Behavioural science is a gold mine for service design and customer experience – Interview with Nicolae Naumof on Adrian Swinscoe’s blog

Two weeks ago I gave this interview for Adrian Swinscoe’s blog. In it I explain my view on applying behavioural science in service design.

Naturally, I speak on what is behavioural science, what drives human behaviour and plead for a simple, two steps approach on applying behavioural science in service design: (1) Use the scientific literature on human behaviour to come up with behaviourally informed interventions and (2) test them, because no one knows the (absolutely) correct answer.

Interview can be listened here (30 mins or so): - open in new tab ;)

Interview and full transcript on: Adrian Swinscoe’s blog 

In a gold mine, you will not find gold bars …

More on applying behavioural science in service design www.Naumof.com

Goodbye My Love, Goodbye!

My dear,

We spent four and a half years together. With good times and bad ones. We shared joys and sorrows.

I came to you with great enthusiasm and high expectations. Some were fulfilled, others not.

The beginning of our relationship was both exciting and a bit difficult. Then, after about two years, I came to love you. I even wanted to make you (a small piece of you) my own. I actually thought that we could have a very long term relationship.

Yet, things didn’t work all that well between us. Maybe you didn’t love me (enough)? Maybe it simply wasn’t meant to be? Who knows?!

None of these matters now…

It’s time to say: “Goodbye!”

I will move on, not without a heavy heart. You will be (stay) the same and, I truly hope you will find others to love you, at least as much as I did.

Thank you for the times we had together!

I hope we will get to see each-other again, and, maybe, we will be together again, at least for some time…

Thank you, my dear The Netherlands! You were, for some years, My Home.

My dear readers,

I haven’t written personal posts on this blog for almost three years. I break this self-imposed rule to mark a rather painful moment in my life: Moving from the country in which I lived for almost five years and I called home for more than three years – The Netherlands.

In a few months my wife and I will move to the USA (Washington DC area).

                                                                                                                

What the future will bring, I am not sure. What I am sure of is that The Netherlands is a great country to live in, with great people (both literally and metaphorically) and living here was a life-changing experience for me.

I’ll be back (sooner or later). 

Behavioural (Service) Design Is About Technology as Much as Rembrandt’s Paintings Are About Canvases and Paints

We are going to make / made a great app that does this and that.

We are building a website that will help people with….

Our new device will enable people to….

These are phrases that are encountered at many conferences, meetings, tradeshows, get-togethers on service design.

A huge proportion of people who (claim to) do service design or customer experience focus their work and their speech on the technology they are working on and how great and mesmerizing it will be for their consumers / users.

Naturally, the ground-breaking, paradigm-shifting technology will enable organizations to be consumer / customer centric…

Although I am allergic to buzz-words, I think that the big issue is not the use of fluffy words that everyone pretends to understand.

The big issue is the over-emphasis on technology.

Good (profitable) service and great experience are as much about technology as Rembrandt’s paintings are about the canvases and paints.  

Source of picture  

It’s obvious that without paints and canvases any painter, including the great Rembrandt, would not be able to create a masterpiece. Nonetheless, good painters draw very beautiful sketches with just a piece of paper and a pencil. It's the same with technology and great service. One can have good service without too much technology being involved.

Even in the case of Service Masterpieces, technology is simply a tool.

It’s about giving a good feeling not about how you do it.

For example, a restaurant stores the phone numbers of frequent (loyal?) clients and when one of them calls to make a reservation, the receptionist answers with “Good day Mr. X, how many will you be this evening?” instead of the typical “Good day, restaurant R, how may I help you?”.

The increase in customer satisfaction with the experience of making a restaurant reservation is not due to some fancy technology (caller ID to be precise). Rather it is because someone (apparently) knows him and (apparently) cares about who he is.

Technology is, not seldom, overused while disregarding the human component.

For example, there are some elevators which have the control buttons on the outside.

Source of picture

Basically, when you call the elevator, you have to type the number of the floor you are going to. The elevator arrives and you enter into it. The doors close and it takes you to where you commanded it when you were on the outside.

I am sure that there is a good reason for this; it might be energy use optimisation.

However, the designers forgot to take into account a very basic human feeling and need.

Once you enter the elevator, you are in a closed small metal box without any control.

That’s pretty freaking, right?

Where the buttons are placed might not influence too much the technology part, but having the buttons on the inside gives you a sense of control. It’s the person who controls the machine and not the machine controlling the person.

We see the technology, but we don’t see the fundamental human truth.

More than 80% of information acquired by humans is received through the visual sense. Our vision is pretty amazing and we rely on it.

There is a draw-back of human vision:

Human vision is great at seeing what is in front of our eyes, but it is horrible at seeing what is behind the salient (shiny) object.

Several years ago, a technology company (with a fruit name) began selling mobile technology devices. There was and still is a lot of buzz around this company and its products. Recently, this company reported the highest profit for a quarter in corporate history… and that amount is in the same league with the GDP of small countries.

Hundreds of business and technology analysts commented on the success of the company and its products. The emphasis, naturally, was on technology and the products’ features: touch screens, apps, memory capacity etc.

Yet, I haven’t heard anyone speaking about the fundamental reason behind this company’s tremendous success. This reason is not technology; rather it is a fundamental human truth.

Without going too much in the depths of evolutionary psychology, the fundamental truth is that all humans have a need to communicate (advertise) themselves on the social and mating market(s).

This is true for other creatures as well, but there is an essential difference between humans and other creatures. Whereas many animals advertise their mating value through conspicuous and costly features such as the peacock’s tail, humans advertise their mating (and social) value through behaviours and ornaments.

In a nutshell, the company mentioned above managed to create and sell peacock tails… It was not the first one to do so, but it managed to become an icon of self-advertising. The most interesting thing is that this company manages to create (and sell) peacock tails that are self-degradable, thus creating the conditions for re-purchase every (other) year.

Whenever a new generation of the product is launched, both the company and its clients talk about the technology progress and the new features, but this is only the surface…

The fundamental truth is that

An “i Peacock’s Tail 5” is sexier than an “i Peacock’s Tail 4”

Happier Customers & Higher Profitability through

Behavioural Science Applied in Service Design

www.naumof.com

When Home Delivery Meets Self Service

Home delivery and Self Service definitely are trends in retail.

(Some) The Dutch managed to combine them wonderfully...

Yes, that is a shopping cart from Albert Heijn conveniently "parked" in front of a door on the second (or third) floor...

Salt & Pepper Choice Architecture

Last year (2014) I had the largest number of flights in my life. Alongside the convenience of fast traveling, flights come with several inconveniences, one of them being in-flight food.

In-flight food can range from (almost) terrible – KLM – to quite good – Tarom – to surprisingly good (for flight food) – Turkish Airlines.

One of the reasons for in-flight food being not exactly a treat is the airlines’ need to cut costs. And this post is a free advice on how airlines can cut costs when it comes to food without damaging the clients’ experience.

Usually, the in-flight food comes with Salt and Pepper in small envelop-like packaging as in the picture below.

While, in our minds, salt and pepper go together very well and are seen more or less as equals, there are some serious differences between them when it comes to prices and use.

You might not realize, but (black, grinded) pepper is more than 79 times more expensive than (white, regular) salt.

According to prices in Albert Heijn (the largest supermarkets chain in The Netherlands), a kilogram of black grinded pepper of the cheapest kind is € 23.80, while a kilogram of regular table salt of the cheapest kind is  € 0.30.

  

When it comes to using salt and pepper, I believe there is a considerable difference. There are a lot more people adding salt to their food than are people who add pepper. It might be just my biased view, but I believe a lot (the huge majority) of the pepper packs are never opened and end up in the trash.

At first glance, this might not look like an issue, but every 200 packs of 5g of pepper thrown in the garbage, are equivalent to throwing 23 euros in the trash. Scale this to millions of passengers each year and things will look very different.  

Just as a note, it would be nice to have some garbology data on this – looking in airplane trash bags and see exactly how much of the pepper ends up unopened in the garbage.

In this light, airlines could simply eliminate pepper from their meals, thus avoiding unwanted waste. But this would damage the experience for the passengers who want pepper in their food.

The solution comes from Choice Architecture.

Instead of providing pepper by default, airlines could make pepper a (free) additional option.  

Here’s a rough prototype on how I see things being solved.

The envelope-like pack of pepper can be replaced by a small piece of paper with the message:

Please ask a flight attendant for pepper.

This change would bring some considerable cost cuts to airlines.

Of course, it would bring some headaches to pepper producers… more on the side-effects of applied behavioural science in a future post.

If you’re curious on how choice architecture can help improve your business, take a look at Designing Decisions.

The Black Swan of the Swiss Franc

In the past week there has been tremendous unrest linked to the evolution of the Swiss Franc (CHF) and its value against the Euro and, subsequently, to other EU currencies (Polish Zlot, Romanian Leu etc.).

In a nutshell, the Swiss Franc skyrocketed in about two weeks. According to the European Central Bank (ECB), on Jan 2^nd 2015, 1 Euro was equivalent to 1.2 Swiss Francs. On the 20^th of Jan 2015 there was (almost) equality between the Euro and the CHF.

For some hundreds of thousands of people in the EU this meant a surge of their payments for returning bank loans. Poland, Romania and Croatia being hit very hard. In these countries the effect is amplified because they do not use the Euro and whenever there is a shock on the financial markets, the national currencies loose value against the Euro. In turn, all other exchange rates are computed using the Euro as a reference. For example, the Romanian Leu (Lion in English) also known as RON uses the Euro as a reference. Thus the exchange rate between the CHF and the RON is computed as: CHF exchange rate to the EURO – EURO exchange rate to the RON.

But enough with the background information.

The evolution of the CHF is what Nasim Taleb calls a Black Swan – a High-Impact event that was fully unpredictable.

Yes, many financial analysts will (do) come forward and explain what has already happened. Though they didn’t predict it….

Naturally, the people having loans in Swiss Francs feel cheated and demand action from the governments and national (central) banks to protect them from the outrageous loan conditions that they face now.

Some governments (e.g. Croatia) decided to impose a fixed exchange rate between the Swiss Franc and their local currency, thus softening some of the pressure the citizens deal with. Though this measure is temporary (1 year).

Other governments (e.g. Hungary) automatically converted the loans in CHF to loans in the local currency … and that was done about one year ago…

Other government (Romania) are still mumbling and debating, arguing whose responsibility it is and who should bear the costs.

Yet, none of these measures and debates focus on the real problem and its solution.

In very abstract terms, the problem is the massive exposure to Black Swans. Rare, High-Impact and completely unpredictable events will happen always. 2014 provided several such events (e.g. Ukrainian-Russian conflict and its economic implications). We know that some Black Swans will happen in the future and we know that we cannot predict them. What we can do is to minimize massive exposure to such events.

Let’s look a bit in recent history and understand the back-workings of the problems generated by the Swiss Franc. I’ll use the example of Romania because it is closer to me, and I believe the situations in other countries (Poland, Hungary, Croatia) was more or less similar.

In 2006-2008 there was a frenzy in taking loans, buying cars, houses etc. The banking sector was booming and there was a gold-rush in getting market share (handing out as many loans as possible).    

Due to the high interest rates for loans in the local currency, the majority of loans was in Euros. Surprisingly or not, the prices for houses, cars etc. were also in Euros. The local currency was at a good level against the Euro and loans in Euros were cheaper than the ones in the national currency.

Unrelated to central and eastern Europe, the Libor (interest rate for inter-banks loans) for the Swiss Franc was very low (approx. 1.8%). Remember that in those days the reference interest rates set by central banks were much higher than they are nowadays. The Libor for Euros was approximately 2.8% and higher.

To put things simply, on the inter-banks market Swiss Francs were cheaper than Euros. For us mere mortals, a difference of one percentage point might not seem like a lot, but in the financial sector it means a great deal.

Since the CHF was cheaper than the Euro banks could hand out larger loans if they did so in Swiss Francs than they could if they used Euros.

For example, if someone needed 100.000 Euros to buy a house, there was a good chance that they would not qualify to get the loan in Euros. The local regulations and the interest rates for Euros would prevent the wannabe clients from taking a loan of 100.000 Euros in Euros.

Some banks used the following artifice: They converted the 100.000 Euros in Swiss Francs (approx. 155.000 CHF at 2006 exchange rate) and because the CHF was cheaper than the Euro (interest rates were smaller), they gave the loan in CHF.

Moreover, since the Swiss Franc was cheaper than the Euro, banks had an incentive to use it in the loans they handed out since they could acquire the capital at lower costs.

At first glance, this was in the clients’ advantage because it allowed them to buy whatever they wanted, say a house, and it provided better loan conditions (smaller interest rate).

In more depth, this was a time-bomb for clients. Switching from Euros to Swiss Francs completely changed the game (not only the rules of the game).

To a regular bank client, the change between CHF and EUR might have looked like some mumbo-jumbo financial bullshit that didn’t change too much what they wanted – buying a house / car. After all, it’s just a difference in some letters.

And here is where all things went bad.

I believe that many regulators have no idea on how decision-making works. They believe that people are well informed, understand risks, think hard before signing anything, make tremendously complicated calculations to see all possible scenarios.

Banks hid behind the fact that their contracts were very clear… Which is more or less true. But what is not said is that the contracts were often signed on the spot, often without being read. OK… this might be the client’s fault, but not entirely.

When signing a contract for a bank loan, the client usually doesn’t give a damn about the loan conditions. The client wants the thing she wants to buy with the money from the loan.

Scarcity, cognitive overload, fatigue, emotional load - finally having you own house etc. make the future financial consequences seem insignificant at the moment of signing the documents.

Add to this present bias the fact that the banks were not providing working scenarios with how much one will have to pay depending on fluctuations of the exchange rate and of the interest rate.

The true poison was (is) that the banks took zero responsibility (risk) during the execution of the loan contract.

The interest rate for the loan was not fixed… this is not necessarily surprizing for a 20-30 years loan. The problem was that there was no clear formula for computing the interest rate for the loan such as Libor+2 percentage points. It was the banks privilege to set the interest rate for the loan during the contract (20 years!!!!).

The client had to return the loan in the currency in which it was given, in this case the Swiss Franc. This means that the exchange-rate risk is entirely in the client’s backyard.

So, a client who wanted to buy a 100.000 Euros house, took a loan in Swiss Francs of 155.000 CHF. The client had to take the risks associated with the Libor level for CHF plus the banks (arbitrary) margin. The client had to take the risks associated with the exchange rate between the CHF and the Euro and the exchange rate between the Euro and the national currency (since their income was in the national currency).

On the other hand, the banks took no risks, except that of people not being able to pay their loans… but, in Romania, even if you lose everything you have to the bank and this doesn’t cover the debt, you still have to repay the remainder of the debt.

So, on one hand the banks gained market share and their employees were incentivized to do so. On the other hand, the clients took on huge risks that were conveniently not shown clearly.  

So, what is the solution?

The solution, too, comes from the same Nasim Taleb: Skin in the Game or Neck in the Line.

In a nutshell, when dealing with risk, especially compound risk – having more risk factors combined – both (all) parties have to share the responsibility and outcomes (consequences).

Indeed, clients who signed loan contracts without understanding what they involve are responsible.

At the same time, Banks who promoted – encouraged loans in Swiss Francs are equally responsible.

I believe that banking regulations should introduce the Skin in the Game principle in all contracts (past, present and future).

If an institution has an incentive to expose their clients to compound risk, then the same institution should take responsibility for the consequences of those risks.

It is easy (and fun) to play Russian Roulette when you are pointing the gun to someone else’s head.

This is what happened with the poisonous Swiss Francs loans and with other toxic financial products.

  

The Shortcoming with Liking (other people)

It's only natural to like people who tell you what you want to hear.

Yet, these people are not the ones who will help / make you develop - progress.

If anything, they are the people who will hold you back.

Nonetheless, you will be happy and (firmly) believe, even congratulate yourself, that you chose the right crowd.

(Apologies for the blunt honesty)