Focus Groups Aren't as Useful as Companies Think

What kinds of things to companies do that are irrational?

Dan Ariely: One of the things that I think companies do \r\nto a large degree that makes very little sense, is the use of focus \r\ngroups.  So think about what a strange idea is that we take 10 people \r\nwho know basically nothing about your project and you put them in the \r\nroom and you let them talk for a while and then you take the, whatever \r\nthey came up with, as a consequence of these two hours of random \r\nthinking and you base your strategy on it, to a large degree.  And I \r\ndon’t want to say that focus groups are always useless and also \r\nuninformative, but I think that taking this data and then relying [on] \r\nit as extensively as companies do, I think it’s crazy in many ways.

\r\nAnd the reason I think companies do it is because when these people \r\ncreate a sentence or an idea, it’s very easy to say, “Joe, focus group \r\n17, said this,” and it can help you create and formulate an idea around \r\nit.  When if you said "87% of the people said X," it just doesn’t have a\r\n face, it doesn’t have a desire, it’s just not as concrete and \r\ntherefore, people are not as excited about the notion.  So I think the \r\nfocus group is incredibly useful as a persuasive attempt to tell people \r\nwhat to do, but as a way to find out information, it’s not as useful as \r\npeople think it is.

The other thing that really puzzles me is \r\nthat companies, how little they understand about how incentives really \r\nwork.  So the biggest expenditure for any company is salaries.  And you \r\nask people, "What do you know about the relationship between salaries \r\nand performance?"  The answer is nothing.  Right?  And the question is, \r\nwhy don’t they study anything?  Why don’t they study?  Why don’t they \r\ntry different performance, different incentive level and see how it \r\ninfluences performance.  And they often say, well, there are all kind of\r\n laws and if we have, pay some people one way and some people another \r\nway, we might be sued.  But in the last two years, with all these \r\nquestions about bonuses and so on, I’ve gone to many companies and said,\r\n “Why don’t we at least do some surveys, why don’t we at least see how \r\nhappy people are in the months where they give them, you give them the \r\nbonus and how productive they are?”  And the answer I got 100% of the \r\ntime is that people are really miserable in bonus season and because of \r\nthat, they don’t want to ask them any more questions.  And I said, “If \r\npeople are miserable in bonus season, shouldn’t it mean that you should \r\nstudy it, understand it, and try to prevent it for next year?”  They \r\nsay, “Well, well, not this year, this year was really miserable, maybe \r\nnext year, come back to us next year.”  And if you think about it, it’s \r\nreally incredible.

Now, how do companies decide about \r\ncompensation?  They look at what other companies are doing and try to \r\nequate compensation to what other companies are doing it, but it’s a \r\nplace of the blind leading the blind, right?  And then if we pay 5% \r\nmore, other people would start doing it, but the real question is, how \r\ndo you pay and how do you get people to care about the work and become \r\nmore productive and be happier at their work?  And the answer is not \r\nsimply that more money is better.

More money can be part of the \r\nequation, but it’s also the question of how do you give that money?  Do \r\nyou give it as bonus, do you give it as a fixed salary, do you give it \r\nas part of the benefits?  Maybe you give benefits for the gym. Do you \r\nsend people on vacation to the Bahamas?  And it turns out that there are\r\n ways to use money that is economically less efficient, but actually get\r\n people to be more motivated, care more, and actually become more \r\nproductive.

Recorded on June 1, 2010
Interviewed by David Hirschman

Polling random people can be "incredibly useful as a persuasive attempt to tell people what to do," but not really as a way to find out information.

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