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Unleashing Discovery: Theory-Driven Innovations in Retail and Consumer Finance

Explore the power of theory in driving experimentation and innovation in consumer goods, finance, and marketing strategies to unlock new market potentials and customer insights. Discover how theory shapes product development, pricing strategies, and customer behavior understanding.

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Unleashing Discovery: Theory-Driven Innovations in Retail and Consumer Finance

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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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