Posted on: Wednesday 17th of August 2011
Over the next few weeks I’m going to do a series of short blogs exploring a gear change in the way markets work, triggered by one aspect of the control shift: the unfolding consumer decision-making revolution.
The bottom line is this. For the last hundred years or so, commercial activities have been organised around identifying and meeting peoples’ consumption needs, via markets for products and services.
Now however, a new level of economic activity is emerging around another set of consumer needs: their decision-making needs – needs that, for the most part, have largely been ignored and which therefore remain unmet.
Helping individuals make (and implement) better decisions is now becoming a hugely important market in its own right – a market for tools, services, sources of information etc that help people research, sift, evaluate and act on the information they need to make better decisions.
It’s a new level of economic activity. The easiest parallel is this: Industrial age production of goods and services was a new level of activity built on top of the foundations provided by agriculture. Information age markets focused on improved decision-making are being built on the foundations provided by the industrial provision of goods and services.
To survive the transition from feudal to industrial, everyone – including farmers – had to change the way they did things. Ditto: today with the decision-making revolution.
The astonishing – frightening – thing is that still, most large organisations haven’t even recognised the existence of this new market. This is a potentially life-threatening strategic oversight. Such oversights are actually quite common. They’re how today’s icons of success become tomorrow’s basket cases – and how new icons emerge, propelled as if from nowhere from zero to hero.
So for anybody wanting the hero option rather than zero option we need to understand what the unmet consumer need for ‘better decisions’ looks like, what’s changing and why, and how to respond.
The costs and benefits of choice
The scene setter is Grade 1 economics: if consumers don’t have a choice, there’s no effective competition, so suppliers aren’t incentivised to innovate, improve their services, or even cut their costs. That’s why the benefits of choice are so huge.
However, the costs of choice can also be huge. Right now, for example, if you devotes just three seconds of your time to considering the relative merits of all the mobile phone tariffs currently on the marketplace, you would have to spend one year – working 24 hours a day, 24/7, without a break – just to complete your market review.
Mobile phones are just one of hundreds of product and service categories where the costs of making a better decision tend to outweigh the benefits. This means that often we don’t bother even trying (or only try up to a certain, very limited, point). Instead we opt for short cuts, which I’ll return to in more detail later.
There’s a further twist here, because the effects of decision-making costs vary across different types of market. Every time we enter the market for a new product or service – one which we are not familiar with – we face a steep learning curve. In the early days, we don’t even know what the right questions to ask are, and if we do get an answer, we don’t really understand what it means.
Generally speaking then, the more often we buy, the more we learn, the more sophisticated we become as decision-makers. Likewise, the less often we buy, the less we learn, the less sophisticated we become as decision-makers. Also, generally speaking, we buy low cost items like groceries very often, and we buy high cost items such as cars, mortgages and pensions quite rarely.
This means that, generally speaking, the more important the decision is the less equipped we are to make a good decision … and the less ‘effective’ competition in this market tends to be. Yes it’s a broad generalisation, but it holds true in the main.
Three things follow:
- First, the way modern markets work – their dynamics, how they tick – are largely shaped by consumer decision-making costs and habits.
- Second, the higher the costs of choice, the less consumers’ ability to make ‘good’ choices – the less likely the benefits of competition will actually materialise.
- Third, if the costs of consumer-decision making change radically, so will the way markets work and the way competition plays itself out.
Guess what? Right now, the costs of decision-making are being revolutionised.