Chapter 8 Individual Decision Making

Consumers as Problem Solvers Consumer purchase = response to problem After realization that we need/want to purchase something, we go through a series of steps in order to complete the purchase Can be instantaneous/automatic or seem like a full-time job Complicated by consumer hyperchoice

Decision-Making Process

Decision-Making Perspectives Rational perspective: Consumers: Integrate as much information as possible with what they already know about a product Weigh pluses and minuses of each alternative Arrive at a satisfactory decision that maximizes their utility Act in their own best interest When/Why are consumers irrational?

Decision-Making Perspectives (cont.) Other models of decision making: Purchase Momentum: occurs when consumers buy beyond needs satisfaction: “buying begets buying” (buying binges) Behavioral Influence Model: consumers buy based on environmental cues, such as a sale or because a friend has it Experiential Model: consumers buy based on the totality of product’s appeal including the “atmospherics”

Continuum of Buying Decision Behavior

Types of Consumer Decisions Extended problem solving (home-buying) Initiated by a motive that is central to self-concept Consumer usually believes the decision carries a fair amount of personal, financial or social risk Limited problem solving (computer buying) Buyers not as motivated to search for information or to evaluate it as rigorously Buyers use simple decision rules (“heuristics”) to evaluate and choose Habitual decision making (replacing your laundry detergent) Choices made with little to no conscious effort

Stage 1: Problem Recognition Occurs when consumer sees difference between actual state and ideal state Need recognition: actual state moves downward Opportunity recognition: ideal state moves upward Either of the above or both together will generate Problem Recognition Marketers can create: Primary demand: encourage consumers to use product category (also called “Category Demand”) Secondary demand: persuade consumers to use specific brand

Problem Recognition: Shifts in Actual or Ideal States

Stage 2: Information Search Information search: process by which consumer surveys the environment for appropriate data to make a reasonable decision. Prepurchase versus Ongoing Search Prepurchase Search Ongoing Search Determinants Involvement with purchase Involvement with product Motives Making better purchase decisions Building a bank of information for future use Outcomes Better purchase decisions Increased impulse buying

Search & Learning Types Internal search Scanning memory to assemble product alternative information External search Obtaining information from ads, retailers, catalogs, friends, family, people-watching, social media, the web, etc. Deliberate learning When consumers expend conscious effort to learn Incidental learning Mere exposure over time to conditioned stimuli and observations of others

The Economics of Information Search Consumers will gather as much data as needed to make informed decisions (is this always true?) Benefits of search must outweigh costs Consumers typically collect the most valuable information first (is this always true?)

Amount of Information Search and Product Knowledge

Do Consumers Always Search Rationally? Some consumers avoid or minimize external search, especially when time-constrained or lacking knowledge Symbolic / Self-concept related / Conspicuous items require more external search because they reflect the self-concept Brand Staying Power: We select familiar brands when the decision situation is ambiguous Variety Seeking: choosing new alternatives over more familiar ones due to their newness Why do consumers “Variety Seek”?

Common Biases in Decision-Making Mental Accounting: framing a problem in terms of gains/losses influences our decisions Segregate gains Integrate losses “Piles” of money for different purposes Sunk-Cost Fallacy We are reluctant to waste something we have paid for. We invest more in things we have already invested in Prospect Theory: risk propensities differ when consumer faces options involving gains versus those involving losses Gaining $5 is less pleasant than losing $5 is unpleasant

Choose an Alternative Option A: Get $5 for sure Option B: Play a gamble in which you have a 20% chance of winning $25 and an 80% chance of winning $0 (nothing).

Choose an Alternative Option A: Lose $5 for sure Option B: Play a gamble in which you have a 20% chance of losing $25 and an 80% chance of losing $0 (nothing).

Five Types of Perceived Product Risk

Identifying Alternatives Choice conflicts involving difficult trade-offs can arouse negative emotions. What do consumers do in these conflict situations? Delay decisions (i.e. choose not to choose) Overbuy (i.e. buy “everything”) Buy with high buyer’s remorse (i.e. cognitive dissonance) What can marketers do to reduce trade-offs or consumers’ negative perception of them?

Identifying Alternatives (cont.) Evoked Set versus consideration set Evoked Set = Brands that come to mind Consideration Set = Brands we’d consider buying We usually don’t seriously consider every brand we know about A surprisingly small number of alternatives are usually included in our evoked set (about three, on average) Marketers must focus on getting their brands into the consumer’s evoked and consideration sets. We usually refuse to give rejected brands a second chance.

Categorizing Products Basic Fact: We evaluate products in terms of what we already know about similar products (existing schemas) Marketers want to ensure that their products are correctly grouped in knowledge structures. Products that do not fit clearly and neatly into pre-conceived categories confuse consumers: Jell-O gelatin flavors for salads $100 hamburgers Frozen dog food The initial release of DVRs like TiVo Tablet Computers Halloween 3 (the greatest horror film ever made!)

Levels of Categorization

Strategic Implications of Product Categorization Product Positioning Convincing consumers that the product should be considered within a given category Products/services different on the basic or sub-ordinate classification levels may compete better on super-ordinate levels. Example: Yogurt as a “dessert”

Strategic Implications of Product Categorization (cont.) Exemplar Products Brands strongly associated with a category “call the shots” by defining the evaluative criteria and making them salient in consumers’ minds But “moderately unusual” products stimulate more information processing and positive evaluations than standard ones

Evaluative Criteria Evaluative Criteria: dimensions used to judge the merits of competing options Determinant Attributes: features we use to differentiate among our choices Criteria on which products differ typically carry more weight Marketers educate consumers about (or even invent) determinant attributes Pepsi’s / Budweiser’s freshness date stamps on beverage cans

Heuristics: Mental Shortcuts Heuristics: mental rules-of-thumb that help consumers make quicker / less mentally-taxing decisions Examples: higher price = higher quality buy the same brand your mother bought buy the cheapest buy the brand with the snazziest packaging Can lead to bad decisions due to incomplete information and use of neglectful decision rules

Consumers’ Marketing Beliefs Consumer assumptions about companies, products, and stores that become shortcuts for decisions (i.e. heuristics!) Common Marketing Beliefs All brands are basically the same (“Brand Parity”) Price-quality relationship: we tend to get what we pay for Larger stores offer better prices than smaller stores Items tied to “giveaways” are not a good value Over-advertised items are not a good value

Country-of-Origin Effects Ethnocentric Biases: We rate our own country’s products more favorably than foreigners do. General notion: Industrialized countries make better products than developing countries Certain countries / regions are known and well-respected for certain products Croissants and wine in France German / Japanese cars American Entertainment and Marketing

Choosing Familiar Brand Names Zipf’s Law: our tendency to prefer a number one brand substantially more than the “inferior” ones (i.e. second and third ranked brands) Brands that dominate the market are typically substantially more profitable than their nearest competitors (the “80/20 Rule”) Much bigger profit and reputational gains by moving from 2nd place to 1st place than 3rd place to 2nd place

Decision Rules Non-Compensatory Decision Processes Products with unfavorable evaluations on attributes cannot be compensated for by more favorable evaluations on other attributes Types of Non-Compensatory Decision Rules: Lexicographic Rule: consumers select the brand that is the best on the most important attribute Elimination-by-Aspects Rule: the buyer automatically rejects any brands that do not have certain attributes or levels of the attributes Conjunctive rule: entails processing by brand

Decision Rules (cont.) Compensatory Decision Processes: product can make up for their unfavorable attributes by doing well on other attributes Types of Compensatory Decision Rules: Simple Additive Rule: the consumer merely chooses the alternative that has the largest number of positive attributes Weighted Additive Rule: the consumer also takes into account the relative importance of positively rated attributes, essentially multiplying brand ratings by importance weights This is Fishbein’s Multi-Attribute Model College choice example