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Tuesday, October 15, 2013

The Freakonomics of Preference Management

Two of my favorite books are Freakonomics and SuperFreakonomics. Like millions of other readers, I was astonished by examples of simple economic principles at work in real life. Over and over again, people respond to simple incentives and disincentives, leading to very predictable behavior choices.

When I think about the Freakonomics in the context of my work, the parallels are obvious. The incentives and disincentives of preference management for enterprise organizations are pretty clear. Consumers reward companies that listen and learn (incentive) while consumers and the governing bodies that represent them punish companies that don’t respect privacy (disincentive). Both forces push businesses in the same direction: the adoption of smart, efficient preference management practices.
Consumers reward it (Forrester survey):
  • 78% improved ROI
  • 80% higher retention
  • 80% better campaign results
  • 89% higher customer satisfaction
Privacy requires it:
  • FCC and the TCPA - $11,000 per violation (call, email, text)
  • FTC and the TSR - $16,000 per violation (call, email, text)
Let’s take this a step further and consider preference management implementation. How do natural incentives and disincentives inform that process?
As noted in Freakonomics, consumers are driven by incentives, but not every incentive will drive every consumer to act. It boils down to value vs. convenience. One customer may not want to provide an email address in a profile because they think it will only lead to spam messages. But if an incentive is offered for giving that email, say a discount on a future purchase, there is more value in providing the address.
It’s the same with convenience. A customer may not want to create a profile including credit card data for a one-time purchase like a gift. But for sites where he makes regular purchases, the convenience of stored information is a time-saving benefit. Convenience may also translate to confidence. As customers interact with a company more frequently they tend to become more confident that my transactions are secure and that they honor my communications preferences.
Consumers want to decide how companies communicate with them and want personalized messages. Even in just the last 10 years, consumer behavior has shifted in significant ways. More consumers are buying online, or interacting with companies via social media over interacting in person. A robust and flexible preference center is necessary to manage customer data at a central point. This is the proverbial carrot, ­the reward or incentive to act.
At the same time, privacy regulations and global governments are requiring more stringent adherence to preferences. In the U.S. we have typically followed an opt-out protocol, it has been up to the customer to manage communications. Outside of the U.S. the burden is on the company to obtain permission to contact. The changes for mobile communications in the U.S. are the first step towards increased regulations. And the penalties for non-compliance can be steep, from single-violation fines to the potential for class-action suits. This is the proverbial stick ­ the powerful disincentive to continuing with business as usual.
It doesn’t take an award-winning economist to see how preference management is critical to engagement and risk mitigation. But it’s fun to look at the problem/opportunity through the Freakonomics lens and see it in a new light.

About the Author: 
Rob Tate is the Director of Enterprise Sales at PossibleNOW.

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