“Making your incentive money work harder”
Previously, I wrote about how financial incentives can effectively mitigate the up-front cost barrier when consumers purchase energy-efficient products and services. However, as the increasingly popular field of behavioral economics demonstrates, simple rational self-interest models don’t adequately account for the way people actually make decisions. A financial incentive that encourages desired behavior is one of the most well established principles in positively influencing economic choice. However, once a person decides to buy something, what proof is there that this product or service provides the best value for its price? A close look demonstrates how the strategy actually works when put into practice.
At this year’s Behavior, Energy & Climate Change Conference, there was a presentation on a study that shed new and interesting light into the role that financial incentives, such as rebates, play in a person’s decision-making process. Observations from the study indicated that price reductions mostly operate on an “intensive margin,” while factors called social norms play a larger role on an “extensive margin.” For those who are neither economists nor psychologists, a translation is offered:
Rebates and incentives can get people to pay more for greater efficiency, but social cues of acceptance for efficient products and services are more important when it comes to choosing whether or not to buy into efficiency at all.
The study concluded that incentives ultimately determine the extent to which people select a product or service’s degree of efficiency only after already deciding efficient alternatives are worth paying for. Factors such as higher group acceptance or a belief in the product or service will significantly improve the number of people choosing to buy in the first place. Given this perspective, the effectiveness of combining rebates with branding such as ENERGY STAR makes sense. The recognizable blue square logo helps foster the social approval cues that encourage the decision to buy, while the rebates increase the number of sales even further. Acting along both margins, enhancing social acceptance and diminishing first-cost barriers, can significantly improve the effectiveness of an efficiency program.
So, how much is it worth for energy efficiency programs to play into these social norms? According to the study, which focused exclusively on compact fluorescent lights (CFLs), the extensive margin was in the range of 30 – 70%, or a savings of $1.40 – $3.50 on the $5 purchase price!
Return soon for the next part in this series on increasing efficiency adoption: Trusted Advice.
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Content for this Blog post courtesy of Nick Lange, Vermont Energy Investment Corporation