The holidays are upon us. Halloween has come and gone, some of us have snow on the ground, and most credit unions are up to their eyeballs in budget plans.
Whether you are looking to reduce overall budget in 2020 or raise it, there is never enough money to do all the things the credit union would like to achieve. Budget season often feels like a game or a dance, but it is helpful when you know the rules. So, with that in mind, here are some scenarios and tips to use behavioral economics to your advantage this budget season.
The Concepts – Relativity and Anchoring & Adjustment
The brain has a hard time valuing one-off items, so comparison points are important when establishing value (relativity). This works hand-in-hand with anchoring and adjustment, in that the first number shared becomes an anchor-point that the future numbers work off of.
A real-life example of this would be if you owned a small electronics store and wanted to start selling espresso machines. You find a great one and price it at $149, placing it on the shelf between a toaster and a microwave. Six months go by and while a lot of people look at it, none have been sold. Instead of discounting it or giving them away, the problem is one of relativity – you need a similar item of a worse value to show how great a deal you have with the $149 model. So, if you put one next to it that is twice the size and double the price at $300, the brain has an ability to see the two items in context and opt for the “introductory model” or “compact version” of the machine.
With this in mind, let’s talk budget.
Scenario 1: Asking People to Reduce Requests
Asking people to cut budget is never fun, but it is often necessary. Let’s say a department had $1 million last year and you need to cut overall expenses by 10%. Sending out the request in this way will encourage people to look for spots to cut a little here and a little there, which can make an overall strategy much less effective.
Instead of asking them to “cut by 10%” which makes people look at what they asked for in the past, consider asking them to start from zero and build an ideal plan of what they would do if they had $750,000-$900,000.
Two reasons why this is better:
- It sets a lower anchor of $750,000 and has the topmost number at the spot you are hoping to reduce to.
- This helps people get out of the “what we did last year” mentality and start fresh. They are now able to evaluate what worked and didn’t, remove any sacred cows that might be lurking, and shine a light on the whole budget. There are likely more unnecessary expenses than meet the eye.
Scenario 2: Requesting More Budget
If you are on the other end of the spectrum – the head of a department asking for funding for your projects – it can feel like an uphill battle sometimes. In most cases, the way you present the request matters more than the numbers themselves (framing). You can use the same concepts of relativity and anchoring to further your cause.
When making a request that is higher than what you have gotten before, you are working against a low anchor (the opposite of the problem in scenario 1). It is your goal to reset that anchor before getting to your request.
Let’s use the example of getting budget to attend a specific conference or training that is more than what your department has used in the past.
If your budget has always been $1,500 and you found something truly valuable for $2,500, it is best to do a little more research and find something above and beyond that number. Say, if it would take two or three other trainings to make up the value of this item and they together add up to more than the $2,500, or if there is a similar program that is more expensive and would provide a lot of the same value, but keep you out of the office more.
You could then say, “The credit union has identified a key goal for me and the department is to increase knowledge in innovative lending solutions to help increase revenue by $100,000 next year. I have done research and found two trainings that will accomplish this goal. The first is $5,000 and will provide X, Y and Z skills. I continued to dig deeper and found another opportunity which will cover X and Y, which are foundational for the task at hand, and it is only $2,500. This seems like the best investment for the credit union, do you agree?”
A couple of things to note there:
- The $100,000 is both a high anchor (even numbers that are completely unrelated can impact the brain) and it shows the relative value to the credit union for the investment in the training. $2,500 compared to the previous training budget is a huge increase, but when it can provide an extra $100,000 in revenue, it is easier to understand the value.
- The $5,000 conference is a second high anchor and relativity point, which shows you did research and continued to have the best interest of the credit union in mind. This little bit of extra effort shows a lot of understanding and can make all the difference.
As you continue through budget season, there will be plenty of opportunities to use these skills, and they apply in other areas of life as well. In any scenario, remember to:
- Understand the existing anchor and which way you want to move the conversation
- Always have at least one comparison point, but no more than three
- Frame the message around the value and what is important to the person you are communicating with