By Michael Baltes
Decisions, decisions. Consumers make hundreds each day, from the mundane (do I buy Tropicana or Minute Maid orange juice?) to the important (do I lock in a fixed or adjustable rate mortgage?) to the life and death (do I undergo a screening for breast or prostate cancer?).
While many consumers recognize that their decisions are important, few think very hard about how they actually make them. Barbara Kahn, a professor of marketing at Wharton, does. She has spent more than a decade researching and discovering the intricacies of consumer decision making — everything from why people seek variety, to how much they’re willing to pay for a product or service, to how likely they are to undergo life-threatening medical treatment.
“My research focuses on the complicated processes that go into consumer decision making,” says Kahn. For example, “consumers sometimes want something just for the sake of variety, even if it’s not what they like the most. The more companies understand the way consumers make decisions, the easier it is to focus on the customers’ needs. It may sound obvious, but it’s not.”
What is obvious is the resurgence of marketing and its growing influence in the executive suite. According to a recent survey by the Economist Intelligence Unit for Korn/Ferry International, 37 percent of top executives in international companies now believe a marketing background provides the fastest path to the CEO’s chair. By contrast, only 14 percent say finance is the best route.
That, according to Kahn, is not surprising given deregulation, the Internet and an around-the- clock, around-the-globe business climate which has triggered an emphasis on marketing in industries that historically haven’t emphasized it, such as utilities, health care and telecommunications.
Marketing has also cast its net across national boundaries, in some unusual ways. For example, Thailand’s Siam Cement, one of Asia’s largest cement producers, is expanding its base manufacturing business into products such as bathroom fixtures and sinks, high-quality roofing tile and possibly a Home Depot-like store. As the company branches out, marketing will play a much more prominent strategic role, says Kahn, who worked with Siam Cement as part of an executive education program. “Even in products like bathroom fixtures there is an issue of beauty, aesthetics, durability, brand name and prestige that is becoming more important to end users. Roofs are becoming a prestige item on houses.”
The fact that companies are printing their names on bathroom fixtures and inside furniture drawers suggests that they’re trying to build a brand identity, adds Kahn. “One way to achieve this is to use consistent symbols in everything from labels on the product to packaging to advertising copy.”
Kahn, who earned a BA in English literature from the University of Rochester, began her marketing career after writing advertising copy and promoting environmental initiatives in Washington state. She earned an MBA, MPhil and PhD in marketing from Columbia University.
Kahn became a full-time member of the Wharton faculty in 1990 and has also held teaching posts at the University of Tokyo, University of Sydney (Australia), UCLA and Pace University. She has consulted with organizations such as UPS, Bell Atlantic and Cigna. Below she discusses some of her research findings as well as trends in the field of marketing.
“What’s interesting about consumer decision making in high stakes areas like medicine, finance and real estate is that it tends to be stressful due to high consequence and uncertainty,” Kahn says. “Also, people may exhibit systematic biases in memory or in decision making, which can result in irrational and often poor judgments. For example, people’s memory of objective information may be biased by such factors as fear or overconfidence. Research historically shows that naïve, or non-expert, decision makers may not deal well with uncertainty.”
Take the health care field. “People generally did what doctors told them to do and had little involvement in the decision making,” Kahn says. “Now, with HMOs and the ability to choose his or her own insurance, the patient is a real decision maker.
“A woman who has just been diagnosed with breast cancer, for example, has to learn very quickly about her disease and its possible treatment options. She will no doubt have to make difficult trade-offs having to do with quality-of-life issues vs. survival rates. Since the outcomes of her decisions are uncertain, they are clearly risky. The woman is also likely to experience considerable stress and intense emotions during this period. People who don’t want to think about death or a lower quality of life due to a debilitating illness may not be making an optimal decision because they would rather not deal with those trade-offs.”
Marketers should pay attention not only to how people make health care decisions, but also to what kind of promotional campaigns can encourage behavior promoting good health, says Kahn. “For example, letters recommending mammography that included the name of the target person were significantly more successful in motivating women to sign up for this procedure than form letters without the name,” according to recent research.
Another factor that has an impact on medical decisions is the growing influence of HMOs and their emphasis on routine tests for diseases such as breast and prostate cancer. Unfortunately, says Kahn, some of those tests have high rates of false positive results, which may wreak havoc with a patient’s decision-making ability. Kahn and Wharton colleague Mary Frances Luce are currently studying the impact of false positives on women undergoing mammograms. “We’re curious to see how a false positive affects a person’s subsequent decision to get another mammogram in a year,” Kahn says.
“Companies have not been paying enough attention to the psychological risks caused by inaccurate test results,” she adds. “Our evidence seems to indicate that [inaccurate test results] do influence people’s feeling of vulnerability and increase stress.” From a consumer education standpoint, companies like Bristol-Meyers Squibb and Johnson & Johnson that make various home testing kits need to anticipate the mistakes a customer might make in administering a test. “If you can help the customer learn to take the tests properly, mistakes are less likely, which insures more accurate test results. That should lead to increases in loyalty towards the test manufacturers.”
Kahn and Luce surveyed the factors that influence the likelihood of taking a test. “It’s critical for companies selling products over the counter like pharmaceuticals and HIV self-diagnosing test kits,” Kahn says.
“How expensive is the test? How painful is it? What is the likelihood of having the disease? How expensive or painful is the treatment? We’re in the process of analyzing data that may help identify which factors are going to make people more likely to take a test. The answers can influence things like ad copy, packaging, labeling and/or where the test is ultimately sold.”
In any type of decision making, Kahn says, it is important for consumers to identify decision traps. Under stressful circumstances, for example, individuals may resort to easy, and seemingly more justifiable, decision rules.
Kahn points to the whole area of money management where people who are novices about financial investments may not want to think about the trade-off between risk and return because traditionally someone else — such as the benefits manager of their pension fund — made investment decisions for them. A sophisticated investor, on the other hand, knows that you have to trade off risk against return. “A novice avoids making that trade off because he or she doesn’t like thinking about the possibility of a loss. It’s easier to go with the risk-averse strategy — putting money into a certificate of deposit, for example, instead of the stock market — which is not always a good investment strategy. Experts have biases, too, but they tend to be a little better calibrated.”
When consumers access information, they don’t necessarily treat it in the same way professionals treat it, nor do they think they should, Kahn says. “They have expectations about how doctors, financial advisors, or other experts ought to make decisions that they don’t place on themselves.”
In a recent study with Jonathan Baron, a psychology professor at the University of Pennsylvania, Kahn found that people tend to use simpler decision rules when making their own choices, but they expect their doctor or financial advisor to use a more complex decision process that considers all the relevant information available.
What this means for consumers who are now making more of these decisions themselves is the need for decision tools, says Kahn. Already a number of marketers have come up with various “smart agents” such as software for tax preparation, financial investments and medical diagnostics. The World Wide Web alone has created an explosion in the amount of information available to a consumer.
“Smart agents can sometimes play the role of a lawyer, an accountant or even a doctor,” Kahn says. For example, health care area interactive videos, such as those developed by the Foundation for Informed Medical Decision Making in Hanover, N.H., allow patients to educate themselves about the details of their medical conditions on the basis of personalized information entered for each individual. In financial investments, new software packages provide consumers with information on investment opportunities, tax planning and estate management based on a consumer’s own financial profile.
These smart agents “allow you to slowly, and by yourself, sift through a customized program and understand the different options and decisions you’re going to make,” Kahn says. “You’re probably going to see more and more of that. It’s not to say that the doctor or financial advisor is not important. It’s that a consumer can become a more informed partner. If we as marketers understand and predict when consumers are either making mistakes or where they’re likely to be uncomfortable in their decision making, then we can design smart agents to help these consumers make better decisions.”
Competing on Service
In addition to the growing importance of consumer education, marketers must take into account a higher expectation with regard to service, Kahn says. “For example, a retail customer with Fidelity Investments may now expect that he or she can telephone every night to check on his or her account. Because companies are dealing more directly with end users, there is more long-term relationship building with the consumer. Record keeping, convenience, reduced risk, ease of decision making, knowing the consumer’s name can all become critically important. It’s not just the performance of the primary service, but also the associated service.
“For example, I might lean toward the medical provider that makes it easier for me to file medical forms,” Kahn says. “I hate dealing with them. It would be a benefit to just pay what I owe and not get involved with paperwork. So organizations such as HMOs may start to position themselves on services other than pure medical care, like record-keeping.”
Competition based in part on service will also have a bigger role in telecommunications where phone and cable companies are interested in offering Internet access, says Kahn. “The service aspect of the decision may present a definite marketing advantage for telephone companies. It’s not clear yet whether Internet connections will be through telephone lines or cable lines, but cable companies’ less-than-stellar track record for service may come back to haunt them. When consumers eventually get a computer hookup, reliability is likely to be very important.” The advertising messages of some telephone companies, Kahn says, have begun to emphasize their reputation for reliability.
“Utilities, an industry notorious for ignoring customers’ convenience, are beginning to change as well. A large energy producer, for example, has recently run ads emphasizing its personalized service. When buyers have alternatives, personalized quality service begins to make the difference. When buyers don’t have a choice among providers, they are forced to take a product any way they can get it.
“What consumers ultimately want is the highest quality at the lowest price. But if that’s not possible, then trade-offs must be made. Many marketing campaigns are built on showing that better service is worth paying for. You have to give up something to gain something else.”
The Grocery Revolution
The retail grocery business, says Kahn, which historically has not been marketing oriented and only recently has begun to take advantage of customer data, is one industry where increased competition has brought a number of visible changes.
Kahn and Leigh McAlister of the University of Texas at Austin have recently completed a comprehensive review of the industry called The Grocery Revolution: New Focus on the Consumer (Addison-Wesley Educational Publishers, Inc. 1997).
Discount stores like Wal-Mart have driven prices down and non-supermarkets have entered the fray, the authors point out. Diapers can be bought in a Safeway or Toys R Us. Grocery items can be purchased at a drugstore or a Wal-Mart.
“My focus in the book was to look at how consumers make purchasing decisions in the supermarket,” says Kahn. “If we understand how they make decisions at every stage of the process, we can add value.”
Faced with competition from both inside and outside, the industry is becoming highly segmented, Kahn adds. “You’re seeing everything from upscale stores like (Maryland-based) Fresh Fields to warehouses like Sam’s (a division of Wal-Mart). You’re seeing sophisticated marketing strategy where it didn’t exist before.”
For example, Fresh Fields carries in-store educational information about the nutritional value of its food and does in-store sampling of new or special products, such as fine cheeses and exotic crackers, says Kahn. “It’s educational in addition to increasing the likelihood of a sale.” A similar practice occurs in upscale wine stores, where store owners suggest wines to accompany various food selections or provide wine-attribute vocabularies to help evaluate the better vintages. Supermarkets have also begun to build relationships with their customers through frequent shopper cards that award loyal customers with special promotions.
“Marketers need to figure out how people choose the stores they shop at,” says Kahn. “Then, once the consumer is in the store, how does he or she choose a product category and select an actual brand? It turns out that shelf placement and merchandising can affect sales. For example, if an item is at the end of the aisle, people may be more likely to buy it. Pricing strategies, coupons, in-store price discounts and advertising in local newspapers can all influence the final purchase. And there are interesting cross-category promotional relationships. For example, retailers have found that when cake mixes are discounted, sales of frosting increases. When expensive salad dressings are moved to the produce/salad department, sales of those salad dressings increase.”
Individual supermarkets focusing on premium quality and extensive selection, such as Piggly Wiggly in Tennessee or Ramey’s Supermarket in Mississippi and Alabama, also have a presence on the Internet. Their Web pages feature new items, sponsor sweepstakes and offer recipes and entertaining tips to their customers. They may also offer promotional coupons.
Food shopping on the Internet is not that popular but there is evidence that it may become more common, Kahn says. One of the most successful Internet grocery shopping outlets is Chicago-based Peapod which has had an on-line grocery shopping and delivery service since 1989. In 1996, Peapod had more than 20,000 subscribers (more than 80 percent women and 89 percent college-educated) who mostly shop in the evenings and spend an average of 37 minutes on line. Shoppers can access more than 20,000 grocery and drugstore items and have them delivered to their homes. The service currently operates in Chicago, San Francisco, Columbus and Boston.
Peapod allows consumers to engage in virtual shopping. They can shop in traditional ways by traveling down “aisles” and stopping to explore specific product categories. But they can also shop in nontraditional ways, such as sorting items by price, by nutritional content, by brand name or by what they bought last time. Consumers who have shopped at Peapod say that they are less likely to purchase on impulse and that comparison shopping is easier.
“Customers are willing to pay a premium for this service, which makes it positive for the marketer, too,” Kahn says. In addition, the marketer is able to collect, by tracking computer mouse clicks, very accurate and detailed records of how customers organize purchases, which products they wanted more information on and price sensitivity. Information like this can help marketers set up their pricing structure, promotions and product assortments.
The Internet Option
The Internet, says Kahn, is fast and interactive. You can get immediate customer feedback, in large quantities, because every move someone makes on the Internet can be recorded — what sites they’ve visited, what they’ve ordered, how much time they’ve spent at a site or what they’re considering purchasing.
“Many experts seem to believe that the most likely way to make money on the Internet is through advertising, perhaps via a service like Pointcast, which offers its users customized news and weather,” says Kahn. “Cosmetic companies are also beginning to experiment with web pages by, for example, helping customers learn about the different products in their cosmetic line or customizing cosmetics for specific users. A consumer might be embarrassed to tell salespeople face-to-face about his or her physical flaws and blemishes. But the Internet is anonymous. If a marketer can get a consumer to interact with their web page in a way that really brings the consumer in, then the Internet could possibly increase sales, either on the web or at the store.”
The Internet can also be valuable in disseminating information to people who make purchases that require a lot of research, like a new car, Kahn adds. “It can supplement sales staff or provide a more efficient way to answer questions. It may be a way to lower costs, even if it doesn’t increase sales.”
How marketers handle all this information is related to Kahn’s research on variety and customization. For example, a consumer trying to fix up a house has a choice of thousands of different kinds of tiles or hundreds of different windows. “How are they supposed to make that decision?” Kahn asks. “One of the things I’m working on with Wharton colleague Cynthia Huffman is a model to help consumers learn their preferences efficiently and painlessly. We want them to be able to appreciate variety instead of being overwhelmed by it. If the consumer doesn’t know what to do with all of this information or is confused by the variety, then a large selection does not provide much value.”