I wrote recently about the frailty of human decision making and the biases which exist in our [protection] heads and in the heads of our customers. I used Behavioural Economics insight to identify how we promote statistics to harm ourselves. Below is another example of how our industry uses numbers to repeatedly shoot itself in the foot.
Most research, asking consumers why they don’t buy protection, has as one of the top answers ‘it costs too much’. The industry antidote to this seems to be that of advertising that cover costs as little as £5 a month or 20p a day.
Of course the truth is that most people don’t think it’s too expensive; the fact is they actually don’t think about our products at all (which is the real issue). But, having been asked the question, and sitting in an environment where an answer has to be given, they offer a plausible, rational (system 2) response, because ‘dunno, I’ve never thought about it’ will just make them feel (and they think look) stupid – and that’s not good.
We know the real answer is ‘dunno, I’ve never thought about it’ because (a) they think like us and (b) when someone gets them thinking about it, they often end up buying.
Anyway, the researcher now has irrefutable evidence that consumer perception is that cover is too expensive and the now poorly informed marketer has commenced advertising, as above. The advertising works a bit (waking customers up) but not fantastically well because of the ‘fall off rate’ and the fact that too many customers are buying cover for very low premiums (reinforcing the falsity that it’s expensive) and messing up the return on investment and capping the markets true potential.
To help understand what is going on here consider the recent Horizon programme ‘How you make decisions’, during which people were stopped in the street and asked what they would pay for a bottle of champagne. First however, they were asked to lucky dip a ping pong ball out of a bag (it was rigged). People either got a ball with the number 10 or 65 inked on. It turns out that after this ‘random act’ what people were actually prepared to pay for the champagne directly correlated to the number on the ping pong ball. Those with the higher number were willing to pay 4-6 times more for the champagne than those with the lower number.
This effect or cognitive bias is called anchoring, a subset of focalism; it affects nearly all of us, most of the time. Anchoring helps explain the problem of low premiums for unassisted purchase where £5 or 20p is advertised. It also explains high fall off rates – if you get a quote and it wasn’t £5 or 20p a day then you probably felt misled.
Time then for a step change in the way research is undertaken and insight is established because, right now, our outdated and now discredited methods lead to poor outcomes for customers and for retailers.
As a footnote – I wonder what impact the current spate of advertising large cashbacks might be having on the amount of cover people buy. I suspect the cashback will help provide momentum and the amount offered will affect the sum of cover bought…
Richard Verdin is chief marketing officer, UK & Ireland at RGA