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Gain A Competitive Advantage With The Secrets Of Behavioral Economics

Posted by Sarah Procopio on Dec 6, 2019 1:08:25 PM

Behavioral what?! Behavioral Economics may sound like the latest buzz word from academia but, this area of study has been around for decades. Our favorite gaming mogul, Steve Wynn, is a master at leveraging the principles. Believe it or not, you are already using some of the core concepts and you may not even don’t know it.

So, why Behavioral Economics?

So, what is Behavior Economics (BH) anyway and why is it important to the gaming and hospitality industry? Simply put, BE is the study of why people spend money. How can it help you? If you know why people make the decisions they do to spend the money, then you know how to get them to spend it - more of it.

Understanding BH principles and leveraging them in marketing and business is a hot topic right now. Uber is receiving a ton of press coverage on the matter. Uber has hired a large team of BH experts and has experienced great success (along with controversy)changing the behavior of their drivers to benefit the company and increase financial gains.

Architect Player Decision Making

In order to run the most financial successfully property possible, we need to engage in choice architecture.  We do it every day in our daily interactions. Choice architecture is the way we structure and present the possible choices to (in this case the guest or the player) and the impact of that presentation on their decision-making. If we present the choices we ask our guests and players to make in a more thoughtful way by using the concepts of Behavioral Economics outlined here, choices go in the property’s favor and revenues increase. Benefits of Choice Architecture via leveraging BH principles include:

  • Increased revenue
  • Improved profit

In this article, I will provide you with the information that will allow you to gain an advantage over your competitors and hit those revenue and EBITDA goals you have budgeted for the year. Here’s an overview:

  1. Understand how you are already using Behavioral Economics principles in your business.
  2. Know why they work so you can better use them.
  3. Learn tips on how you can put area of study to work to hit your property’s financial goals.
  4. Learn about business is other industries that are getting in the BH game.  
  5. Get secrets to BH success so you are on your way to cashing in.

You are using Behavioral Economics principles and don't even know it. 

  • The Priming Effect – Priming happens when a person is exposed to stimuli (visual, words, smells etc.) that activate associated memories. This process i.e. priming then influences them in their performance of subsequent tasks. For example, a guest has the intention of calling it an early night after they check into their hotel. After having to walk through the casino floor on the way to their room and sensing the excitment, they drop their bags off in the room and head back down to the blackjack table. In this scenario, the priming effect is in full effect. If the guest didn’t have to walk through the casino to get to their room, they would have likely stuck with their original plan.

 

  • Zero Price Effect – We all know that “free” has additional pulling power – the casino environment is the home of the comp. However, did you know that people perceive something as more valuable when the price is reduced to zero –even if the alternative price is almost nothing? The power of free is so high that even if something is $.01 or $.15 instead of free, it drastically changes the consumers perceived value of it i.e. it isn’t as valuable or as exciting as free even when it costs very little. Take this into consideration the next time you are creating offers for your lower level player worth segments. It is better to give them something of little value for free than it is to give them something of greater value for a small cost. Strange but true.

 

Why do I need to understand the reason behind how these principles work?

Great sales people and marketing people often seem to have a natural gift for intrinsically understanding Behavioral Economics concepts but, they may not know why they work or how to apply them consistently in different ways. Developing a deeper understanding for why these concepts work allows you to improve the results you drive – consistently. Amazing, right?Now that you can put a label on a couple of the core concepts (the Priming Effect and the Zero Price Effect), you are able to become better at using them to your advantage consistently thereby increasing property revenue and profit margins.

The most effective principals and ways to use them.

Now that you have a taste for how impactful applying the principles of Behavioral Economics can be to your bottom line, here are some other BH concepts and ways you can apply them to effect your bottom line:

  • Ego Depletion – Willpower operates like a muscle that can be weakened, sort of like a gas tank. When we wake up in the morning our willpower “gas tank” is full. The more decisions we make throughout the day that require us to use our willpower, the emptier our willpower “gas tank” becomes. To leverage this to your advantage as a business leader, consider having your Player Development team provide players with an incentive to rebook their next trip at the end of their stay in the evening after dinner, instead of in the morning upon checkout. Now that you know the “why” behind that approach, you can see how this small change can have a big impact on the percentage of players you can rebook before they leave.

 

  • Default Option – This is perhaps one of the most underused principles in gaming. Default options are pre-set courses of action that take effect if nothing is specified by the decision maker. Setting defaults is an effective tool in choice architecture when there is inertia or uncertainty in decision making. For example, we all know that the longer a player stays on property, the more of their wallet share the casino will obtain. The Player Development team works hard to ensure that high level players spend most their time at the property. But, what about the high volume of low and mid-level players that would also increase they’re spend if they increased their time on property? More effort can be made to increase this business segment’s time on property by locking in a default option when guests make their reservation. For example, the reservationist could say, “Mr. Mid-Level Mario, to make your trip as pleasurable as possible, I am going to make a reservation for you at each of our restaurants and include your dinner reservations upon check-in at any time. You are welcome to cancel the reservation at any time. Just be sure to let us know in advance or a small fee may be applied will to your account. Bam! You just made it more convenient for the player to stay on property for dinner in the evenings and less convenient for him to choose to leave. This is a simple but highly effective way to grow the wallet share yielded from your low and mid level player segments.

 

  • Herd Behavior – This principal applies when people choose to do what they observe the crowd doing instead of thinking independently and making the choice on their own. Back to the guest making a reservationist for a player, this is how leveraging this principle would sound… “Thank you for your reservation Ms. Low-Level-Lana, most of our guests that book the offer you have been rewarded are choosing to upgrade to a suite for a small fee. Is that something you would like to do as well?” Simple but brilliant. Just a small and thoughtful shift in the language used to usell can yield huge returns when you use the Heard Behavior concept.

Does this really work? Results.

Gary Loveman, arguably the godfather of data driven and loyalty player marketing, used Behavioral Economics principles as his hidden secret to yield high returns for the properties he oversaw. Want to guess where he is at now? In the industry that is trending the as the hottest users of BE. The healthcare company - Aetna. On the surface, going from casinos to healthcare seems like a big leap. When you look deeper, it isn’t. All businesses are focused on either accommodating existing market behavior or changing that behavior to increase revenue. Casinos and healthcare are no different. Casinos want players to play at their casino as much as possible. Healthcare companies generally want patients to change their unhealthy behaviors into health ones (depending on the company) to decrease the expense associated with healcare costs. BH is at the intersection of mathematics, data science and human behavior – three areas of discipline that all businesses need to be good at in order to go to the next level.

Still not sure Behavioral Economics is for you? Check out some of the companies getting in the game.  

  • Google
  • Domino’s Pizza
  • JP Morgan Chase

Some of my most innovative business ideas come from studying the success of companies in other industries and creatively applying what they are doing to the industry I am working in. It takes a little extra time and a lot of extra thought but the payoff from this approach to strategic business planning can a valuable impact.

Secrets to success – some tricks to help you avoid bad player experiences.

 

  • Choice Overload – People love choices, right? Wrong. Too many choices are not a good thing. The greater the number or complexity of choices offered, the more likely a guest is to become overwhelmed, get decision fatigue and generally have an unhappy experience. When this happens, often guests avoid making a choice at all which is exactly the opposite of what you want. The good news is choice overload can be counter-acted by simplifying choice attributes or the number of available options – think Sam’s club or Costco. They have minimal options available of each product time for this very reason.

 

  • Decoy Effect – The Decoy Effect is tricky. When used right, all the guest’s choices can go in your favor resulting in a major financial payoff. When used wrong (which is usually a product of being unaware of how powerful this principle is), guests will make choices that are not in their property’s favor. Here is why. The options offered during to a person that is making the choice have a big impact. I might like an omelet for breakfast but my choices are Fruity Pebbles or Co Co Puffs so, I choose the Co Co Puffs. This mindset is in play with the Decoy Effect. It occurs when people’s preference for one option over another change by adding a third (similar but less attractive) option. For example, I would be more likely to choose a Starbucks latte instead of take $5 in cash if a third option was presented in the form of a low quality coffee from a gas station.

 

Gain a competitive advantage by putting all the Behavioral Economics principles outlined in this article to work get ready to see the positive financial impact. As will all new efforts, take a scientific approach during the rollout:

  1. Establish a baseline (How much is your revenue and profit in the planned area of testing now?)
  2. Formulate a hypothesis (When I apply the principle of the Decoy Effect I expect to increase revenue by X.)
  3. Ensure all other variables stay the same i.e. only include the Decoy Effect so that you know for certain that is the only element that impacts results.
  4. Keep a control group. Inevitably, there will be a variable change that you neglected to exclude, control groups i.e. groups that you didn’t change will help to gauge the impact.
  5. Test and refine, test and refine, test and refine. Ensure small tests are executed and refined until you obtain the desired results. Then and only then, roll the change out property or database wide.

Happy choice architecting!

Sarah Procopio, President of Thrive Marketing Science, a business intelligence and driven marketing firm. Sarah specializes in loyalty program development and turning around flailing companies and marketing programs quickly. She can be reached at sprocopio@thrivemarketingscience.com or 949.230.7873. This article was original published in Gaming & Liesure Magazine and can be found at https://mygamingandleisure.com/digital-edition-archives