How do customers make decisions? This question has been at the core of marketing strategy for many years. As marketing professionals manipulate the various principles of their craft, the consumers they seek to reach also change their decision-making criteria.
So, how do marketers adapt to this fluid environment?
First, they need to understand the typical consumer decision-making process. Then, they need to constantly evaluate their existing customers and prospect universe to come up with a smarter strategic approach.
Are these consumer decision-making theories new? Not exactly. About 300 years ago, an economist named Nicholas Bernoulli developed the first formal explanation of consumer decision making. This foundation was later built on by other economists and ultimately called the "Utility Theory."
The Utility Theory suggests that consumers make decisions based on expected outcomes. This, of course, assumes that consumers are rational and able to predict the outcomes of their decisions. As we probably all have learned, consumers are typically not completely rational or particularly good at predicting the outcomes of their decisions. So the Utility Theory has some shortcomings.
Back in the 1950’s, another economist, Herbert Simon, proposed a simpler model that was called "Satisficing." This theory holds that consumers reach a certain point and then stop the decision-making process. You can also call this the “settling for good enough” theory. While Satisficing addressed many of the shortcomings of the Utility Theory, there was still room for improvement in the area of prediction. After all, if a marketing pro can't predict consumer behavior, then how can he or she put a productive strategy in place?
About 20 years later, two psychologists developed the "Prospect Theory." The Prospect Theory solved many of the problems of the earlier two theories. The two major ingredients of Prospect Theory are value and endowment. While value might be self-explanatory, endowment is a little trickier to understand. Basically, the notion of endowment is that an item is considered more precious if one owns it rather than if someone else owns it. This is probably the theory behind eBay’s success, because winning something feels better than simply buying it.
Understanding consumer decision-making theory is all well and good. But it’s really just an academic exercise unless you have actionable analytic insights to deploy your marketing plans.
SIGMA Marketing Insights is a data-driven, boutique marketing services firm that has been improving marketing ROI for clients since 1985. Learn more about us at www.sigmamarketing.com.