Jared Lindzon

'Nudging' consumers is a common marketing tactic, but study finds it carries risk

Christopher.Sorensen — Wed, 03 Apr 2024 16:31:15 +0000

'Nudging' consumers is a common marketing tactic, but study finds it carries risk

Christopher.Sorensen Wed, 04/03/2024 - 12:31

Cutline

Marketers should think twice before leaning on nudging as a tactic “in situations where you care about longevity or you want the customer to use your products for a long time,” says �鶹��Ƶ researcher Sam Maglio (R.J. Johnston Toronto Star/Toronto Star via Getty Images)

Jared Lindzon

Topic

Breaking Research

Marketing

Research & Innovation

Rotman School of Management

�鶹��Ƶ Scarborough

Subheadline

Researchers discover that subtle prompts designed to encourage consumers to make a particular purchase can have negative consequences in the long term

Marketers have found so-called “nudging” to be an effective way to influence consumer behaviour – but new research suggests those who are prompted, either subtly or directly, to select a particular product or service may be quicker to abandon it.

A recent study, published in the Journal of Consumer Research, is among the first to consider the long-term impact of the widely utilized marketing tactic, which capitalizes on psychology and carefully designed prompts to encourage people to make a particular purchase. Examples include limited time offers or presenting people with a “compromise” option between two extremes.

Study co-author Sam Maglio, a professor of marketing and psychology at the University of Toronto Scarborough and the Rotman School of Management, says the research findings make it clear that nudging can have negative consequences for brands.

In particular, he points to subscription offerings, which are becoming more prominent across a broad array of product and service categories.

“If you want someone to continue renewing or using whatever service you provide for a long period of time, it turns out that nudges backfire,” he says.

Maglio conducted two experiments to test three of the most popular nudging strategies to see how they affected long-term utilization.

In the first experiment, he offered students and faculty a free air plant. Among the control group, participants were offered the choice between a plant that was said to be lower maintenance and lower quality, and another that was higher maintenance and higher quality. For the nudged group, he offered a third “middle” option that was average in both maintenance and quality.

In reality, all plants were identical.

“Research has shown that when people look at three options that include one extreme and another extreme, they gravitate towards the middle, compromise option,” Maglio says. This form of nudging is referred to as the ‘compromise effect,’ and proved effective in this experiment.

In exchange for getting a free plant, participants received an email every two weeks asking whether they still had the plant. After the first 10 weeks, Maglio says there was little difference in the likelihood of caring for the plant between the nudged group, who were subtly persuaded with the “compromise” option, and the control group.

“[But] once you get to about three months in, then we start to see the rate of [retention] separate,” he says. “People in the nudged condition who picked the middle option were more likely to start saying, ‘Yep, I let it die,’ or ‘Yep, I threw it out.’

“It ended up being a total of nine months that we kept checking in, and the longer we waited, the bigger the gap between those two groups got.”

At the end of the experiment, the researchers found that those who were nudged into a selection were 16 per cent quicker to discard their plant than those in the control group.

In the second experiment, researchers offered participants a free membership to a website that provided a new “fun fact” each day. In the control group, members were offered the choice between a “Trivia Expert” subscription plan or a “Back to School” membership option.

Another group of participants were automatically opted-in to the “Trivia Expert” plan, but were provided the option to switch, utilizing a nudging strategy known as the “default effect.” In the final group, a third “decoy” option was added, titled “Trivia Expert for Kids,” which was designed to nudge the adult participants towards the “Trivia Expert” option.

As with the previous experiment, all of the options led to an identical product and both nudging strategies proved effective at influencing participants’ behaviour – and both had a negative impact on participant retention.

“In the control condition, where they just chose between ‘Trivia Expert’ and ‘Back to School,’ they [logged in consistently] about 14 days in a row, and then they stopped,” Maglio says. “In both of the nudge conditions – default and decoy – they were only logged on for an average of eight days, so it’s a hefty drop-off after getting nudged as far as losing interest in the subscription.”

Yet, despite the findings, Maglio suggests that nudging shouldn’t be abandoned as a marketing strategy, as its effectiveness in influencing buying decisions is well established. Instead, he suggests marketers think twice before leaning on such tactics “in situations where you care about longevity, or you want the customer to use your products for a long time.”

Maglio adds that there is little data on the long-term consequences of nudging, which could have significant implications for brand loyalty and consumer trust.

“We need to get more specific about which kinds of nudges have a counterproductive effect, which kinds of nudges have no effect – and which tactics work as a win-win for customers and brands,” he said. “We’re coming in with two experiments after decades of nudging, so there’s still a long way to go.”

Read the story at the Rotman Insights Hub

'We’re still in the middle of this': Rotman Dean Susan Christoffersen unpacks global banking woes

Christopher.Sorensen — Fri, 31 Mar 2023 19:07:50 +0000

'We’re still in the middle of this': Rotman Dean Susan Christoffersen unpacks global banking woes

Christopher.Sorensen Fri, 03/31/2023 - 15:07

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(photo by Justin Sullivan/Getty Images)

Jared Lindzon

Topic

Global Lens

Global

Rotman School of Management

The banking crisis that has toppled several financial institutions in recent weeks remains ongoing – and while the Canadian financial sector is well protected against the contagion, experts say it is not entirely immune.

When Silvergate Capital, a lender that focused heavily on the crypto industry, announced it was shutting down operations on March 8, it was broadly received as a standalone incident that was the result of the lender being overly dependent on the now-bankrupt crypto exchange FTX.

Susan Christoffersen

But the sudden collapse of California-based Silicon Valley Bank (SVB) a couple of days later wasn’t so easy to dismiss. It marked the largest banking failure since the global financial crisis of 2008. A few days after that, Signature Bank suffered the same fate, becoming the third-largest bank failure in American history. Then came Credit Suisse, which was on the cusp of collapse when it was bought out by Swiss banking rival UBS on March 19.

While the underlying circumstances can be varied and complex, a bank failure generally occurs when a financial institution is unable to fulfill its obligations to creditors and depositors – either due to insolvency or a liquidity crunch. And, worryingly, a bank failure can spread particularly quickly in a digital era stoked by social media.

“We’re still in the middle of this,” says Susan Christoffersen, dean of the University of Toronto’s Rotman School of Management. “There’s a contagion problem that can happen when you have a banking crisis and that’s the reason why you absolutely need regulators to do what they’re doing now.”

When a bank faces unexpected liquidity pressures from depositors, it typically is forced to sell off its assets at heavily discounted prices, which can devalue similar assets held by rival banks. Christoffersen says this, in turn, can adversely affect the capital buffers and the confidence of depositors at otherwise healthy banks, placing them at risk.

“This is why it’s so important for regulators to step in and not let banks like SVB sell off its assets at massive losses,” says Christoffersen, whose research includes a focus on the role of financial institutions in capital markets.

In the wake of the SVB failure, American regulators quickly rolled out emergency measures that put the bank under the control of the Federal Deposit Insurance Corporation (FDIC). The FDIC guaranteed depositors would have access to all their funds even though the organization only insures individual deposits up to US$250,000. North of the border, the Canada Deposit Insurance Corporation (CDIC) similarly insures deposits held at Canadian banks up to $100,000.

“It seems that the interventions are certainly helping, but it creates nervousness,” Christoffersen says. “If I had an uninsured deposit, I might be anxious about whether or not this crisis might affect my bank since it is difficult to know in real time the quality of assets being held and the potential impacts of economic shocks. The speed at which money can move also adds a whole other level of uncertainty.”

Though regulators have taken steps to reduce their frequency and impact, bank failures remain a risk – particularly during periods of high inflation and rising interest rates.

Christoffersen explains that banks generally use deposits in ways that boost the economy, such as handing out loans to new businesses or homebuyers. But that leaves banks vulnerable to a sudden panic because the money is invested over the long term, making it difficult to meet short-term liquidity demands should all customers want to pull their money out at the same time.

In the case of SVB, the bank succumbed to pressure from both the liability side and the asset side. On the liability side, SVB was heavily dependent on depositors from a single industry – tech – and recessionary pressures coupled with a scarcity of alternative funding sources meant SVB’s customers were more reliant than most on the funds they had sitting in the bank.

“It also had an abnormally high rate of depositors who were not covered by the FDIC guarantee,” added Christoffersen. “[Clients] were much more wary of their bank’s financial difficulties and were much faster to pull their cash out since it wasn’t insured.”

SVP also invested a lot of its assets in low-interest, longer-term bonds.So, as interest rates went up, the value of the bonds plummeted and eroded capital buffers.

While the circumstances surrounding SVB’s collapse may be unique, it nevertheless highlighted the degree to which the sector relies on consumer confidence. Which means the high-profile banking failures dominating the news in recent weeks potentially puts every bank at risk.

Christoffersen, however, says that Canadian institutions are much less exposed.

“Our banks fared very well during the [2008] financial crisis, and I think part of it is the different regulatory environment that we’re in,” she says.

For example, while the United States has a patchwork of state and federal regulators overseeing its financial sector, Canada’s Office of the Superintendent of Financial Institutions (OSFI) oversees all banks in Canada regardless of size or ownership structure. Furthermore, while there are more than 4,200 banks south of the border, there are just 81 banks operating on Canadian soil – 34 of which are owned and operated domestically.

“Our banks are fewer, larger, and tend to have more diversified types of deposits. In addition, our regulations are more standardized; we have pretty robust capital requirements,” says Christoffersen. “That means the asset values can fluctuate pretty significantly without resulting in insolvency and affecting depositors.”

Canada’s largest banking failure occurred at the Home Bank of Canada in 1923. Since then, only two small regional banks – the Canadian Commercial Bank and Northland Bank – have gone under, both in September of 1985. (Both institutions were founded during the oil and gas boom of the mid-1970s and invested heavily in energy-related real estate, only to have their loan portfolios deteriorate in the early 1980s due to rising interest rates and downward pressure on the Canadian dollar.)

“Canada has a pretty robust and healthy system – that’s the benefit of having larger and more diversified banks that can better manage risks,” says Christoffersen. “That doesn’t mean bank runs can’t happen here, but I’m not pulling my money out just yet.”

This story originally appeared at the Rotman Insights Hub.