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

Putting the “R” in R&D: Theory-Driven Experiments. Jonathan Zinman Dartmouth College May 18, 2009. Disclaimer: Different Backgrounds. You: Consumer goods and services Digital Some wholesale elements Ultimate objective: profit Me: Consumer finance ( intertemporal choice)

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

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  1. Putting the “R” in R&D:Theory-Driven Experiments Jonathan Zinman Dartmouth College May 18, 2009

  2. 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

  3. 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

  4. 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”

  5. 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

  6. 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)

  7. 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

  8. 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)

  9. 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)

  10. Theory-Driven Product Testing:Commitment Contracts Domain/product-specific: savings “Category-killer” contract providers

  11. 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

  12. 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

  13. 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

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