Uncommon Sense: What Public Policy Can Learn from the Private Sector

Uncommon Sense: What Public Policy Can Learn from the Private Sector

By Venkatesh Bala, Chief Economist, and Kevin Bowen, Principal, The Cambridge Group

Public policy often involves motivating a large section of the population to modify its behavior toward a more desirable outcome. There are many such situations: for example, discouraging young people from prescription and recreational drug abuse, getting under-banked populations to adopt more mainstream and less costly financial relationships, motivating unemployed workers to persist in their job search, encouraging working age Americans to save for retirement, and getting students to focus on gaining an education in science and technology immediately applicable to available job opportunities.

In the past few years, the use of “behavioral economics” has become highly popular as a public policy tool. For example, employers have had some success getting employees to save more by creating a default retirement plan where employees must explicitly choose to opt out if they want a different plan or if they wish not to contribute. This contrasts with the typical “opt-in” approach where employees have to make an explicit commitment to sign up for the retirement plan, which many do not do.

This and similar approaches arising from behavioral economics, while having the advantage of simplicity, also have their limitations. They typically rely on phenomena such as inertia or group behavior in response to a change in policy to create a corresponding change in behavior. At best, they can create a one-time shift in favor of the desired policy change, so that a new and higher plateau is established, with few prospects for further improvement. Additionally, behavioral economics leaves out sub-groups of the population who have different motivations than inertia, and who in fact, might be among those who would most benefit from effective policies for change.

Can the private sector help? It’s no secret that the private sector is confronted with similar challenges. It, too, seeks to reorient consumer habits, behavior and attitudes in favor of its own products and services. In the process of doing so, the most successful and innovative companies have gained deep insight into consumer psychology and individual and collective decision-making. Public policy leaders and program managers can make use of these insights to improve significantly the likelihood of success in achieving their policy goals.

Public policy leaders have often looked to the private sector as a model to improve efficiency, such as increasing the speed of decision-making and execution. This is important, but overlooks the other crucial element of private sector effectiveness, which has to do with behavior change—beginning with the audience and extending to the program workforce and the activities of delivery partners.

Undoubtedly, there are important differences in efforts in the private and public spheres to modify what may be ingrained human habits. The private sector is motivated by profitable growth on behalf of its investors, and faces competition from all sides in reaching the consumer. The public sector has other objectives, a broader and different constituency of stakeholders, and faces a different set of constraints on its activities, including political concerns.

That said, there are a number of fundamental principles associated with successful private sector approaches to large scale behavioral change that we believe it would be useful for public policy managers to understand and adapt. Five principles in particular strike us as being important in both spheres.

Segment the audience: Recognize that the group of people you are trying to influence is diverse. People have different sets of needs, motivations, attitudes, beliefs and aspirations.

Consider a program to motivate working age Americans to save more for retirement. There may be one segment of the audience that would like to do so, but is unsure about the best way to proceed. Another segment may believe that such saving would not be possible given their specific circumstances. Yet a third segment may be “lifestyle extenders” that has consciously put off saving for a future date, for a variety of reasons. The time remaining until retirement would also be an important consideration for these and other segments, affecting the savings options they have and the ability to influence them through public policy.

Obviously, using the same approach for the different segments is unlikely to meet the needs and motivations of any segment particularly well, leading to sub-par results in terms of achieving behavior change.

Successful private sector companies focus on one or a few segments within a population and try to serve them better than other alternatives available to them. Successful low-cost airlines, for instance, often gear their service offerings not to people who might otherwise take a more expensive carrier, but to those who would be using other, generally slower, forms of transport. By making it possible for them to spend not that much more for the time saved by an airline flight, the airlines make themselves very attractive.

Of course, public policy managers may not have the option of focusing on specific segments of the audience. Nevertheless, a simple framework to clarify the diversity of demand for behavior change can be very useful in helping with resource allocation, program sequencing and effective communication with the different segments. For instance, policy managers can begin with segments where the likelihood of success is highest, thus gaining momentum and valuable experience (as well as establishing the credibility of the program), and then tailor and expand efforts to address harder-to-convert segments of the population.

Identify the most important benefits sought by the audience: Successful companies recognize that their customers value their products and services based on the benefits they offer, which can be functional or emotional, or both. Sellers of electric vehicles recognize that, in addition to higher fuel economy, they are selling the feeling that the buyer is contributing to a better environment—a segment that is likely to be looking for very different things in a car than many buyers, and certainly one that is willing to make trade-offs.

In general, companies that really understand this put themselves in the shoes of their potential customers and ask “What does this product or service do for me?” Policy managers should look from the “customer’s” point of view to see what the most important benefits are for different segments in the audience, and use that knowledge to improve communication and positioning.

In our retirement savings example, the primary benefit to the segment open to saving more but unsure how to proceed might be education about the options likely to be most effective in creating retirement security. For a different segment, one that believes that their present situation does not allow them to save, for whatever reason, the primary benefits might be credible encouragement and advice. For instance, if they see role models with whom they identify who are themselves demonstrating success in creating a retirement nest egg in conditions similar to their own, they are likely to be more motivated.

Address the audience’s pain points: Behavior change occurs when companies satisfy people’s unmet needs, relieve them from compromises they are making, or free them from an unsatisfactory status quo. Successful private sector companies tap into these situations and make them the basis for changing habits.

For instance, as Rick Kash and Dave Calhoun, the authors of How Companies Win (and, respectively, vice-chairman and executive chairman of Nielsen), describe in their book: “What customers told Allstate was that when they bought insurance, they wanted to put their complete trust in that auto insurance company to protect them if they had an accident. But, they continued, they never knew whether this would be the case until after they had an accident and filed a claim. These consumers saw this as one-sided, with all the leverage on the side of the insurance company. And thus was born a series of new features such as expanded Accident Forgiveness and a Safe Driver Bonus—not terms one was likely to hear in an auto insurance company, at least not until Allstate began to build its understanding of consumer demand. Consumers were elated. For the first time, an insurance company was willing to guarantee that under virtually all circumstances, Allstate would guarantee not to raise their premium just because of an accident.”

Public policy managers should also investigate unmet needs and dissatisfactions to identify potential breakthrough ideas that could substantially improve their chances of success. If they linked saving for the future to the idea of “gaining more financial control over your life,” a feeling that might be as powerful as “protection” in the example above, the impact might be enormous: people like to feel in control of their own situation.

Create internal platforms for continuous improvement: Spurred by competition and consumer expectations, the best private sector companies are constantly improving on their products and processes, and so increasing the benefits desired by their respective audiences. One consumer goods company we know instituted a program in which every part of the company, including manufacturing, finance, sales and other areas were required to systematically improve their operations and activities.

Public programs should also emphasize institutionalizing such approaches, both for the sake of their audience and for their workforce. Constant improvement of their services enables their programs to reach new thresholds in encouraging the population they serve to change prior habits. For their workforce, the effort focuses and reinforces the importance of their mission, fosters team relationships and collaboration, and leads to new learning and experience to create a positive feedback loop for greater success.

Deliver on the “last mile”: Just as public programs rely on various organizations, institutions and other stakeholders beyond themselves to execute the policy, private sector companies require an array of suppliers, distributors, retailers, media partners and others to create, deliver and communicate their products and services to the final consumer. Successful private sector companies have a well-developed “demand chain” among all their industry partners. This leads to mutually consistent goals, participation and collaboration to ensure that the right set of product offers are communicated to and reach their intended audience through the right channels at the right price in an efficient manner.

Public policy managers need to coordinate the incentives and constraints among their delivery partners likewise so that they are fully aligned as regards executing the policy. This would include realistic agreements about what each delivery partner needs to accomplish relative to their mission, and the resources and support they can expect to receive, along with mechanisms to ensure such resources are provided in a timely manner.

Proceeding in this way will require public policy efforts to devote time up front in developing a strategic, segmented approach to their goals. But what such time will make possible—the use of approaches private sector enterprises have successfully applied in many different contexts—it should be possible for public programs to achieve significantly better results for their change efforts, and avoid losing too much time to costly trial and error.