Why Consumer Psychology Matters
On the topic of value investing, Warren Buffett once quipped: "Risk comes from not knowing what you're doing”. This nugget of truth isn't just for Wall Street; it's equally relevant in the fast-paced world of marketing, and in terms of knowing what you’re doing, grasping some principles of consumer psychology can go a long way.
Think of value investing as a Sherlock Holmes adventure—sleuthing through financial reports and market trends to uncover hidden gems. Similarly, savvy marketers play detective—hypothesizing, testing, and analyzing data to unlock the right media mix to drive business results. And just as Holmes meticulously pieces together clues to solve a case, marketers keenly observe key performance indicators to make informed decisions that minimize uncertainty and maximize the effectiveness of their strategies.
But here's the twist: just as Sherlock encounters the mercurial Moriarty, marketers must contend with the at times irrational nature of consumer behavior. And despite the most cutting-edge trend analyses, human psychology can throw a spanner in the works—call it the "Mr. Market" of marketing.
While humans can behave in ways that are not always rational, these behaviors are often predictable. That’s why understanding consumer psychology allows marketers to better interpret their data and develop more effective strategies.
To illustrate the notion of predictable irrationality, let’s consider a consumer who is deciding between buying a Guaranteed Investment Certificate (GIC) as part of a short-term savings strategy.
GIC A is from a well-known bank and guarantees a 5% interest rate over 12 months
GIC B is from an unknown bank but guarantees a 6% return over 12 months
Strictly from a rational, output-optimization perspective, one would expect GIC B to be preferred.
That said, many (if not most) consumers will choose GIC A, favoring less output for lower perceived risk of possibly losing one’s hard-earned savings. This bias is but one among hundreds studied by consumer psychologists and reflects a key component of prospect theory known as loss aversion: the idea that consumers tend to place greater weight on avoiding losses than on achieving gains. In the case of our example, considering loss aversion, the less-known provider may be wise to reinforce that GIC B is underscored by insurance that protects the consumer’s original deposit and any interest earned, rather than just paying for preferred placement on the trading desk’s search engine.
Of course, much like in the stock market, luck still plays a role. Buffett himself admits luck's part in his success. But in the dynamic realm of marketing, understanding consumer behavior, and all its foibles, gives marketers the ultimate edge to make an impact and drive results.
About The author
Richard is founder of STEP MARKETING and faculty lecturer at Concordia University’s John Molson School Business in Montreal.
After 15+ years of growing multimillion dollar e-commerce businesses and creating integrated marketing campaigns for leaders in CPG and retail, Richard created STEP MARKETING to help businesses at all stages scale their digital performance and drive profitable growth.
Richard’s been an invited speaker at dozens of business conferences across North America and has co-authored publications in peer-reviewed journals, namely the Journal of Business Research and the Journal of Behavioral Decision Making.