The trap of the rational model

April 29, 2016

Overwhelmed by the evidence of human emotion as the driving (if subconscious) element in decision-making, we discard the traditional economic theory that people act rationally. (Contrary to classic economics theory, empirical research in the field of behavioral economics reveals that purchasing choices are perhaps 30% rational decision-making and 70% based on emotional, psychological and perceptual factors.) Brand experts and advertisers have known this all along without the hard evidence. Successful brands make the buyer feel a certain way. In the case of luxury brands, advertising feeds into customer fantasy. The problem with assuming rational price-oriented approaches such as promotions and discounts is that they do not inspire loyalty, as many retailers offering Groupon and LivingSocial specials have discovered to their dismay. Loyalty brings a much-coveted price insensitivity, the holy grail of a brand and marketing strategy. If buying decisions have more to do with an emotional connection to a brand or company, how does a company elicit an emotional response from customers? Implications for the price elasticity of demand, and therefore profitability, are enormous. Specifically, Gallup finds that, in their words: “In the retail banking industry, customers who are fully engaged bring 37% more annual revenue to their primary bank than do customers who are actively disengaged. Fully engaged banking customers also have more products with their bank, from checking and savings accounts to mortgages and auto loans. Plus, they have higher deposit balances in their accounts than less engaged customers with the same products do. In the consumer electronics industry, fully engaged shoppers make 44% more visits per year to their preferred retailer than do actively disengaged shoppers. And when they do visit their preferred electronics retailer, these fully engaged shoppers purchase more items than they originally intended to. On average, they spend $373 per shopping trip, while actively disengaged customers spend $289 per trip. Gallup found similar results in other industries, including the restaurant, hospitality, and insurance industries.

 

How do we get there? Gallup’s study suggests that keeping promises and inspiring customer pride are key but doesn’t offer insight into how. Certainly the two are quite different and require reflection. For the former, developing and executing policies that respect the customer’s time and effort throughout the buying and delivery process would be required. Regarding the latter, customer pride relates not only to functional, innovative products and services that delight customers but also to extends to corporate policies on social issues. Think of Apple’s (RED) program to fight HIV and AIDS and the more recent support of the LGBT community by giant retailer Target, winning the loyalty of some and of course disloyalty of others.

 

Double bottom-line goals, thinking beyond financial stakeholders, could well build pride and loyalty, as Team B and Benefits Corporations proponents argue. In some industries, giving away free valuable content builds engagement. Interestingly, it also turns out, to our surprise, that even satisfied customers are not necessarily loyal if they are not engaged. Let that sink in a moment. Rationally satisfied but emotionally disengaged customers who have only their price and performance needs met can have the same behavioral characteristics (i.e., not buying again) as dissatisfied customers, according to Gallup research. This is kind of scary if your company is focused on customer satisfaction to the exclusion of emotional engagement.

 

On the other hand it’s encouraging that engagement might not even require more commitment or expense but rather thought. Again, it gets back to what brand strategists already knew: In the long run, the brand is your most valuable asset (apart from your people) and how you make people feel about your brand through your values, your investments, your support, your commitment and your interest in your customers truly matters. Corporate strategies often evolve from an executive vision of either leading with the most innovative product, offering the lowest price, or beating the competition on service. To sustain an advantage in the long run and leverage the premium of the emotionally engaged customer, consider human nature, irrational decision-making and what you are doing to make your customers feel proud of you. Let’s remember it’s not the same thing as customer satisfaction in the rational model.

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