Bob McCarron
How do customers make decisions? This question has been at the core of marketing strategy for many years. As marketers manipulate the various principles of marketing, the consumers they seek to reach also change their decision-making criteria. So how does a professional marketer adapt to this evolving environment? First, they need to understand the typical consumer decision-making process and tailor their marketing strategy accordingly. Then they need to constantly evaluate their existing customers, as well as their prospect universe, to come up with a marketing strategy.
Are these consumer decision-making theories new? Not exactly. About 300 years ago, an economist named Nicholas Bernoulli (I knew the textbooks I saved from grad school would finally come in handy) 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 basically holds that consumers make decisions based on the expected outcomes of those decisions. This of course assumes that consumers are rational and likely 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 50’s, another economist, Herbert Simon, proposed a simpler model that was called Satisficing. This theory holds that consumers get to a point where they wanted to be and then stopped the decision-making process. This could also be referred to as 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 professional can’t predict consumer behavior, then how can he or she put a productive marketing strategy in place?
About 20 years later, two psychologist 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 (winning something makes it better than simply buying something).
Understanding consumer decision-making theory is all well and good. But it’s really just an academic exercise unless you have actionable marketing analytic insights to deploy your marketing plans. In a future blog post I will outline several specific marketing strategies that take into account the consumer decision-making process.
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About the Author:
Bob McCarron is the Financial Services and Insurance Practice Leader at SIGMA Marketing Group, a marketing analytics agency. Connect with Bob on , or follow him on .
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