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How brands are using behavioral science to increase customer retention in a downturn

The economic downturn is reshaping how brands spend their marketing budgets, with a sharper, more strategic focus on customer retention.

As the business world moves into a more measured, profitable growth era, the acquisition-focused, growth-at-any-cost mindset is fundamentally shifting.

Hyper-growth startups and disrupter brands are a case in point. Their decade-old playbook is now well worn: raise massive funds to fuel advertising and incentives that encourage new customers to get onboard.

If you’ve seen an Instagram ad for $15 off your first order, you’ve been offered three-months free on a recently launched streaming platform or you’ve received a referral code for a new subscription service, you’ve been in the belly of the beast.

Yet the fact that many startups weren’t profitable barely raised an angel investor’s eyebrow. After all, growth would bring scale. Scale would bring profit … eventually.

“Eventually” was fine when the global economy was buoyant and interest rates were low. When times are good, customer retention strategies are quickly downgraded in favor of marketing plans geared towards attracting new customers.

For one thing, the thrill of the hunt tends to be far more exciting than putting in the work required to build stable, longer-term relationships. Then there’s the chorus of Byron Sharp devotees, quoting (and often misquoting) sage advice – that in order to grow, we should always be talking to light users and non-users. Of course, in doing so, we end up talking to heavy users anyway.

Now, CMOs need to think equally hard about how to retain and grow the customers they’ve already spent good money acquiring. Burning cash to attract random, one-time buyers doesn’t make for much of a business model.

Thankfully, the choice between focusing on new or existing customers doesn’t have to be binary. After all, what good is high growth if it’s offset by even higher customer churn?

Reducing customer churn or “loving the one you’re with” is even more critical when considering the increasing economic pressure awaiting millions of Australians in the months ahead. Hot offers to switch telco, electricity or insurance providers have a funny way of looking even more alluring when the purse strings are being pulled.

The role of cognitive bias in boosting customer retention

While cognitive biases – specific shortcuts our brains use in the decision-making process – are most often employed to build desirability for a brand, they can also be very useful when maximizing customer retention.

Take, for example, the idea of creating defaults. In behavioral science parlance, “default bias” speaks to how people often accept the option laid out for them rather than diligently evaluating alternatives.

If you want evidence of the power of default bias, a recent Compare the Market study found that the majority of Australians simply accept changes made to their insurance premiums without challenging them or taking the opportunity to compare providers.

Defaults make things easier by giving our brains one less thing to worry about. For example, your hairdresser, nail technician or dentist taps directly into default bias when they masterfully ask when you’d like to book your next appointment while you’re busy settling up the appointment you’ve just had.

Once you’re attuned to it, you start to notice default bias being tapped everywhere, from businesses setting contract lengths (for example, suggesting 24 months over 12 months) to rolling subscription services (hello, fitness industry) and even the world of dining and hospitality (“sparkling water to start?”).

The genius of product sequencing

Defaults also manifest in the form of product sequencing. Sure, telling people exactly which product they should buy next is good for business, but it can also be good for customers. We often fail to recognize that the most significant benefit of having “preferred brands” is a coping mechanism against the unrelenting pressure of unlimited choice.

Knowing you prefer a specific brand of toothpaste means you have no reason to evaluate – or even consider – the 11 other options on the shelf. The same goes for your preferred coffee shop, fabric softener and skin cream.

No retailer is better at telling you the next big thing to buy than Apple who, in doing so, negates technological overwhelm. The genius of Steve Jobs lay in simplifying Apple’s range and focusing on creating new (updated) versions of the same products, preempting your next decision when the latest version comes out.

The same goes for running shoes. There’s a reason Asics Kayano is now at version 29, while Nike Pegasus is 10 paces ahead at version 39. Both brands have simplified the choice for customers, sold millions of pairs of trainers and built cult-like followings.

Another cognitive bias that can be powerful when building customer retention is the “IKEA effect”. Research studies show that consumers place a higher value on a process or product they’ve helped to create, even if their contribution is minimal.

Brands can keep their customers close by giving them ways to tailor or customize their products, inviting them to test new versions or seeking feedback on features and functions in the product backlog. While the bias’s namesake, IKEA, is synonymous with building loyalty through co-creation, other brands, such as Betty Crocker and Mailchimp, have also used it to great effect.

Implementing techniques based on psychological and cognitive biases won’t be infallible to the winds of economic change. Still, they can go some way to prolonging the value of current customers.

Dan Monheit is cofounder of award-winning Hardhat, Australia’s foremost creative agency built around Behavioral Science. His new book Terrible Advice for Marketers … according to Behavioural Science will be released in 2022.

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