Those of you who shop around make everyone else feel tired, but may be getting better deals. There are reasons why we don't shop around as much as we should (or at all), and now a study has confirmed that in certain markets our behavioural biases thwart us, but offers a solution to anyone wanting to encourage consumers to shop around. This will generally tend to be regulators, but within business, being on the winning end of this prompt means more business.
The industries we are mostly likely to blindly enter into with the first provider who crosses our path are power or gas suppliers, cash savings accounts, and insurance.
How we can use prompts to change behaviour
We have loss aversion, present bias, mistaken beliefs (about benefits and costs), and faulty 'heuristics' (like when we're overloaded with information). The Oxera study examines how prompts - framing information in a certain way to encourage behaviour in a certain direction - are used in some industries to mitigate these biases.
Prompts can be effective at improving outcomes for consumers, with a good example being a text alert for an overdraft balance. A look at data showed us that those sent a text prompt reduced overdraft usage, reduced the average overdraft charges, and increased the average 'buffer' that is kept on a current account by consumers. Payday loan customers saw similar benefits.
Some prompts are more effective than others, however. Prompt design - content, medium, formatting - matters quite a lot in consumer choices. Intuition is not necessarily the best guide to a good deal.
How can consumers be persuaded to shop around?
Oxera and the Nuffield CESS did some experiments on the efficacy of different prompts in encouraging people to shop around, using annuities as their basis.
Annuities is an area lacking a lot of shopping around by consumers. Considering that an annuity product is one that will sustain a person for the rest of their retired life, it's an important decision, and one that not very many people understand how to make competitively. In the United Kingdom, 60 per cent of those buying an annuity did so from their current pension provider. This resulted in some significant losses by retirees.
The process was examined by the researchers.
At about six months until retirement, the consumer gets a pack from their pension provider showing them their options after retirement, with various products laid out including lump sum, income, or annuities. A quote can be requested via the pension provider, or the pre-retiree can go directly to an alternative provider. Either way, a quote is sent out by mail.
There is now some discussion as to whether an in-letter notice should be mandatory at this point to encourage people to shop around. Thus, an experiment was born.
The research was designed to test the impact of certain prompts on shopping around and switching providers, with the point at which consumers receive a quote being the point of interference.
The impact of different prompts was evaluated amongst 1,996 people aged between 55 and 65 in a paid randomised controlled trial. This particular trial was undertaken both in a lab and online, with the goal to replicate the decision-making journey as closely as possible, including distractions and personalisation.
There were three elements tested:
A call to action - the study participants were told that '80 per cent of people who fail to switch from their pension provider lose out by not doing so', with a picture of the 80 per cent.
Personalised quote comparison - each participant was given the best quote they could have found by shopping around, with the difference between that quote and their pension provider's quote highlighted. This version had a bar chart appended.
Non-personalised quote comparison - this was an estimate of how much could be gained by shopping around, but with a focus on 'estimate only, individual results may vary'.
There were variations on the personalised and non-personalised quote comparison groups by inclusion of lifetime gains obtained by shopping around and switching. An initial online pilot found that most people did in fact shop around, which wasn't based in reality: it was too rational. So, they changed it.
The best prompt award goes to...
The best prompt to encourage shopping around was the personalised annual prompt, followed by the call to action - there were eight percentage points in between. The non-personalised prompt caused significantly less shopping around, with perhaps the prompt containing too much text (information overload), encouraging consumers to stick to the status quo.
Lifetime gains were not a selling point, and there was no evidence that pension pot size caused more or less shopping around. What was learned, however, was that the relative gains compared to the pension provider's quote did have an impact, so consumers were influenced by the percentage value more than the monetary value gained by shopping around. This is known as reference dependence.
Demographic clues gleaned
- Gender, income, and education mattered
- Women were more likely than men to shop around (by four percentage points)
- Women were more likely to respond to the personalised annual comparison than men (by 12 percentage points)
- High-income-earners were more likely to shop around than low-income-earners assigned to the non-personalised lifetime group (by 10 points)
- Highly-educated consumers were more likely to shop around than less-educated participants when assigned to either the control group or the non-personalised group (by 8-13 points)
- Those who answered the follow-up survey question correctly were more likely to have shopped around: ‘You buy a bat and a ball for £1.10. The bat costs £1 more than the ball. How much does the ball cost?’
- Information prompts can cause consumers to shop around
- Personalisation works best, but strong generic visuals can work just as well
- Non-personalisation prompt was less effective
- Relative gains were most noticeably important in shopping around compared to monetary value of gains
- These findings are applicable to any industry across markets
The study: Oxera and the Nuffield Centre for Experimental Social Sciences (CESS) (2016) research paper, Increasing consumer engagement in the annuities market: can prompts raise shopping around?