.
“I'd say to marketers that they've got to look at this now, because they need to take what they already know and add a bit of flavour over the top,” says Bernard. “Not just understand how to market well, but why what works, works - and what doesn't work is something that we should really stop doing.”
So will behavioural economics land in 2021, or will it be consigned to a long list of shiny things marketers ultimately cast aside?
Hardhat’s Dan Monheit is convinced the former is true.
“I feel like as far as shiny things go, this one is 300 million years in the making. So, it's pretty resilient and it's pretty robust. I think it is deep foundational knowledge for any marketer,” says Monheit.
“And even if you learn it and you don't get to use it at work, I promise it'll make you more interesting at dinner parties, because you end up observing and understanding things that happen all around you every day that a lot of people just don't even realise are happening.”