Blog Detail

Decoding the Customer Rationale


Is the consumer rational or irrational?

Do you sometimes struggle to understand your customers? You're not alone! Making choices is not as simple or as single-minded as the classical economists thought.

Do you sometimes struggle to understand your customers?

You're not alone!

The purchasing patterns of customers can be perplexing.

Classical economists used to posit that, since consumers are rational, we make decisions to maximise our pleasure, end of the story.

Whereas the view of neoclassical consumer theory is that choices are good. Trade is good. Consumers make decisions based on all available choices.

However, is that the case? All economics students, kindly refrain from being horrified that the assumption for all of your years of study might be wrong! Let us explore the rationality of the consumer in this blog.

The “Rational” Consumer

The idea of the rational consumer is credited to the father of economics Adam Smith. In his 1759 book, The Theory of Moral Sentiments, Smith introduced the concept of "Homo Economicus," who is a consumer who purchases with self-interest and the sharpness of an economist.

With the concept of the "budget line" - economists can pinpoint the exact point of optimal consumption: the point where you're able to buy the most satisfaction with your money. Consumer spending was therefore rationalised as such. Which sounds great and easy, but unfortunately offers both a simplistic and idealistic perspective for consumers.

New Ideology proposes “Irrational Consumer”

Behavioural economics proposes that we are not rational consumers.

Initially, this new ideology of behavioural economics and the irrational consumer wasn’t met with much enthusiasm within the commercial industry.

There is an interesting difference in view between traditional advertisers and psychology. On the one hand, traditional advertisers are fierce advocates of the Unique Selling Proposition(USP): highlighting a specific benefit of a product to set it apart from the opposition. Whereas the new wave of psychologists favoured in-depth research into the (largely) subconscious motivations of the consumer and leaned towards strategizing on empathy rather than detailed qualities.

Our take

Our counter against the rational consumer argument comes from the fact that we're social animals. Thereby, we let our friends and family and tribes do our thinking for us. In a fascinating example, Korean peasant women within the same village tend to use the same contraception - even though there is "substantial, persistent diversity across villages." This pattern could not be explained by income, education, or price. Word-of-mouth explained practically all the difference.

Making choices is not as simple or as single-minded as the classical economists thought. A lot of behaviour is consistent with the pursuit of self-interest, but in novel or ambiguous decision-making environments there is a good chance that our habits will fail us and inconsistencies in the way we process information will undo us.

After many years of surveying consumers for our clients’ marketing research, our take is that people don't like making decisions. Consumers have habits, they like thinking automatically. So sometimes they avoid making choices altogether because it stresses them out. Why is that? And how might, say, a company use that superior understanding of consumer theory to make consumers behave a certain way?

How to market to YOUR consumer

McDonald's is successful because it knows what to expect based on its large database of customer behaviour. They have created a brand people trust. A "30-day free trial" or "satisfaction or your money back" or "bring us a better price and we will refund the difference" are offered by them to promote the idea that they can be trusted.

We will break factors that influence the average consumer down into 3 major points:

1. Emotions

Emotions have long been known to shape our choices in many ways. We use a cognitive appraisal to anticipate the emotions we expect with an upcoming (purchase) decision. Though that may sound like a rational thing to do, not all appraisals are.

For instance, anticipating guilt can be good when you’re on a diet and craving some chocolate. But anticipating fear might scare you out of doing things you want to do - such as stopping people who are afraid of flying from going on vacation by plane.

The connections between decisions and emotions are so strong that they even defy logic. For example, we know that accidents happen by car, yet this doesn’t dissuade us from using them. But that's not all.

Consumption by itself can also be a means to an end when it comes to regulating our emotions or affirming our self-image by buying status goods.

Just think about it: Did I have to order takeout after that tough day at work? Did I have to buy those expensive new clothes?

Your rational self might disagree, but your emotions are telling you: “Go ahead, you deserve this right now.”

Application of emotion:

Using humour in advertisements has shown to not only increase people’s opinion of a brand but also help them to remember the brand better.

Anticipated regret, on the other hand, can be quite a powerful tool as well, convincing shoppers to act faster. Displaying prompts on a product page that say “Don’t wait too long, only a few items left!” is likely to trigger a person’s fear of missing out.

In this case, consumers will suddenly feel the urge to quickly finish their transaction, as they don’t want to feel disappointed if the item is sold out.

2. Context

Most decisions are context-specific, meaning they are influenced by situational factors. This can relate to anything ranging from environment, past decisions, alternative options, etc.

In particular, the phrasing of a message is known to greatly affect a person’s preferences - as established in Tversky’s and Kahneman’s famous experiment on psychological framing. In this study, people were presented with a hypothetical scenario in which a group of 600 people were caught with the outbreak of a deadly disease and asked to choose between two possible solutions. Most people preferred saving 200 people for sure, rather than taking a 33% chance of saving everyone (with a 66% that all would die).

However, putting these options in a negative frame significantly changed people’s preferences. Suddenly, the 33% that no one would die (with a 66% that everyone would) seemed more preferable than a guarantee that 400 people would die.

Conclusion: people act risk-averse when there are things to gain, but risk-seeking when there’s something to lose - even when the effective outcome of both options is the same.

Application of context:

When you offer a basic and a premium package in your store and you want more people to choose the second option, you might try making use of the decoy effect.

Adding a third option that is similar in price to the premium option, but offers significantly fewer advantages, will automatically make the premium option seem more attractive.

3. Time

Lastly, consumer behaviour is not just irrational between emotions and situations, but also across different moments in time. As consumers, we often find ourselves faced with intertemporal choices. These are decisions in which the moment of choice and its consequences are separated by time.

In conclusion,

The evidence proves there’s no such thing as a 100% rational consumer. Your consumers need to be studied before you can determine what kind of consumers they are. The good thing is, that knowing and keeping track of all people’s little quirks and imperfections is what forces marketers and advertisers to be more empathetic and develop their creative skills.

Just think of the countless memorable campaigns we’ve seen throughout the years as a result of companies acknowledging their clients as actual people rather than numbers.

Developing an understanding of your consumer requires careful, rigorous and reliable research along with immaculate execution. Aeon Research provides you with one of these crucial aspects: the research. Leave the data to us and you will have more time to execute and strategize with perfection. Contact us for personalised research services.

AEON

Published On - June 27, 2022