How to Understand the Notoriously Irrational Consumer

http://www.innovationmanagement.se/2012/02/28/how-to-understand-the-notoriously-irrational-consumer/

Innovation Psychology

The hyped word innovation may soon be spelled innoflation as we are busy filling it with corporate lingo. Why then, do we still see so few results of innovation work outside power point descriptions and strategy discussions in the board rooms? Despite an ever increasing knowledge in how to manage innovation we still seem to struggle in getting it done. Why? There are strong psychological hurdles that stop us from going from thinking about innovation into doing innovation. The human factor revealed in our irrational psychological behavior explored in e.g. Prospect Theory are still somewhat white fields in the map of innovation. Follow Bengt, Leif and Susanna as they delve deeper into the area of innovation psychology, searching for explanations that help organizations go from thinking innovation to doing innovation.

Sometimes we come up with an invention which we believe is a no-brainer. It is a "sure winner, the innovation of the year", but later we are surprised that it is not appreciated at all on the market as it was internally within the company. In other cases we conduct thorough Customer Preference Tests (CPTs), just to find when the real launch is made –there is a totally different reaction from the market than the CPT earlier indicated. Why is this so? Well, it may be due to the Endowment Effect and the Status Quo Bias. Two effects coined by the Nobel laureate in economy 2002, Daniel Kahneman, who actually was a psychologist (!), not an economist….

The Endowment Effect

You overvalue what you are given by roughly 3 times.

In this case a test was conducted where one group of people was given a sum corresponding to 15 dollars and told to keep the money for a week, but they were not allowed to spend it. They borrowed the money under the condition that it be used in a game. A second group was given a coffee cup and urged not to use it. After a week the first group was told that they were to buy a coffee cup looking like the one the second group had received – and they were to write down the price they thought was fair for this cup – they should buy it for that price and give the rest of the money back together with the cup they purchased. The average sum corresponded to 5 dollars. The second group was told that they should sell their cups and that they could not keep the money. The average sum they appreciated for the cup was 14 dollars.  This shows that you overvalue what you are given ~3 times.

The Status Quo Bias

You overvalue what you have and your final choice is not reflected by your initial preference.

A group of 100 persons was presented with a choice of getting coffee cups or chocolate bars, both roughly worth the same. About 50 persons chose the cups, the other 50 chose the chocolate bars – although there was an abundance of both. Therefore, the preference was 50% for each choice. Another group of 100 new people, but from the same population, were divided in 2 groups of 50 each and they were not given the possibility to choose, but the cups were given to the first group of 50 and chocolate bars were given to the second. We then learned that 25 persons in each group (50%) was not satisfied with what they received.

After 1 hour the groups were asked whether they would like to change to the other option, but only about 15 persons (30%) of each group wanted to change, not 50% as would have been expected.  When the question was asked 1 week later only 1 %, not 50%, wanted to change.

Two lessons learned

1. Consumers overvalue what they have or have been given  (are you surprised??)
2. The Consumers' final choice was not reflected by their initial preference. Although they actually stated they wanted to have something else in the beginning, e.g. a cup, they got strongly attached to what they were given instead, the chocolate bar. Therefore if a customer survey would have been carried out and a product  development of coffee cups was made based on the outcome of that survey – we would have developed the wrong product.

Take Aways

Do not over-rely on the outcome of Market Research. There are predictably irrational reasons why consumers say one thing and actually do the other.  There is only one sure way to check if they really appreciate what you have come up with or if it is only lip service…..  to test it live – however initially this should be done at as small scale as possible. You can choose geographical test markets or so called Lead Customers or Early Adopters depending on what you try to accomplish.

About the author

Bengt Järrehult is Fellow Scientist Innovation at SCA, a global hygiene products and paper company. He is also adjunct professor and visiting professor resp. at 2 departments of Lund University in Sweden. He is an avid reader of and presenter on the topics of innovation, especially on breakthrough innovation and the psychological hurdles that exist to achieve this, hurdles that we may or may not be aware of. He is of the opinion that most companies more or less know what to do to become more innovative. What they don't know is what really hinders them from doing these measures…

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