Behavioral economics has emerged as a powerful tool for influencing customer behavior across various industries, and the utility sector is no exception.
By understanding the psychological and social factors that drive decision-making, utilities can develop strategies that not only improve customer engagement but also drive positive outcomes such as increased energy efficiency and timely bill payments. In this blog, we explore key principles of behavioral economics and how they can be effectively applied in the utility industry.
Social Influence
Humans are inherently social beings, and our actions are often influenced by those around us. In the utility sector, social influence can be utilized through techniques such as social norming. For example, by providing customers with energy usage reports that compare their consumption to that of their neighbors, utilities can inspire them to adopt more energy-efficient habits. Demonstrating to customers that most of their peers are using less energy can gently steer them towards conservation.
Individuals are significantly impacted by the expectations and actions of others, particularly in the realm of resource conservation (Allcott, 2011; Farrow et al., 2017). Informing customers about the average water consumption of households in the area can help establish social expectations and motivate high-consuming households to decrease their usage to align with the social norm.
Studies show that including social comparisons in water bills can reduce consumption by 5% (Brent et al., 2015; Datta et al., 2015; Ferraro and Price, 2013).
Interestingly, the language used to describe reference groups is crucial in social norms comparisons. The term "neighbors" can cause misunderstanding or frustration among customers who interpret it to mean the household next door, which may not represent their reference group. This effect is most pronounced in high-consuming households, those with strong community ties, individuals with low conservation norms, and those who commit to reducing consumption after seeing the comparison (Datta et al., 2015; De Dominics et al., 2019; Schultz et al., 2014; Jaeger and Schultz, 2017).
The Framing Effect
The way information is presented can have a significant impact on our perceptions and decisions. This concept, known as the framing effect, can be utilized by utilities to encourage desired behaviors. For example, framing bill payments in a positive light, such as offering early payment discounts, can make on-time payments more appealing. Instead of viewing bill payments as a loss, customers see them as an opportunity to save money.
On the other hand, research in behavioral science and economics has shown that people tend to dislike losing more than they like winning (Kahneman and Tversky, 1984). This suggests that customer decision-making is particularly sensitive to how messages are framed. Customers are more likely to take action if they are informed that they would lose money by failing to reduce water consumption, rather than being told they could save money by cutting water use.
A large-scale randomized controlled trial conducted by Hahn et al. (2016) in partnership with San Antonio Water System (SAWS) analyzed the impact of offering rebates for the adoption of drought-resistant plants. One of the study's findings is that using a loss-framed message increased the number of requests for the rebate program.
This result underscores how slight changes in communication framing can lead to significant shifts in behavior towards adopting efficient technologies. Including loss-framed messages in communications to customers could be an effective strategy to boost customer sign-ups, engagement with AMI portals, and encourage water-saving behaviors.
Further Aspects of Behavioral Economics to Impact Customer Experience
Status Quo Bias
Individuals naturally tend to stick with what is familiar and resist change, known as the status quo bias. Utilities can leverage this by implementing opt-out enrollment for beneficial programs. By automatically enrolling customers in initiatives such as energy-saving programs or digital billing, and giving them the option to opt out, utilities can boost participation rates as customers are more inclined to stay with the default choice.
The Endowment Effect
We tend to place higher value on things we perceive as our own. Utilities can utilize this endowment effect by creating personalized experiences for their customers. Digital platforms that enable customers to monitor and manage their energy usage can cultivate a sense of ownership and engagement. When customers feel a personal connection to their energy consumption data and the tools available, they are more likely to proactively manage their usage effectively.
Research in psychology and economics indicates that humans have a natural inclination to maintain the status quo, often opting for the default choice when presented with alternatives. This could be attributed to the fact that the potential losses from deviating from the status quo are weighed more heavily than the potential gains from selecting a different option, a concept known as the endowment effect.
Conclusion
By applying principles of behavioral economics, utilities can develop more effective customer engagement strategies that drive positive behaviors. Leveraging social influence, framing information effectively, utilizing status quo bias, and fostering a sense of ownership can lead to improved customer satisfaction and operational efficiency. At VertexOne, we believe in the power of behavioral economics to transform the utility industry and create a more sustainable future.
For more information, join our upcoming webinar on behavioral economics in the utility industry on June 25th. 
Research from this blog comes from Madeleine Broman Toft, Geertje Schuitema, John Thøgersen, The importance of framing for consumer acceptance of the Smart Grid: A comparative study of Denmark, Norway and Switzerland, Energy Research & Social Science, Volume 3, 2014, Pages 113-123, ISSN 2214-6296, https://doi.org/10.1016/j.erss.2014.07.010.
