Noah Healy is a master growth strategist who uses game theory and gamification to help businesses reach their goals. He has been involved with this industry for many years, going back to the dot com boom, and he understands it better than anyone.
Noah Healy spoke about all of these topics during a summer 2022 episode of This Week With Sabir. You can watch the full video on YouTube and on this blog, learning more about invaluable snippets such as:
- Use Gamification: Gamification refers to the act of using gaming mechanics to improve your conversions. They include loyalty programs, referral programs, and more, all of which are aimed at engaging your customers, getting more information out of them, and ensuring that they keep returning day after day.
- Loyalty and Incentives: Loyalty programs are a great way to incentivize your customers to return, but you can’t simply offer cheap freebies or coupon codes and then expect them to become devotees. The best loyalty programs offer something that has value, something that customers actually need or want. Finding a balance between what’s affordable for the business and what’s valuable for the customer can be difficult, but if you get it right you’ll notice a sharp increase in consumer loyalty.
- Gamification in Action: If you want to see how effective game theory can be, look no further than supermarkets. They have massive amounts of data at their disposal and they have used it to plot every inch of the aisles, from the location of big-ticket items to the colors, smells, and sights that are designed to influence your shopping habits.
- Signal vs Noise: When trying to understand why your customers do what they do, it’s important to focus on the habits and trends that matter and ignore everything else. This is something that Healy referred to as “signal and noise”, as the direct path is the signal and the noise is everything that distracts you from it.
As always, I ended my discussion with Noah Healy by asking for his single most valuable piece of advice—a $100,000 insight. Noah Healy’s insight was based on empathy and why it’s such a valuable tool when plotting your growth strategy.
Be sure to watch to the end of the video or read the accompanying blog to learn more.
How To Use Game Theory And Gamification As Part Of Your Growth Strategy
Noah Healy is an expert in game theory and how it can be used to fine-tune your business strategy. He has worked for numerous tech startups and has created growth strategies that implement game theory and gamification.
I invited Noah Healy to join me on This Week With Sabir, where we spoke about entrepreneurship, investing, growth strategy, market design, and how all of these things relate to game theory, big data, and machine learning.
He provided some invaluable insights on these subjects and if you’re an entrepreneur, this is a must-watch video.
In the following guide, I have highlighted and expanded upon some of the points that we discussed, focusing on those that can help small and medium-sized businesses.
What Is Game Theory And Gamification?
In simple terms, game theory is the study of how people interact and make decisions. It’s something that you can use to your advantage as an entrepreneur. After all, if you have a better understanding of what your customers are thinking and how they are interacting, it will be easier to sell them products and services.
As for gamification, it describes the process of adding gaming mechanics to your business strategy.
In its simplest form, business is a transaction. You have something to sell and the customer has something that they want to buy.
By adding gamification mechanics, you can make that process more entertaining, engaging, and valuable for the consumer. You can give them reasons to spend more time on your site, make larger purchases, return in the future, or recommend their friends.
For instance, if you give them a loyalty card when they make their first purchase, punch holes with every subsequent purchase, and give them a freebie when they have 10 holes, you’re tracking their progress, incentivizing them to continue, and providing them with a reward at the end.
Just like a video game.
There are many elements of gamification and game theory, as well as multiple ways to use them to your advantage.
Keep reading to learn more.
Creating A Game For Your Customers
The most basic way to utilize game theory is to create an incentive-based loyalty program for your customers.
But these programs have to be done right if they are going to be effective.
As an example, I recently addressed this topic with a friend of mine who runs a small business.
He was despairing that his marketing efforts weren’t working, but those efforts were weak, to say the least.
The main “strategy” was to include a glossy leaflet with all new customer orders. The leaflet contained a coupon code that gave them 10% off their second order.
On the surface, it seems like a good idea. After all, it encourages first-time customers to become loyal customers, and 10% is a small price to pay when you consider how much you’ll be saving on marketing.
But in making this offer, he was forgetting all of the times he had received similar leaflets and had thrown them in the trash.
We all do it.
10% is great if you’re going to make a purchase there and then, or you’re buying something substantial. But it’s not good enough to convince you to make a larger purchase or to buy sooner than you otherwise would.
Think about it: If you buy a month’s supply or supplement and you get a 10% coupon at the same time, are you going to immediately use it and buy another 30-day supply? Probably not.
You’ll either throw the coupon away or put it in a drawer for “later”, only to forget it by the time you need to restock.
A more effective form of this would be to offer a free coffee to every customer who purchases 10 coffees. Technically, it’s still a 10% deal, but a freebie sounds like a much better deal than a 10% discount.
What’s more, if the customer has a punch card or an app to keep track of their purchases, it will gamify the process. It’s like advancing through the levels on a puzzle game or earning XP on an RPG.
And that’s just the tip of the iceberg.
There are better ways to engage your customers and earn their loyalty.
McDonald’s Monopoly is a great example of this. It gave customers pieces of a Monopoly board with every purchase that they made. If they collected the right pieces, they could win free food, free drinks, and a host of other prizes.
Of course, it wasn’t handled as well as it could have been and a few bad actors spoiled it for everyone, but that wasn’t really the company’s fault and it still helped to boost sales and earn more loyal customers.
The trick to making a program like this work is to find something that aligns the outcomes that you find desirable with ones that your users find desirable.
For that, you need to be empathetic and selfless, to know what they want, and be willing to provide it.
In the above examples, your customers aren’t going to care much about a 10% discount. It might be something they are willing to use if it’s presented just before a purchase, but it’s probably not going to make them buy more.
However, a game of Monopoly where they can win 6-figure sums just by purchasing a coffee, as well as consolation prizes of free food and drink, is hard to resist
Customers were buying items just to get the little Monopoly cards, and they were also bulk buying for the purpose of doing YouTube haul/unboxing videos.
Now that’s an incentive.
You don’t need to be selling food, beverages, or other consumer products to create these types of incentive programs. You can do something similar for B2B and service-based businesses—you just need to be a little creative.
NFTs could potentially be used for this purpose. As I discussed a few months ago with the brilliant Gary Vaynerchuk, an NFT can serve as a ticket, reward, and subscription all in one. It can give a customer voting rights, discounts, and access to exclusive events and programs.
Learning From Supermarkets
Supermarkets are a perfect example of how companies can use game theory as part of a growth strategy.
They have been in operation for decades and have been tasked with supplying groceries and other essentials to the population throughout that time. They’ve worked with more brands and customers than anyone else, so they have plenty of data they can tap into.
Some of the tricks they use include putting essential items in the middle or at the back of the store, requiring you to walk past all those eye-catching goods before you get to what you need.
The lighting, music, and layout have been carefully tailored to increase the amount of time that consumers spend in the store. Supermarkets also stack impulsive items near the checkout, place expensive items at eye level, and intentionally disorientate you.
If you could simply walk in, grab some bread and milk, and then leave without seeing anything else, the supermarket wouldn’t make much money. So, they take you around the aisles, show you everything they have to sell, and rack up those big bills at the tills.
Supermarkets also have the means to run large-scale tests on consumers and products. They know which products sell and who will buy them. Not only is this information incredibly useful when appealing to consumers, but it also means they can trigger a bidding war with the brands.
Big brands want to place their products where they will be seen the most, and with so many brands competing for those spaces, it gives the supermarkets more power.
As a small business, those tests may seem out of reach, but there are still a few things you can do to better understand your demographics.
For instance, you can test the most effective landing pages by creating two pages, sending 10,000 visitors to each, and then seeing which one generates the most sales. When you have that information, create a third landing page, test it against the “winner”, and then rinse and repeat.
This is known as A/B testing, and it’s how businesses of all sizes can fine-tune landing pages, websites, and marketing campaigns.
For more information, check out this previous This Week With Sabir episode featuring optimization expert Gajan Retnasaba.
Signal Versus Noise
When trying to determine what your customers are interested in and why they do certain things, you need to decipher the signal from the noise.
For instance, let’s assume that you sell herbal supplements and other wellbeing products and you experienced a boom during the pandemic.
You want to learn how many of those sales were a direct result of customers buying because of health fears. Maybe they were more health-conscious than usual as a result of the pandemic. Maybe they believed that some of your products could actually help with some of the symptoms of COVID.
But the problem in deciphering this signal is that you have to deal with the noise of customers who bought because they had more time on their hands or because their local health shop was closed.
Not only can this noise confuse the signal and make it hard to attain clarity, but it can also steer you down the wrong path.
It reminds me of the correlation vs causation debate that has fooled so many readers and delighted countless journalists.
Tyler Vigen, an author and Harvard student, created the website Spurious Correlations in which he finds links between two obscure things. One of the most cited examples shows that there is a direct correlation between the consumption of margarine and the divorce rate in the state of Maine.
But there is no causation here, nothing that connects the two beyond similar patterns on a graph.
If the signal is to find a reason for changing divorce rates, the margarine—and all the other doubtless correlations that exist—is just the noise that distracts you.
Healy used a different example during our discussion. He asked me to think about the signal as the video call that was connecting us and the noise as the interference from static, background noise, and interference.
If there is a lot of background noise, it can be hard to hear the signal and understand what’s happening.
The same is true for your business and your customers.
When looking at data, therefore, you must focus on the data that matters and ignore the data that does not matter.
Find the signal and block out the noise.
One of the biggest mistakes that business owners make is to make assumptions about their customers and their needs. It’s a mistake I’ve seen in countless business owners and one I even made myself when I was just starting out.
It’s also the subject of a conversation I had with Paul Butler.
For example, I once worked with an entrepreneur who made a very niche product in his kitchen. It wasn’t entirely original, but it was rare, highly unusual, and had a very niche appeal.
Before he launched the business, he invested heavily in a generic product that he could sell alongside his homemade creations. He assumed that this product would be purchased as an impulse buy—something familiar to go with something unfamiliar.
He invested over half of his budget in buying this product, even though it would have the lowest margin of all the products he sold.
After 6 months, that product was the lowest-selling one in his store. After a year, he had sold less than 10% of his stock and the rest perished.
Conversely, the other products, ones he had assumed were too niche, sold very well. Today, his business is flourishing, but that reckless assumption nearly broke him.
If he had done a little research, he would have realized that customers actually wanted niche products from him and preferred to buy the common products from Amazon.
Ask yourself what you know about your business and then ask yourself why you know it. If the answer can’t be supported by research, studies, focus groups, or analytics, go back to the drawing board.
The $100,000 Question
Empathy is key.
That’s what Noah told me when I asked for his $100,000 advice.
It harks back to what he said earlier about understanding your customers before you try to appeal to them.
Don’t just treat incentives as an offer of something useful, something with value. Think about what the people you’re trying to incentivize actually want.
Believe it or not, your customers won’t go mad for 5% or 10% coupons. They also don’t care about generic t-shirts and keyrings that carry your company’s brand.
I have lost count of how many brands have sent me t-shirts just for buying their products, and usually, those t-shirts go straight into the closet and never see the light of day.
They’ll cost the brand around $5 to $10 each to print and ship, and that’s money that could be better spent elsewhere. Companies assume that those t-shirts will be worn, in which case they get free exposure. But very few customers will be so devoted to your brand that they’ll proudly wear its logo (unless you’re actually a clothing brand).
So, put yourself in your customer’s shoes, think about what they actually want, and give it to them. Grab their attention, keep their interest, and they will reward you in kind.
ABOUT NOAH HEALY
Noah Healy is a market designer and game theorist working on better economic systems. After training in nuclear engineering he worked for tech startups at the peak of the dot com boom. Becoming fascinated by the mathematics of information and computation led to patent work on a better commodity market design. Visit him on the web at http://coordisc.com/.