Conversations about consumer buying decisions invariably turn to behavioral economics. Behavioral economics essentially is the study of the impact of non-economic factors on economic decision making. Homo Economicus – consumers as rational, information processors making optimal decisions that maximize their economic well-being – has been declared dead. So what else is new?
Other than in the mental laboratory of classical economists, no one in the real world has ever paid any attention to this idealized version of the consumer as an engine of micro-economic efficiency. Economists may have been lost in this unrealistic picture of reality, but economists are the people who solve the problem of “how do you open a can if you are stranded on a desert island with no tools?” by assuming you have a can opener. Business people and marketers, on the other hand, I would argue, always have practiced behavioral economics.
Regardless of any text book or AMA gobbledygook definitions, the Laxtionary defines marketing as:
Every aspect of marketing tactics and strategy – from advertising, branding, messaging, promotions and placement to pricing, product features, distribution, packaging and distribution – ultimately is aimed at influencing the purchase behavior of consumers based on behavioral economics. I doubt very much that Adam Smith would disagree.
Consumers as IRrational?
While I guess this puts me firmly in the camp of behavioral economists, I take extreme exception with those who categorize consumer behavior as irrational in their failure to make decisions that maximize their economic gains. We live in a world of “bounded rationality” in which we are constrained by limited and imperfect information, as well as highly variable but always imperfect information processing capabilities. Equally important, we attach “value” to a spectrum of individual needs and desires – from time, ease, safety and convenience to self-fulfillment, emotional satisfaction, social recognition and status – that extend well beyond simple economic priorities.
Rather than characterize our “failure” to make decisions based on maximizing economic outcomes as irrational, I would argue that consumers make spectacularly rational decisions based on their ability to process the information they have (and the information they want), their perceptions and understanding, and the calculus of the multiplicity of things they value. The seemingly endless array of decisions that economists might classify as irrational are quite rational given the constraints of bounded rationality, perceptions and personal values.
- Does it make sense to buy new, unproven technology products or cars with no track record; to shop in expensive stores for products available for less elsewhere; to buy early in the season rather than wait for sales; to pay more for a specific brand instead of buying a knock-off? It all comes down to the individual consumer’s set of values: if they are an early adopter technophile or a “car guy/girl;” prefer the status/service/what-ever of more expensive stores; want to enjoy something now rather than wait; or appreciate being identified with a particular brand, all of these decisions are perfectly rational reflections of the tradeoffs between economic maximizing and other values that consumers have.
- Are the tens-of-millions of Americans who buy lottery tickets irrational because the likelihood of winning is so astronomically small that you probably would net a higher rate of return by handing out dollar bills to strangers in the hope that one of them is a wealthy altruist who reciprocates by giving you a million in return? While characterized by homo economicus as a tax on stupidity, lottery tickets are dreams, not investments.
- There are countless varieties of onerous loans that make “no sense,” from payday, subprime, rent-to-own, pawn shop and tax refund loans to the type that are illegal. But for consumers faced with limited resources, the need for immediate cash and, very often, a poor understanding of the alternative or consequences of their decisions, their use of these financial “instruments” is rational.
The list is endless.
As researchers, we strive to understand consumer preferences across the spectrum of things to which people attach value and the conditions under which they make purchase decisions. As marketers, we strive to use this understanding to maximize our influence over those purchase decisions. This is the world of behavioral economics.
Loyalty and Customer Experience
When it comes to research and implementation in customer loyalty and experience, companies have two “rational” options (which are not mutually exclusive):
- Strive to understand and deliver on those experiences and aspects of the relationship that build loyalty – or at least convince customers the company is delivering on these promises
- Try to understand other ways in which the company can create unique experiences and aspects that customer will truly enjoy and desire; and work to convince customers that these are things they should value highly and aggressively seek out in the future.
While the latter approach is the ever-sexy domain of innovation and inspiration – with legendary success stories like Disney and Apple – the former is the arena in which the overwhelming majority of companies compete for customer attention and loyalty.
If we move beyond loyalty as a concept to loyalty as an expression of customer preferences made tangible in the form of Loyalty Behaviors, the connection to behavioral economics is obvious: it’s not about the delivery of some idealized “best product at the best price;” it’s about understanding what “drives” customer behaviors and then wowing customers by exceeding their expectations on those things they most value, while satisfying their expectations on their more basic needs. After they have redefined the customer experience, even the Disneys and the Apples must turn to understanding the expectations customers have regarding the experiences the companies created so the firms can continue to delight customers and deliver against the very expectations they helped to fashion.
So while the debate over behavioral economics may rage on between theorists, those of us in the applied world of marketing and customer experience and loyalty will continue to focus on what we have known has been the keystone all along. That is, trying to understand what consumers value most and then influencing how people think about a product or a company with the objective of capturing, retaining and growing customer spend.