The Fine Art of Nudging

A topic increasingly discussed in the more innovative operations and product design teams lately is the "nudge." What is a nudge? Many organizations state their rules for their customers with detail and clarity. Other organizations give default options; an organization can communicate clear and concise rules or nudge their customers in the desired direction.

Once you know about the nudge concept, you realize that it is actually being used almost everywhere. You'll see that we are swimming in a sea of subtle (and not-so-subtle) nudges. Some are honest nudges; some, not so much.

An industry that represents some of the best and worst of services are airline providers. A good example of a nudge in the airline industry is the check-in process. You can stand in line at the airport and interact with a random human and receive a random service experience, then stand in another line to receive a random security and transportation experience. Or utilize one of two nudges provided as an alternative:

• Print your boarding pass at home or office and go directly to the TSA line—you win and so does the airline.

• Go directly to the kiosk for a random technology encounter (avoiding the random human service experience), and you both win again.

In this case, the choices allow the customer to match their needs—such as an extra bag or resolving an issue with a connecting flight—with the airline's service capability.

Another lesser-known nudge airlines hope their customers will take seems like a somewhat dishonest one. If you would like to change your assigned seat, you may select the kiosk over human intervention. However, the kiosk is programmed to offer an opportunity to buy an upgrade before it offers one of the 16 open seats. You may end up paying more for a better seat that would have been free at the ticket counter.

Insurance companies are fertile ground for nudge observation. They offer products to the public with bewildering and complex rules to accommodate a wide range of demographic and personal issues. This complexity contributes to service failure and distrust. Some insurers have become clever about nudging and calling it "product design." In most cases, it helps reduce product complexity and buyers make a more rational, understandable purchase.

Experience suggests four useful guidelines for integrating "nudges" into your product and service offerings:

• Honest nudges only, please. Use nudges that don't manipulate. An honest nudge clearly communicates client choices that benefit both parties.

• Nudge to improve service by increasing ease of use for low-complexity interactions or high-frequency users. Also, nudge to help reduce product complexity at point of selection. Use a simple nudge to show potential buyers what others are purchasing.

• Nudging to lower service costs may compromise the customer experience. Many nudges seem to involve removing humans from points of decision and service. A human may be needed to explain your nudge and maintain a favorable service experience.

• Pilot test your nudge before committing to it.

As a strategy, nudging can be effective and beneficial to customers and shareholders alike. Organizations that take care in their use of nudges, and follow the suggested guidelines, should benefit over time in terms of competitive positioning and customer satisfaction. All in all, it can represent a good thing given the industry's dynamic state.

Merit Smith is VP & director, health care at the Robert E. Nolan Co., a management consulting firm specializing in the insurance industry.

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