Tuesday, February 4, 2014

Itamar Simonson and Emanuel Rosen: How the Digital Age Is Rewriting the Rule Book on Consumer Behavior

The authors of a new book on market research explain how a shift in consumer decision-making affects marketing.

In 2007, 10,000 people around the globe were asked about portable digital devices. It was part of a study conducted by the global media company Universal McCann. One of the hottest topics at the time was the first iPhone, which was announced but hadn’t yet been released. Once researchers tallied the results, they reached an interesting conclusion: Products like the iPhone are desired by consumers in countries such as Mexico or India, but not in affluent countries. The study stated: “There is no real need for a convergent product in the U.S., Germany and Japan,” places where, one researcher later theorized, users would not be motivated to replace their existing digital cameras, cellphones and MP3 players with one device that did everything.

There’s a growing feeling that something is not working with market research, where billions are spent every year but results are mixed at best. Some of the problems relate to the basic challenge of using research to predict what consumers will want (especially with respect to products that are radically different). But marketers face one additional key problem: Study participants typically indicate preferences without first checking other information sources — yet this is very different from the way people shop for many products today.

In the Universal McCann study, for example, people were asked how much they agree with the statement, “I like the idea of having one portable device to fulfill all my needs.” Indeed, there was a significant difference between the percentage of people who completely agreed with this statement in Mexico (79 percent) and in the United States (31 percent). So, in theory, people in the United States were much less excited about a phone that’s also a camera and a music player.

But it was a different story when people got closer to making a decision. They heard about the iPhone in the media, where it was declared a revolutionary device, and read blogs and reviews from real users. As iPhones started rolling into the marketplace, the idea of “having one portable device to fulfill all my needs” was replaced by actual reports from users.

It’s easy to blame the market research firm for this, but this is not our point. We are trying to explain the inherent difficulties in assessing consumers’ reaction in this new era. First, more decisions today are impacted by what we call O sources of information — “Other” information sources, such as user reviews, friend and expert opinions, price comparison tools, and emerging technologies or sources — whereas market research measures P sources — “Prior” preferences, beliefs and experiences. But let’s go beyond that: As we discussed, consumers have limited insight into their real preferences. This is especially true with respect to products that are radically different. Universal McCann correctly reported what it found. What market researchers often underestimate, though, is the degree to which consumers have difficulty imagining or anticipating a new and very different reality. What makes the task of a market research firm even trickier is that just as consumers’ expectations may be wrong (as was the case with the iPhone), there are many cases where industry expectations about what consumers will buy are wrong.

Not to mention that O-sourced information is often much more dynamic, so even if a researcher were trying to somehow account for the present effect of O, that may become largely irrelevant and out of date by the time actual purchase decisions are made. Also, beyond the unpredictability of O’s influence, decisions made under the influence of O are much “noisier” than hypothetical decisions made by an individual consumer on her own when completing a questionnaire. While a limited set of studied features might be reasonably representative of the factors that an individual consumer will consider, a larger set of reviewers and information sources introduces various unpredictable factors (for example, “coolness,” popularity, highlighting of seemingly insignificant features) that will be difficult to capture in traditional measurement.

The noise and hard-to-anticipate information sources similarly limit the usefulness of other common research techniques such as brand equity measures or pricing studies. While predicting individual decisions that are made in isolation is not a simple task, predicting the joint evaluations of many consumers and the influences of other information sources is likely to be an order of magnitude more difficult.

Indeed, trying to predict where things are going has become more challenging. While traditional consumer research can still tell a marketer if their next toothpaste will do better with purple or black stripes, it is not of great help for more radical, unfamiliar changes. There is no effective way to use market research to predict consumer reaction to major changes. When assessing new concepts, consumers tend to be locked into what they are used to and believe today, which makes them less receptive to very different concepts and more receptive to small improvements over the current state. Similarly, experts who try to predict the success or failure of radically new products are unlikely to be much more accurate than consumers. (Among other things, experts have famously made bad predictions regarding the success of the telephone, the Internet and television.) What marketers are often left with is trying to quickly figure out where things are going and what consumers and competitors appear to follow. And then try to offer a better solution. Instead of predicting vague consumer preferences (which may change anyway when it’s time to buy), these days one of the few things a marketer can do is follow O and play along to make the best of a situation they no longer control.

The current environment does not mean the end of market research, just a shift in focus with some silver linings. We expect that future market research will focus more on tracking and responding to consumers’ decisions as they occur, and less on long-term preference forecasting. Instead of measuring individual consumers’ preferences, expectations, satisfaction and loyalty, marketers should systematically track the readily available public information on review sites, user forums and other social media.

From ABSOLUTE VALUE by Itamar Simonson and Emanuel Rosen © 2014 Itamar Simonson and Emanuel Rosen. Reprinted courtesy of Harper Business, an imprint of HarperCollins Publishers.

Interview with the coauthors:

What is the focus of Absolute Value?

Simonson: We identify a previously unrecognized shift in how consumers make decisions, which leads to a diminishing role of brands, loyalty and marketing persuasion. We show that this profound shift has far-reaching implications for consumers and for the practice of marketing, and we offer a new framework that allows marketers to reach better business decisions. It all begins with how consumers assess quality in the current information-rich, socially intensive environment.

What’s changed in the way customers assess quality?

Rosen: For the first time in history, consumers have the tools to assess what we call the absolute value of things. In the past, consumers could not easily evaluate the quality of products before buying, so they depended on evaluations relative to generic, top-of-mind reference points or (often unreliable) quality proxies. Brand loyalty is one example for such a proxy — if I had a good experience with other products by Brand X, I trust this brand and will buy its product the next time. Yet we’ve all seen cases where one product by a particular company is great, but the next one is not so great. So today, many consumers have replaced these proxies with better sources of information such as reviews from other users or experts, online product demonstrations, etc., which make it easier for them to know the absolute value of the specific product or service they’re considering.

So how does this affect consumer behavior?

Simonson: Contrary to what we frequently hear nowadays, consumers will, on average, make better choices and act more rationally. When I started my career and for the next 20 years, my research showed that consumers often behaved irrationally, as economists define this term. Years ago I demonstrated what I called the compromise effect: If given a set of three cameras placed in front of them, for example, consumers will, in many cases, opt for the middle or compromise in terms of price and features. Recently, a doctoral student here at Stanford, Taly Reich, and I tried to replicate this effect, but we found something interesting: For participants who first saw what consumers usually see when they shop for a camera online — lots of options, reviews written by other consumers, feature comparison charts — the compromise effect was gone. They were no longer biased in favor of the middle option. That is, once consumers are better informed about the actual, absolute values of products and are not dependent on things like brand name or a small set of options in front of them, the effect becomes much weaker. More generally, many of the so-called irrationality effects work best when the consumer is confined to information from the marketer, which is often no longer the case. Customers are better able to evaluate products for what they are rather than just how the products are described or how they compare with other options they happen to see.

How does this shift in decision-making affect marketing?

Simonson: It should lead us to reevaluate everything we know about marketing. When consumers have easy access to nearly perfect information about product quality, things work differently. Yet we keep hearing that brands are more important than ever or that investing in customer loyalty is the best long-term strategy. We argue that the opposite is true. In an increasing number of categories, brands are losing their role as proxies for quality. Consumers’ loyalty is declining and is a weaker driver of future purchases. Positioning and persuasion techniques are less effective than in the past. Sales tactics that try to capitalize on consumer irrationality don’t work as effectively as they used to. Again, the shift from relative to absolute has far-reaching implications for managers and the practice of marketing. The marketing textbook needs to be rewritten.

How should marketers change their approach?

Rosen: The first step is to understand the mix of information sources that consumers use in assessing quality. With some products, consumers still use old proxies, and in those cases, marketers can use some traditional marketing. The shift in decision-making does not apply in the same way to toothpastes as to cars, to less-connected versus well-connected consumers, and to decisions made with versus without time pressure. We present in the book a new framework called the Influence Mix to help managers identify the mix of sources that influence their customers, and plan their marketing strategies around these sources. More specifically, we offer a tool we call the O-Continuum. O stands for “Other” information sources (as opposed to prior preferences or marketing information). O includes user reviews, expert opinions, advice from people you know on social media, etc. The key question marketers should ask is: To what extent do the customers we try to reach depend on O in making their decisions? If customers depend on O, this should affect everything from a company’s market research program to its communication strategies.

What should it change with respect to market research?

Simonson: Much of market research still measures consumer preferences in order to predict what they will buy in the future. But if your potential customers use online reviews as their main source of information, it becomes very challenging to predict their choices using traditional market research. The reason is simple: When it’s time to buy, more and more of your customers base their decisions not on their prior preferences but on new information. So you’re better off tracking these online sources directly.

What about a company’s communication strategy?

Rosen: A company’s communication strategy should derive from its customers’ Influence Mix. If your customers base their decision on user and expert reviews, it’s pointless to use advertising to try convince them that your product is better. Similarly, using banner ads to create top-of-mind brand awareness is also less important because when it’s time to buy, these consumers rely on reviews, which usually overrides any residual effect of exposure to banner ads. Instead, marketers should focus on promoting an ongoing flow of authentic content from users on retail sites.

Does the shift in consumer decision-making open any opportunities?

Simonson: In domains where customers depend on reviews, new companies can take advantage of lower barriers to entry. Companies can also diversify more easily regardless of the skills consumers associate with their particular brand. In general, one should expect greater volatility in brands’ market shares in these domains—which presents threats and opportunities, depending on your initial position.

Are there variations in how consumers rely on new information sources?

Rosen: Reliance on reviews can vary across customer segments. One segment may rely primarily on reviews, while another may rely more on the marketer as a source for information. This type of analysis should drive the marketing strategies to influence each segment. But keep in mind that the way consumers make decisions is constantly changing, so marketers should be on the lookout for game-changing technologies that change the influence mix. A segment that heavily relied on the marketer up to a few months ago may discover new information sources. Increasingly, the name of the game in marketing will be to track the sources of information your customers are using, and try to reach them with the mix of tools and channels that fits the way they decide.

Itamar Simonson is the Sebastian S. Kresge Professor of Marketing at Stanford Graduate School of Business. Emanuel Rosen, the author of the national bestseller The Anatomy of Buzz, was previously vice president, marketing, at Niles Software, where he launched the company's flagship product, EndNote.