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Anne Arquit Niederberger8/12/21 12:00 AM12 min read

Predicting the human response to Eco Financing

Guy Champniss leads the behavioral science unit at The Creative Engagement Group in London. With over 25 years’ experience, Guy has been recognized for contributions in the creative and academic fields, and his work in applied behavioral science has led to awards for innovation and impact. Guy is award-winning adjunct faculty in behavioral science and innovation with IE Business School (Madrid), is a Fellow of the Royal Society of Arts and a Chartered Member of the British Psychological Society.

Guy was also a close colleague of mine at Enervee and remains an investor and advisor to the company. Lucky us!

Join me and Guy in exploring how shoppers may respond to Eco Financing – a new way to pay for energy efficient consumer products – reflecting on behavioral science insights.

What is Eco Financing?

Eco Financing allows people to obtain instantly underwritten loans to pay for energy efficient products, while shopping on utility marketplaces, such as the SoCalGas Marketplace (which launched integrated Eco Financing in August 2021). Customers can buy energy-saving appliances with no money down and low down payments.

The SoCalGas Marketplace features Enervee’s Choice Engine technology, which was developed during Guy’s time at Enervee and is proven to eliminate barriers to energy efficient purchases, including market, cognitive and psychological barriers. Here’s a link to one of the papers Guy and I published on the behavioral science behind the Choice Engine. Meanwhile, a growing number of independent evaluations has underscored the effectiveness of the platform, as deployed on utility marketplaces across the country.

But the Choice Engine only partially addressed financial barriers faced by many consumers. This is where Eco Financing comes in. By allowing people to be approved for term loans on energy efficient products as part of the online buying experience, Eco Financing:

  • Spreads payments out over 60 months, with no penalties for early repayment
  • Extends consumer credit to people with credit scores as low as 580
  • Offers more favorable interest rates than alternative payment methods.

For people who have a hard time coming up with the hundreds to thousands of dollars needed to replace a broken appliance in a hurry, the resulting low monthly payments, combined with energy bill savings, help close the attitude – behavior gap. Instead of paying $750 for an inefficient clothes washer at checkout, for example, roughly $15 a month would get you a super-efficient model at the same price point, with the added financial benefit of cutting energy and water bills and reducing greenhouse gas emissions over the lifetime of the product.

With that intro, let’s hear what Guy has to say!

What does behavioral science have to do with consumer lending?

GC: Hi Anne - very good to speak to you! Actually, one of the areas that has seen the most focus from applied behavioral science is consumer finance and lending. It seems our decision-making can deviate a fair way from what’s in our best interests when it comes to money and lending. There are a few interesting points here which will be relevant for Eco Financing. 

Firstly, for any decision, we tend to run a quick cost-benefit analysis. If we think the price (or the price premium) isn’t matched by an increased benefit, then we’ll abandon the decision, and most likely revert to the previous option. So if we’re laboring under the belief that super efficient products are more expensive, then the benefits of the efficiency (which will be felt over time) are more than likely squashed by the additional costs (felt right at the beginning). Any form of financing can help here, as it gives us the impression that those additional costs are also now felt over time, meaning the benefits are more salient - this is the underlying principle that makes a credit card attractive! 

Second, that cost-benefit analysis is not only shaped by hard financial costs; effort is also a cost for consumers. So if we’re having to spend time working out which product is best for us (a ‘discovery’ cost) then this can also diminish the value of the product for us. Again, having an easy-to-action financing option in front of us allows us to slash those effort costs (so making the cost-benefit analysis tip even further in our favor). 

Third, it’s important not to lose sight of the fact that nearly all of us want to do the right thing when it comes to energy efficiency. More and more research shows our attitudes are strong and positive when it comes to wanting to save energy. So making efficiency affordable and easy to action enables us all to follow-through on our attitudinal beliefs. This is where Eco Financing could have a significant - and accidental - positive impact. I’m assuming that Eco Financing will carry some visual identifier? If so, then seeing this badge next to our purchase provides a clear signaling opportunity; an opportunity for me as a consumer to show others (to signal) my attitudes towards doing the right thing. I’m an "Eco-Financer", and this matters to me. 

Plus there’s one more accidental benefit of Eco Financing. If we see only a select number of products carrying the Eco Financing badge, then we can see this information as a decision aid, or a soft default. Defaults are probably the most powerful decision intervention as they steer us towards a specific choice because we recognize that others – with more time and expertise than us – have made a decision for us. 

So all of these factors could play-in to making Eco Financing highly effective at steering consumer decisions towards specific efficient products.

Have buying behaviors, in general, changed as a result of COVID?

GC: The reality is COVID has been the mother of all behavior change interventions. If we stop and think for a moment, almost every behavior has been disrupted. And most of our daily behaviors are habitual. Habits are interesting, because they’re triggered not by wanting to meet a goal, but by some contextual cue. So our daily coffee purchase on the way to work was triggered by our commute rather than a desire to have a coffee (although originally it was because we wanted a coffee). So with all of these behaviors, they started out as a way to meet a goal, but over time became linked to the specific context in which they tend to happen (e.g. coffee shop next to office, at 0810) . Habits are also interesting, since as soon as some friction is put in front of them, we quickly re-evaluate whether they are in fact still meeting a goal, if there’s a better way to meet that goal, or if the goal is still even relevant. Recognizing COVID as a source of profound friction, we can see how everyone’s reflecting on whether old habits are fit to still meet goals, and if those goals are still fit. Look at going to the office - is that still the best way to get a day’s work done? Zoom doesn’t think so.

The same thing has happened to our habitual shopping behaviors. We’re no longer going into stores (because lockdowns stopped us) and we’re no longer using cash (because all shops effectively demanded contactless payments). Look at the extraordinary growth of Amazon and online grocery delivery services – this supports the breakdown of these habits in the face of COVID. Whilst arguably these trends were underway already, COVID has accelerated consumer appetite for online, near-frictionless options to buy. It has also shaped our expectations in other areas. It’s always a mistake to compare your UX to your competitors’. Consumers never do this – we don’t have multiple TV packages, cellphone contracts and gym memberships. Instead, we compare each of these against what we think is the best. Energy utilities risk being at a significant disadvantage here if consumers compare this experience with their experience with Amazon, for example. 

But COVID has likely changed buying behaviors in another way. The pandemic has exposed a collective vulnerability, which is likely causing us all to reflect somewhat as we continue to shop. Again, we can consider this vulnerability as a source of profound friction. This reflection could well result in us being (momentarily) more focused on the next event likely to expose our vulnerability again, and with far greater intensity – climate change. As the former central banker and climate activist Mark Carney brilliantly states ‘no-one can self-isolate from climate change’. So this may be a unique moment in time to engage us as consumers in making better buying decisions.

Does it matter why someone is buying an appliance?

GC: Yes it does. Previous Enervee research shows this to be the case. If we’re in a rush (e.g. our old appliance has failed), then efficiency largely goes out of the window. This is a very interesting way to segment shoppers when it comes to having efficiency protected as a purchasing attribute. We can speculate why that may be, but one credible reason is we’re under stress and need a good new appliance as soon as we can, so are not willing to factor-in elements that make the decision more complex. Eco Financing can help here for some of the reasons mentioned in the first response – the Eco Financing label can act as a soft default, making the right choice the easy choice, even under stress. Anything we can do to remove cognitive load in what is already a stressful situation is likely to be welcomed in the decision-making process. I’ve no evidence to support it, but I’ve a hunch that Eco Financing may make more of an impact in this ‘stressed purchase’ environment. 

Will Eco Financing only impact buying decisions of people who can’t afford to buy products outright?

GC: I don’t believe so. Everyone likes a deal, and if Eco Financing offers competitive loan rates, there’s no reason why anyone and everyone wouldn’t take the opportunity. If we look at car financing, we can see almost everyone buying a car this way now - there’s no affordability issue. However, the attractiveness of financing deals for cars also relies heavily on strong user design and the imaginative choice architecture on those sites.

But as we’ve also mentioned earlier, Eco Financing can also work more widely for other reasons. First, it can act as a soft default for consumers (these products have been pre-selected for their efficiency and quality). So in this case, the default works by being a proxy for quality.

Second, financing allows us to match costs with benefits i.e. the efficiency benefits will accrue over time, and financing allows us to do the same with our costs. Regardless of income and wealth, we’re drawn to opportunities where costs and benefits are balanced in this way.

And third, the opportunity for Eco Financing products to effortlessly signal someone’s green and environmental preferences is just as valid for someone with more financial means. 

Do you have any thoughts, from a behavioral perspective, on the Eco Financing offer and user experience?

GC: One of the foundational pieces of behavioral science is Tversky and Kahneman’s Prospect Theory. This theory focuses on how we respond differently to gains and losses (and that losses hurt more than the equivalent gains). Linked to this is the importance of reference points i.e. the point at which gains stop and losses start. Credit cards know this effect well in terms of showing a credit card price as the reference point rather than the cash price (otherwise, the credit card price captures a perceived loss and is less attractive). Eco Financing has an immense opportunity here to set a reference point that makes it compelling. If Enervee’s able to show all other financing options as costs (by making Eco Financing the reference point), then this makes the proposition strong for consumers. Again, car financing does this already to motivate us to buy a new car over a second car.

Enervee should also focus on a few other elements in the UX to support the process:

  1. Make sure sort orders highlight Eco Financing qualified products (we know the primacy effect - what we see or hear first - is important when it comes to search results). 
  2. Make sure the Eco Financing badge is clearly visible on products AND then migrates in some way to the consumer; that they can wear this as a badge to signal their commitment to energy efficiency).
  3. Use disfluency effects creatively at specific points of the UX to increase the likelihood of consumers engaging and challenging their status quo and assumptions to keep the door open on super-efficient options. 
  4. Consider creating clear and engaging anchors to describe the monthly repayment costs i.e. don’t simply show the $ amount but instead compare it (anchor it) to other payments that make it easier for consumers to visualize and imagine the costs going forward (e.g. for the same cost as five coffees per month). 
  5. Consider feedback loops to reinforce the positive impact of the Eco Financing choice i.e. recognize the purchase journey extends way past the point of purchase. McKinsey has studied in great detail and shown the importance of keeping your customer past the point of buying, for both re-buy opportunities but also as a newly-formed marketing channel. I am sure Enervee and its clients would like to see Marketplace customers as advocates for Eco Financing - so make it easy for those customers to remain visible and become that new credible channel. 

AAN: Thanks for that great advice, Guy. The first is something we’re already doing with our MVP; the rest, I’ll pass on to our product team as food for thought. To wrap up, Guy, I’d like to get your prediction...

Based on what you know and the insights you shared, do you think Eco Financing will work?

GC: I think there’s a lot of strong support for the argument that Eco Financing will work. In the various sections above we can see a number of obvious – and less obvious – mechanisms that can all play in Eco Financing’s favor. So yes, I think it will work! 

However, it’s important to remember that human behavior is very noisy, which makes predictions tough (Daniel Kahneman’s latest book is in fact called Noise!). Seemingly inconsequential factors on the edges of the experience can end-up being the very thing that makes it attractive for the consumer. Who would have thought better lighting on host photos on Airbnb would lead to price premiums being paid for their properties, or removing the moving car on the Uber map would see a drop in usage. If there’s one thing behavioral science tells us, it’s that we don’t know our customers as well as we think we do, and we should never assume features or elements of an experience are irrelevant (or important). When it comes to Eco Financing, I think alongside the concept and ambition, the secret sauce will be in the UX being able to both disrupt existing shopping behaviors by prompting reflection and consideration (adding friction) and being able to make the resultant purchases near-automatic and fluent (removing friction).

AAN: Many thanks for sharing these behavioral insights on Eco Financing, Guy! I look forward to continuing the conversation as we see the market response.