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In this post you will learn:
- what mental accounting is
- actionable tips on how to leverage this in your debt resolution strategy
Encouraging customers to engage with an outstanding balance can be challenging enough for creditors, let alone in a time when households have reduced disposable income.
It’s important to note that a meaningful engagement doesn’t necessarily mean encouraging customers to repay their debts - it could be having a conversation to understand the customer’s unique position, signposting them to external help or just supporting them in tackling a challenging thing head on rather than sticking their head in the sand.
It probably goes without saying that managing bills is not something people wish to spend a lot of time on, no matter how big the consequences (accruing debt, a knock to your credit score, perhaps even legal action). Owing money can bring up a lot of emotions, such as guilt, anxiety and stress, making it an intimidating thing to engage with.
In addition to this, by asking for an outstanding payment, businesses are asking customers to dedicate money towards paying down debt rather than spend it on something else. That's no small request.
Moving money intended for one use to another use doesn't sit particularly well with us. This is because we subconsciously categorise money into different 'buckets', such as 'entertainment', 'food' or 'savings'.
This is a form of mental accounting - a label which refers to the different values a person places on the same amount of money, based on subjective criteria. It can be very effective for budgeting - we subconsciously preallocate money that is needed for certain expenses and get a general idea of our overall spending.
Studies have found that we are hesitant to move money from one imagined bucket to another, as we create artificial feelings of budgetary constraint. In other words, we sometimes restrict ourselves from buying something we want or need simply because we feel that there isn't enough money left in an imaginary budget for it, even though we might have enough money for that item overall.
Let's look at an example
Chip Heath and Jack Soll tested this concept in America in 1996. They asked participants a series of questions that looked like this:
Suppose that earlier this week you spent $50 to pay for a parking fine. Would you purchase a $25 theatre ticket to a show you want to see later this week?
What would you say? And how would you feel about this version:
Suppose that earlier this week you spent $50 to go to a sports event. Would you purchase a $25 theatre ticket to a show you want to see later this week?
The majority of people are more likely to buy a $25 theatre ticket after paying a parking fine rather than a sports event.
Why?
Because many of us would class a theatre ticket and a sports event in the same category (e.g. 'entertainment') while a parking fine comes out of a different category (such as 'unforeseen expenditure' or 'emergency funds').
And as $50 is a relatively large amount for most of us, spending more on entertainment in one week starts to feel excessive.
We each have our own way of mental accounting
It's worth noting that different people have different buckets, so the nature of spending will differ from person to person.
It's not always as simple as splitting up expenditure into categories like food, clothing or bills. Sometimes a person might use vaguer categories like 'essential' and 'for a treat', therefore blurring the line for things like food and clothing, which could come under either.
Using mental accounting to drive engagement
By asking a customer to make a late payment you are potentially asking them to move money from one bucket to another, i.e. from 'savings' or 'rainy day' to 'energy', for example.
So how do you encourage customers to engage and take the right steps to improve their financial health, whether that means paying off debt, reaching out for help or seeking debt advice?
Here are three tips:
1. Consider which bucket your product or service fits into
You can give customers the flexibility to use different mental buckets by presenting different options.
This is largely determined by your design and copy.
Example:
An energy company is trying to encourage a customer to pay down debt as well as meet their ongoing monthly payments.
Instead of focusing on the debt (which might come from a ‘money leftover at the end of the month’ pot, a category which can compete with other discretionary spending like ‘going out with friends’) the energy firm may wish to create a payment plan which lumps a portion of the debt together with the monthly bill. That way, you transparently encourage the customer to combine debt and monthly expenses, and to think of the bill simply as 'energy', something which they already know is a spending bucket.
2. Suggest a bucket for the debt
Rather than relying on customers to assign the debt to the category you would hope for, you can think about how you might frame the debt in a certain way.
Example:
It might be as simple as referring to the debt as ‘credit card balance’ rather than just ‘debt’. That way there’s less ambiguity about which spending category this falls into.
3. Encourage customers to take into account their full financial situation
While breaking money down into categories can be useful, it can sometimes obscure our view of the bigger picture. Encouraging customers to consider their holistic financial situation might give them a new perspective and support decision-making.
Example:
Following a budget assessment, you might show customers their wider financial situation with a design that makes it easy to visualise all categories at once. This could help a customer to realise that perhaps they need to seek debt advice, or maybe that they have enough left over each month to put towards debt repayments.
Would you like to hear more?
We incorporate behavioural science into everything we do at Ophelos. Interested in hearing how? Why not set up a demo.
