Behavioral Economics Experiments For Lean Startups

Source: Behavioral Economics Experiments for Lean Startups - MOVES THE NEEDLE

By Brant Cooper on September 14, 2014

Rapid experimentation is a foundational principle of the lean startup movement, and also one of the most difficult skills to master. How we run experiments is simple, especially when we follow a disciplined process Lean Innovation Experiment Map , but deciding what to experiment with can be truly daunting. How do we prioritize the small experiments most likely to make a big difference?Behavioral economics experiments are “the science of why we do what we do”, and seek to discover how we might help our customers by encouraging them to make better choices. Choices that improve their financials lives, their health and their overall well being. If you’re not already familiar with the concepts of behavioral economics experiments, I’ll let Dan Ariely share his point of view on why it’s important to your new venture.

“In the future, we are all great people. We eat healthy, we call our mom and we save money. The problem is that we don’t live in the future. We live in the Now. In the Now, the environment determines our behavior. By designing the environment and creating thoughtful interventions, we are able to improve people’s decision making in a way that benefits customers while also growing the companies bottom line.” – Dan Ariely, Irrational Labs

How to use behavioral economics experiments in your lean startup?

First we start by considering when to use behavioral economics principles, or “BE” for short. In our experience, the best time to begin exploring BE is once you already have your MVP in place, and you have a steady flow of customers producing minimal baseline metrics. This is the perfect time to leverage BE experiments as you attempt to improve these metrics. Of course you should consider these principles from the start, but we’ve found a good foundation is easier to build on. Next, select a BE principle you’d like to use as a starting point for your experiment, and then identify the place in your customer experience when this principle might be applied. (For those of you new to BE check out a TED talk by Dan Ariely Dan Ariely: Are we in control of our own decisions? | TED Talk , and of course read his book, Predictably Irrational [http://danariely.com/the-books/] , read a few tips from Nir Eyal at his website Nir Eyal Bestselling Author and Behavioral Designer | NirandFar.com, and 4 detailed examples details from McKinsey&Co A marketer’s guide to behavioral economics | McKinsey & Company ). You can read more about BE on Wikipedia Behavioral economics - Wikipedia.

For Example: Consider the “Endowment Effect” (Reprinted from Irrational Labs http://irrationallabs.org/ Pricing workbook) The short version: We overvalue things that we own. You’ve likely noticed this throughout your life.

  • A friend finds a new apartment that is actually not very nice. Soon after signing the lease, however, they brag to you about how great the place is, how convenient the location is, and so on.
  • A couple begins dating out of convenience, only to later tell their friends how much they “really, honestly liked” that person from the start.
  • You buy a pair of shoes that are out of your budget but are very stylish and desirable. But after wearing them only once, you discover they are also extremely painful; you’re limping after only a short walk. You keep wearing them night after night, in the hopes that the pain will go away and it’s just a matter of breaking in the shoes.In a classic experiment that magnified this effect, Daniel Kahneman and colleagues took a group of students and gave half of them mugs for free. The other half were instructed to buy the very same mugs. On average, the buyers offered half as much as the mug-owners wanted for the same product.

So, what does this mean? Ownership instantly caused these people to double the perceived value of their mugs. That’s a powerful effect.

Research like this shows us that we overvalue things that we own.1 Study after study has shown that merely owning something increases our valuation of an object. This is called the Endowment Effect.

Product Tip: The more you can get customers to invest in the creation process, the more they’ll value your product.

So, how might you use the endowment effect mentioned above to increase the perceived value of your product? What hypothesis might you create, and how might you run a quick experiment to test your hypothesis? That’s BE + lean startup…Whichever strategy you choose, be sure to focus on a single behavior you wish to change, since changing multiple variables in your experiment is never a good idea. For example, you may wish to experiment with your product’s pricing strategy by using “anchoring” or “dominating alternatives”. Simply brainstorm a series of hypotheses based on potential behavioral interventions, using the BE principle you selected as a constraint.

Once you have a few experiment ideas, be sure to follow the disciplined experiment process Lean Innovation Experiment Map you already know from your LEAP training. When your experiment details are documented using your experiment map, simply run the experiments to see if your BE intervention moves the needle. Then return to the beginning of the process, and run your next series of experiments.