putting the “r” in r&d: theory-driven experiments

Putting the “R” in R&D:Theory-Driven Experiments

Jonathan ZinmanDartmouth College

May 18, 2009

Disclaimer:Different Backgrounds

You:• Consumer goods and services• Digital• Some wholesale elements• Ultimate objective: profit

Me:• Consumer finance (intertemporal choice)• Snail mail, bricks and mortar• Retail• Ultimate objective: discovery

– What makes people, markets tick

Premise: “Theory” Matters

• Theory = body of evidence on what drives decisions in a deeper sense– Consumer psychology– Competitive dynamics

• Why do we need it?– Tells us what to test– Generates big ideas: product development for

missing markets

Theory Tells us What to Test

Can’t I test everything? No• Not even in pricing (example later)• Certainly not in marketing/messaging

– Logic of psychology is that subtle differences in content, timing thereof can affect behavior

– So in principle infinitely many “frames”, “cues” to test

• Infinitely many more combinations thereof– exponential economics working against us!

– All this compounded by “information overload”

Theory Tells us What to Test:Marketing/Messaging

• Hypothesis: “Trigger emotion/intuition, not reason/deliberation, when selling something that’s not consistent with customer intentions”

• Example: Burger King• Example: direct mail experiment

– Subprime consumer lender in South Africa– 50,000 former clients– Who hadn’t borrowed in a while

Results Consistent with Hypothesis

• Hypothesis: “Trigger emotion/intuition, not reason/deliberation, when selling something that’s not consistent with customer intentions”

• Findings:– Content triggering deliberation backfires– Content triggering emotion spurs takeup– (Overall: content effect large relative to price)

Theory Tells us What to Test:Another Messaging Example

• Hypothesis: “Trigger attention/deliberation, not emotion/intuition, when selling product consistent with customer intentions”

• Example: savings product utilization– 3 different banks, 3 different countries– 14,000 clients who signed up for commitment or goal-oriented

savings product– Test: does merely reminding people (by text, mail) to make

deposits increase saving?– Yes, by about 6%– Emotional appeals within reminders (loss vs. gain frame) have

no effect• New example: energy conservation

Theory Tells us What to Test:Pricing and Direct Marketing

• Working with subprime consumer finance company that wants to position as “trusted, first-stop, one-stop”

• Rolling out alternative checking account• How sell transparency, still make money?

– Banks make all their money on hidden fees• Knowing customer and her existing relationships key: if

you pitch “avoid hidden fees” to someone with bank account she may change behavior, but not with you!

• Test:– Pricing (more vs. less transparent) x– Pitch Orientation (own vs. competitor attributes) x– Customer Status (banked vs. not)

Theory Gives us Big Ideas:Behavioral Diagnostics » Treatments

• Cognitive problem highlighted by research: consumers impulsive, lack self-control– Health: weight loss; smoking– Financial management; time management

• One solution: commitment– Help consumers formulate and stick to a sensible plan, in

their less-impulsive moments• Missing market: enforcement (ruthlessness)

Theory-Driven Product Testing:Commitment Contracts

• Domain/product-specific: savings• “Category-killer” contract providers

Theory Gives us Ideas:Another New Product to Test

• Imagine a product/service space where self-help doomed to fail– Personal finance: more like medicine or engine repair

than sanding a deck– Only worse– Research showing us how and why

• Unlike other such markets, no obvious place for most people to go to get “treatment”

• Why not? Cognitive forces*market forces– Consumer psychology: biases and limitations– Firms know these– Consumers don’t, or lack motivation/ability to get help

Product Development:Financial Medicine

• Events, regulatory response creating disruptions– Increased consumer awareness– Limits on firms’ ability to cater to consumer biases– Researchers: engineering, prescriptions

• Opportunity: mass-marketed financial medicine– Store/web-front portals for checkups, advice

Summing Up

Theory helps determine what to test• New products

– Mass missing market in defined space– Category-killer

• Direct marketing– Pricing and messaging

• Customer communication content