How behavioral economics can improve product strategy

I am a product manager with experiences across industries like social media, food delivery, and education. This includes solving user experience, retention and growth problems at Daily.dev, Bumble, and Swiggy. My background in software engineering and an MBA from IIM Ahmedabad gave me a great dimension when it comes to product development and strategy, and I am very passionate about using principles of behavioral economics to create products that speak to users themselves.

As product managers, we often find ourselves at the intersection of user needs and business goals. While we depend on surveys, interviews, and feedback to identify user needs, one powerful tool can help us bridge the gap between user behavior and product success: behavioral economics.

Behavioral economics dictates that consumers rarely make rational choices; instead, their choices are hijacked by cognitive biases, emotions, and social influences to make irrational ones, which deviates from classical economic theory. To the product manager, behavioral economics provides a rich set of principles for designing products that go beyond solving pain points to also drive engagement and retention.

The core of many successful products lies in making user habits. Every time a user passes through a product-driven behavior and receives a reward, they get an unmistakable hit of dopamine. It is good feelings that drive users to come back for more to the product, increasing engagement and retention.

Understanding this cycle is critical for product managers, as is knowing how to tap into habit formation-no matter if you are building a fitness app or productivity tool. Having a grip on behavioral economics can really affect how your product will succeed.

Although there are numerous behavioral economic frames, for instance, nudge theory, prospect theory, and mental accounting, it is the Octalysis framework that will provide us with the deepest understanding of user motivation.

 It identifies eight core drives influencing human behavior:

(Source: upshot.ai)

Each of these drives can be leveraged in creating more engaging and motivating product experiences. Now let’s look at how two of those principles are applied in real situations.

The number of new delivery partners joining this biggest food delivery platform of India, Swiggy, was a challenge to retain.

Many were leaving the platform due to the steep initial learning curve in understanding how to earn well. We decided to leverage the “Development & Accomplishment” drive by introducing a feature called the “Payment progress bar.” This feature gave the delivery partners a sense of accomplishment with each completed order. It also made them aware that more earnings awaited them upon hitting milestones.

As a result, earnings of new partners increased by 17%, while attrition decreased by over 3%. By making earning an achievement, we could keep the interest of the partners for a longer period of time.

At Daily.dev - a community for developers - we wanted to incentivize users to build up a daily reading habit. We applied the “Ownership & Possession” drive by introducing reading streaks.

It incentivizes daily reading by allowing users to maintain their motivation through elements such as freezes of streaks on weekends and recoveries of missed streaks with reputation points. This creates ownership in the user’s learning journey and motivates them to use the platform consistently.

While there are powerful tools in product development, a word of caution on the ethical use of these principles is important. Dark patterns in user experience design can make use of behavioral economics axioms to trick users into actions that benefit the business at the user’s expense.

As product managers, we need to stay tuned for practices such as forced continuity, hidden fees, or designs of interfaces in a way that misleads users into making choices that they never intend to make. This is aimed at making design choices that are transparent and ethical, truly empowering users, and helping them build trust over the long term.

Behavioral economics is an excellent lens for the product manager to understand how to design more effective products. By deeply understanding the ideas of creating habits, leveraging frameworks like Octalysis, we can create products that will not only fit user needs but drive engagement and retention.

With this power comes a responsibility: when we say apply these principles, one has to remember user autonomy, clarity, and trust are paramount in every sense. When used right, behavioral economics is an absolute win-win for both users and businesses where products resonate with their audience and create sustainable growth.