Part Two – The Irrational Consumer
By: Ilan MannApril 14, 2020
This is part two of an ongoing series about consumer behaviour. You are strongly encouraged to read part one here before reading this post.
If all of your customers were perfectly rational, and could instantly calculate with a high degree of accuracy the trade-off between the value you are providing, and the price that you are asking in return, all of marketing would be as simple as the following:
- Find the people for whom the value is highest
- Communicate that value to them in clear, economic terms
- Set the price such that the price plus associated transaction costs equal slightly (if barely) less than the value
Indeed, a lot of traditional business philosophy is based around the idea that that is indeed the crux of marketing (I don’t want to diminish the importance of efficiently finding people for whom your product or service delivers a lot of value, and clearly communicating that value).
But traditional economic models are based on the idea that we make considered, rational purchasing decisions. If a pound of potatoes is selling for $3, and a 5-pound bag of the same potatoes is selling for $14 dollars, Homo Economicus should maximize her self interest and buy the bag of potatoes.
Making that kind of decision may be possible, and even common, when buying just one item at one store.
But when it comes to reality, making daily purchasing decisions end up being a lot more like driving a car than like doing a math problem. You need to consider not just the cost of each pound of potato, but also the cost in energy of lugging that bag of potatoes to your car, the cost to your peace of mind when your children complain that they have to eat potatoes for a fourth time this week, because you need to use up the 5-pound bag before the potatoes go bad, the cost in pantry space, etc…
And that’s just one item on your grocery list of 20 items that you need to buy after a long day of work. You don’t have the mental energy to engage system 2 that much at the end of a long day!
System 2 wants to compare prices across a dozen different stores, quantities, and brands. System 1 wants to get this shopping done quickly and use your mental energy for better things.
So system 1 engages what Tversky and Kahneman call “heuristics” – basically mental shortcuts – like preconceived notions, prejudices, and emotional responses.
For example: “I want cheap groceries. Walmart’s brand is synonymous with inexpensive.”
“I want cheap groceries, I’ll buy the no-name brand.”
“My mom used to buy the 5-pound bag of potatoes. My mom is a smart and savvy shopper. I’ll buy that brand.”
Except for that our purchasing decisions are not even as sophisticated as that, and our mental process is not even as thoughtful as that.
The above thought process manifests itself as “I’m looking for potatoes, I’m at Walmart, I recognize that bag of potatoes from my childhood, potatoes meet shopping cart.”
These heuristics – biases, emotional responses, mental shortcuts, logical fallacies, irrational behaviours – drive so many of our purchase decisions, whether we’re buying a $5 bag of potatoes or a $50,000 car.
We simply don’t have the mental capacity/energy to engage system 2 to slowly and rationally calculate all of the different factors at play, unless we intentionally and purposefully spend the time to do so – and that kind of considered approach to buying is exactly what you should do when making a big purchase.
This isn’t about smart people v.s. dumb people, or educated consumers v.s. irrational consumers. Everyone is subject to these limitations. If you don’t believe that, you should watch the video below:
Understanding why consumer behaviour is such a strong force in purchasing decisions is half the battle. The other half is understanding how to capitalize on consumer behaviour.
While traditional economic models suggest that the competitor with the best price will win the consumer’s business, behavioural economics paints a substantially more complicated picture:
Brand A has a better price, but:
I associate brand B with quality.
I trust the salesperson at brand B to not sneak any hidden costs by me.
I find it easy to talk to the service guy at brand B.
My father drove a car from brand B, and he let me drive it sometimes. I’m familiar with it. I don’t need to learn anything new about what all the buttons and controls do.
If I was making all of those calculations using only my rational, considerate, slow-thinking system 2, I might phrase the argument like this:
“Brand A costs $2,000 less. I value the quality that I associate with brand B at $1,200 in future frustration saved, in extra months and years that I expect to be able to drive the car, and in resale value. I value the trust that I have in the salesperson at brand B at $800 in hidden costs that it’s going to save me. I value the relationship that I have with the service guy at brand B $450 in time that it’s going to save me explaining my problems to him over the next 5 years, and extra bells and whistles that he isn’t going to try to pressure me into buying. I value my comfort with brand B at $150 it’s going to save me in time and mental anguish figuring out those damned buttons over the first few months.”
Therefore, I consider brand B worth $600 more than brand A.
Except all of those calculations are actually made using system 1 – that is to say, very quickly.
If I were to do the math, I may discover that I’m unlikely to incur even $250 of extra expenses over the life of the car by working with a less trusted service professional. But my trust in the service guy? May be worth more to me than a $500 discount, may be worth more than a $5,000 discount, and I can’t tell you why; that’s how I feel, I haven’t slowed down my thinking enough to think about it, and I’m not going to. I have cognitive biases, emotions, and irrational tendencies at play, and I’m doing the math very, very quickly as I go along.
In the next part of this series, we will look at how some of these cognitive biases come in to play when you’re sending mail to your customers, donors, prospects, stakeholders, voters, employees, or guests.