Dynamics of Customer Decisions

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Event background

Knowledge and understanding of consumer behaviour has greatly expanded in recent years, while at the same time there has been rapid change in the way that consumers behave in markets. The OFT needs to have a comprehensive understanding of consumer decision-making to ensure that our analysis of markets, firms and consumers is as accurate as it can be.

We are therefore keen to learn from the sophisticated understanding of consumers that businesses and their marketers have developed, and to share this learning with others from business, government, academia and regulators. The OFT's Dynamics of Customer Decisions event, held on 26 April 2010, formed part of this work by drawing together advanced thinking and insights in this area, looking at the issues involved from a range of different perspectives.

A panel of five eminent speakers from the business world were invited to set out evidenced insights into consumer behaviour, and then to discuss those with a select audience of representatives and experts from business, government, regulators, consumer bodies and academia. Our aims were to inform OFT's work and that of others present, to develop common understanding of these issues through discussion, and to reduce the need for regulation and intervention further down the line.

Contact details for feedback questions:

If you have any comments, feedback or questions regarding this event, please contact Mark Dungworth (mark.dungworth@oft.gsi.gov.uk or 020 7211 8241).

• Download the event programme and speaker biographies (pdf 59kb)

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Synopsis of event proceedings

This section briefly summarises a selection of opinions and observations expressed by individual participants at the Trust in Markets event. The discussion was held under Chatham House rules. It should not be inferred that the OFT necessarily agrees with any of the views included here.

Tracking behaviour and targeting customers

• Consumers' stated attitudes and actual behaviour can be very different, and the focus in marketing and business has been slowly shifting from the former to the latter. The range of different behaviour between consumers is much wider than the range of attitudes.
• Firms (especially in retail) have an ever-increasing set of data on consumers' behaviour, tracking not just what they buy but whole transactions and decision journeys - who's buying what, where, when, why and how - and feeding into increasingly individualised offerings to consumers. 
• Firms use data to build up very detailed pictures of individuals and customer groups. They do not aggregate information to the level of the 'average consumer', because this would give them a misleading picture of what their customers want (e.g. if they had two main but very different groups of consumers).
• Firms' increased ability to target individuals can have significant benefits for consumers, who get better deals in exchange for access to their data. However, there is an inherent tension between understanding individual consumers and responding to this personal insight, and being widely accessible to all consumers, that firms have to manage very carefully.

Consumer habits

• Consumers' existing habits are a significant factor in their behaviour, reducing the number of conscious decisions that they have to make. This means that behaviour can't be properly understood purely by analysing a series of individual decisions.
• Habits can be bad for consumers if they don't reevaluate decisions that they've previously made, because deals and products can change frequently. One solution is for markets to periodically remind people to review decisions they've already made and consider switching; online markets are particularly good at this as they can do it without adding pressure or extra risk. It's important to disaggregate sales from advice in this context, as consumers will ignore or be hostile to reminders that are seen as sales pitches.

Social norms and behaviour

• Consumers behave differently in different countries, underlining the importance of social norms in decision-making - people's decisions are heavily influenced by the attitudes and behaviours of those around them, not just their own preferences. For example, 50% of the EU's ready meals are eaten in the UK while in other countries they are far less popular, and German consumers are far less likely to give out their credit card details online than people in the UK.
• Social norms and markets react to each other - so for example the increase in availability of vouchers for restaurants has led to social activity based around using these vouchers, which in turn changes the dynamics of the restaurant market.
• All markets are open to change eventually, even where social norms underpin current structures - they will eventually change where there is a better choice available to consumers and no artificial barriers, e.g. those imposed by government.

Social Behaviour and Communications

• A key challenge for firms and brands is to manage their effect on consumers' social behaviour, such as passing on word of mouth. Consumers' 'herd mentality' mean that poor feedback or negative stories can spread widely and can cause significant harm to a business.
• Messages from firms to consumers have to be delicately handled, not just in direct communications but also in messages consumers take from indirect contact (e.g. via the media or social networking). None of these channels of communication between the firm and consumer is 'neutral', and they all affect messages differently (e.g. the media can amplify negative stories on health products) - this has both risks and opportunities for marketing.
• It can be very hard for marketers to get their heads around the small-scale interactions that occur on social networking platforms, and consumers do not react well to 'traditional' marketing trying to intervene in these areas. 
• Companies building platforms have to be very open about the balance between their marketing and social value balance, and get this balance right, to attract and keep users. The user has control when interacting with the platform, and any marketing they encounter has to add value for the user - or they'll just leave.

Choice and comparisons

• Consumers always reward better channels when they become available - they make better decisions when you give them a wider choice and transparency on what they're buying, and spend more time and money in markets with these features. 
• Real, detailed comparison often wasn't fully possible before online shopping - e.g. you couldn't go to four different supermarkets, calculate what your bill would be at each one, then make a decision. Consumers are gaining access to much better information on all aspects of their purchases, allowing for easier comparisons, and this will lead to change in every market where it happens.
• People don't make comparisons on purely numerical grounds. Price and value are not the same, and people include many other factors in their decisions besides price - not all of which can be described as 'rational'.

Direct marketing

• Traditional direct marketing techniques don't make good use of consumer data and are a comparatively expensive way of getting customers. The key for direct marketing in future is better targeting of deals and vouchers to individual consumers, rather than offering all recipients the same deal.
• For example by large financial services firms, and have their advantages - they give people less scope to defer decisions and reduce consumer inertia, making them particularly successful in areas like encouraging charitable giving.

Intermediaries, complexity and trust

• Consumers have far more information than they can possibly assess and factor into their conscious decision-making. They simply wouldn't have enough time, even if they were able to take in the full complexity of all of the markets they interact with. 
• The internet destroys and then builds new industries, filling the spaces that it creates, and we will see new internet intermediaries like comparison websites in lots of markets. Many markets that have been fragmented in recent years will need to be drawn back together by intermediaries who can help consumers navigate them (e.g. 'one-stop shops' for purchasing holidays online as a solution to disintermediation and complexity). 
• There may be many different roles in intermediating markets for firms, for brands and for the state, any of which can help consumers to manage decision-making in different circumstances.
• Key to putting successful intermediaries together is building trust into their systems, so that consumers will use them. However, all trust systems will be exploited and 'gamed' to some extent, and businesses have to be smart about this.

Pricing and trust in brands

• Some brands are successful without being seen as generally trustworthy. This may be because these brands are competing purely on price terms, and this approach may not be sustainable in the longer term; it may also be that there is little real competition for their specific products. 
• Cheap goods become less valuable precisely because they are low-cost and this has a stigma attached to it. However, brands can be known for low prices without necessarily being viewed as inferior if consumers can see why the products are cheaper. 
• Low-cost airlines have managed to avoid this effect because they do most of their sales online - hence people can see that their tickets cost less because selling online is cheaper, avoiding the assumption that they're 'worth' less.

Value and decisions

• Value and decision-making can be separated - there's a difference between making things saleable, and making sales. Perceived value is in some cases better than actual value, so there should not be a stigma to creating perceived value.
• Human value judgment is not founded on a consistent basis, which is why psychological influences like framing have a significant effect on perceived value. Human preferences can't be valued numerically, and all value is subjective, but humans are biased against accepting this.

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Presentation documents

Moneysupermarket (pdf 1.1M)

Other presentations to follow.

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