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Nudge Theory for Small Businesses

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Lexington, KY had a problem: millions of dollars in outstanding resident sewer utility bills. Letters were sent, threats were made, and still nothing moved.

Then, the city partnered with a group from the U.K. to make some collection letter changes, and the payments started rolling in.

It didn’t take escalated threats, increased fines, or stronger language. Instead, the city generated $112,000 in extra revenue by adding three small lines to the letter:

  • On the front: a personalized note reading “[First name], you really need to read this.”
  • Inside: language making non-payment sound like a personal choice.
  • On the bill: a big stamp reading “Pay Now.”

Three small changes resulted in a 34-percent increase in compliance. Each of the three changes was a small nudge, designed to get the recipient to take an associated specific action.

Today, we’ll look at how nudge theory can be used in your business to effect change and run things more efficiently.

What is nudge theory?

Nudging is a behavioral theory predicated on the idea that instead of making a bold move or implementing a huge change to get people to act differently, you should make small, economically neutral changes instead.

Imagine wanting to increase sales of your generic store brand over the major brand—Toasted Oats instead of Cheerios, for example. You could stop carrying Cheerios or make them prohibitively expensive, neither of which is an economically neutral plan.

Instead, nudge theory would have you move the Cheerios to a lower shelf or put bright tape markers on the shelf holding the store brand. These are tiny, almost imperceptible changes that draw a consumer’s eye and change their behavior.

The history of nudge theory

Nudge theory has been around since the mid-nineties, but its most famous iteration came in 2008 when Richard Thaler (a recent Nobel Prize winner) and Cass Sunstein published Nudge: Improving Decisions about Health, Wealth and Happiness.

The authors defined a nudge in two simple sentences:

“A nudge, as we will use the term, is any aspect of the choice architecture that alters people’s behavior in a predictable way without forbidding any options or significantly changing their economic incentives. To count as a mere nudge, the intervention must be easy and cheap to avoid.”

Nudges should be so slight that no one should walk away thinking, “That seems overly complex.” Footprints painted on the floor leading to recycling bins, water coolers in physical spaces dedicated to collaboration, or putting a few dollars in the collection plate before passing it around.

Real life nudge theory examples

One nudge I encounter almost every day is the “Most Popular Plan” nudge. Almost every SaaS solution on the market gives you a pricing plan selection screen that looks something like this:

Pricing for Salesforce and QuickBooks.

That “Most Popular” label nudges you toward a specific choice. It doesn’t force your hand or change your ability to choose any option; it catches your eye and makes a subtle suggestion by claiming that a specific option is the one everyone else likes.

On a larger scale, the U.K. government created an entire division dedicated to nudging people—the Behavioural Insights Team. The team operates under the premise that “government policy can better be executed by employing small, clever prompts.”

The team worked with HMRC (Her Majesty’s Revenue & Customs—the U.K.’s version of the IRS) to change wording in collections letters in an effort to get more people to pay their bills on time without resorting to threats or new legislation.

They edited the letters to say that most people in the recipient’s area had paid on time, implying that the reader was the only one doing it wrong. This tiny change increased payments by five percent.

Nudging employees

Now that we’ve demonstrated the power of a good nudge, let’s talk about how you can use them to make your employees happier and more effective.

Planning for the future

Making “opt in” the default language for saving plans enrollment at the maximum employer-matched amount is a great way to help your employees save more. In one study, researchers examined changing the default opt in pension savings amount from 3% of an employee paycheck to 6%, where 6% was the maximum employer match.

Before the change, about a quarter of new hires were saving the default 3%. After the change, almost no new hires opted to decrease their contribution to the 3% level.

There was no increased cost for employees, who could still opt out or change their contributions manually as before. The nudge was a subtle and effective way to help employees increase their retirement savings and take full advantage of their employer’s offerings plan.

Increasing compliance

The HMRC example above is an example of social proof. It plays on our innate desire to not stand out from the crowd. While social proofs come in many forms, the most straightforward is the method saying “Everyone else is doing it.”

In the office, you can use this to help manage employee compliance and buy in. Let’s say you’re introducing a new training program for corporate credit cards. You want everyone to complete the training to understand the dos and don’ts.

Most folks will do it if you ask them, but a portion will always need a reminder. In the non-nudge world, you’d email these employees and say something like, “If you don’t complete this by the end of the week, we’re going to [take the card back, make you take some other course, tell your manager, etc.].”

A social proof nudge can give you better results and save you time and money. Consider going with this message instead: “Almost everyone has already completed the training, please make sure you do as well.”

Making better estimates

Planning is one of the most important parts of any business, but it’s fraught with problems. Employees regularly overestimate free time and success rates, making optimistic forecasts that end up reflecting best case scenarios rather than reality.

Having sessions where employees “plan and openly communicate their key objectives, thereby committing themselves to these plans in front of their peers” can help cut down on unwarranted optimism.

Again, there’s no barrier erected. People will plan the way they’ve always planned, they’ll just have to do it with an audience. By committing in front of their peers, employees are less likely to set themselves up for failure.

Other ways to use nudges in your business

These are some basic ways to get started with nudge theory in your business, but there are plenty of other ideas out there. Moving furniture, personalizing emails, and shifting meeting times can all have a notable impact on your day-to-day.

Have you had any success nudging your employees in desired directions? If so, shoot me an email and let me know. I’m also interested in hearing from the other side. Do you think nudging is manipulation? Convince me.

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About the Author

Andrew Marder

Andrew Marder is a writer for Capterra. His background is in retail management, banking, and financial writing. When he’s not working, Andrew enjoys spending time with his son and playing board games of all stripes.

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