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Consumer Empowerment: Wave One

Posted on: Friday 17th of April 2009

In one sense, consumers have always been ‘empowered’ by choice: being able to choose between competing products forces suppliers to compete for their customers’ custom.

Most of the fruits and benefits of free market competition derive from this choice-driven ‘empowerment’. Without it, suppliers would have few incentives to invest in innovation, better quality, lower prices, and so on. So ‘freedom of choice’ is the launching pad of consumer empowerment – and it’s been around a long time.

However, the way choice actually works in modern markets doesn’t always deliver the empowerment it promises.

Until very recently, consumer choice was constrained in five different ways..

1) First, the scope of choice. In traditional industrial age markets, while consumers were free to choose between competing products and services they were pretty much spoon-fed with information about these products and services; their ability to choose between different sources and types of information was actually quite limited. This has had a number of knock-on consequences.

2) One important consequence was (and still is) information asymmetries. Almost by definition, in any market, suppliers of the products and services within that market know more about what they are producing, the science and the supply chain behind it, the market dynamics driving it and so on – than most consumers. Suppliers can, and do, take advantage of the relative ignorance of the consumer to beguile them into making decisions they wouldn’t make if they knew better.

Over the last couple of decades, this has created some interesting dynamics. For example, in markets where consumers have the chance to learn from experience (such as frequently purchased packaged goods) competition and choice work relatively well (though there are still many debates as to whether the claims manufacturers’ make for their products, the labels they present consumers with, and are really honest, useful to the buyer, and so on.)

However, there are other markets where the product itself is very complex or the consumers’ ability to learn from experience is very limited. Take pensions, The choices of different investment strategies and vehicles with their related risks, charges and so on is bewildering (complexity). And generally speaking you only find out once – near the end of your life – if the decisions you made about your pension were wise or not. By which time it’s too late to learn your lesson and make a different, better decision next time. That’s why some markets such as financial services have evolved pretty toxic forms of competition: sometimes they are more about exploiting consumers’ ignorance and inertia than competing over quality and cost.

3) A third limit on consumer empowerment in the industrial age was the limited range of choices. For many years in the UK highly regulated or nationalised industries presented only one choice for telephony, health, energy, housing and so on. There wasn’t any competition. Privatisation doesn’t necessarily resolve this problem if a small handful of very large providers effectively act as a cartel, copying each other’s prices and strategies so that the choices offered to consumers are more apparent than real.

4) The other side of this coin of too little choice however is ‘too much’ choice. Sometimes, ‘too much’ choice is just as bad a problem as ‘too little’. That’s because, in most markets the costs of choice are high. These costs present themselves in two ways: operational costs and emotional costs.

Let’s take emotional costs first. Fact is, making decisions is often difficult. We worry about making the right choice We regret making the wrong choices, and so on. Barry Schwartz’s excellent book The Paradox of Choice uncovers the many layers of emotional costs that can be imposed by ‘freedom of choice’. Many consumer choices, and decision-making processes, are driven primarily not by the pros and cons of the things they are buying, but by the emotional pros and cons of the decision-making process attached to these things. This holds true both ways – with people who ‘love’ shopping (say, for clothes), and with people who hate shopping (say, for financial services), because of the anxieties it generates.

So what about the operational side of decision-making? In the UK, before the credit crunch, there were 16,000 different mortgages on the market. If a buyer devoted just six minutes to understanding the details and implications of each offer, he would need to invest 96,000 minutes in his decision-making process. That’s 1600 hours of work – or 40 weeks of work, assuming we are working to a 40 hour week. And that’s just for one decision.

The more choices we are confronted with, the higher these costs become. And over the last few decades the number of choices consumers are presented with has exploded. According to one recent estimate for example, the average consumer in the western world is now faced with a potential 10 billion choices between all the various products and variants that have now been made available across all markets: food, health, transport, the home, etc.

If just one decision could, in theory, require 40 weeks of work, what about 10 billion decisions? Faced with high and rising decision-making costs, consumers have done the only thing they can do: find ways of reducing them by trading the cost of making a better decision against the benefits this better decision is likely to bring.

The result is the evolution of a wide range of go-to-market habits and heuristics such as ‘opt for the brand I know’, ‘buy from my existing supplier’, ‘buy the cheapest’, ‘buy the best bargain (i.e. biggest discount)’, ‘buy the most expensive’ (where expensive is short-hand for quality), ‘buy what my friends recommend’ (risk reduction), ‘buy the one that happens to be in front of me’ (convenience), and so on.

These short cuts have three effects.
•    First, they can play into the hands of suppliers wanting to ‘game’ them in some way or another. So, for example, a supplier might put up the price of his product to signal better quality without actually improving quality in any way.
•    Second, these evolved habits and heuristics now largely define many aspects of consumer go-to-market behaviour. For example, knowing that the physical costs of ‘shopping around’ are very high, many shoppers choose to go to just one or two ‘destination’ stores, see what choices are available within these stores, and make their decisions on this basis. This massively reduces the cost of researching better decisions – and makes ‘destination store’ status a prerequisite of success for the retailer.
•    As the ‘destination store’ example illustrates, many organisations’ own go-to-market strategies have, in turn, evolved in response to consumer behaviours and heuristics.

5) The persuasion paradigm. The fifth and final problem with our current approach to choice is this: if consumers are free to choose the product or brand they wish, there is always the risk that they will make the ‘wrong’ choice – by choosing my competitor’s product in favour of mine. In such an environment, it is therefore vital for sellers that are as effective as possible in influencing consumers’ decisions, to persuade them to make the ‘right’ choice instead. Result? An explosion in ‘push’ or persuasion marketing.

This is natural and inevitable, but it imposes a heavy burden on both sides.
•    For consumers, marketing’s persuasion paradigm represents a cost not a benefit: the information sellers’ provide is not designed to help the consumer make a better decision. Rather it is designed to bias this decision. This means that when they go to market, consumers are faced with the new and extra expense of sifting through mountains of push messaging to separate the bits of information which are useful, relevant and trustworthy from the vast majority which is either useless, positively misleading and untrustworthy or irrelevant.
•    Suppliers are meanwhile sucked into persuasion arms races where each supplier tries to outgun his rivals in terms of his ability to cajole and persuade customers into choosing his particular product. Year by year, decade by decade, the costs of these marketing ‘arms race’ have risen disproportionately – faster than the value of the products and services they represent. Thus: one hundred years ago, in advanced economies total corporate go-to-market costs absorbed less than a quarter of total costs, the rest being absorbed by the costs of actually making things. Today, over 50 percent of total costs are absorbed by the go-to-market challenge. Slowly but surely, the costs of selling what we make is dwarfing the cost of actually making it in the first place.

How these five constraints on choice actually work differs from market by market and, to a large degree, consumer segment by consumer segment (not everybody reacts to these constraints in the same way). But the bottom line is this:
•    The ‘first wave’ of consumer empowerment revolved around choice between products and services.
•    The limitations and dynamics of this form of choice have come to define how modern markets, and marketing, works.
•    The issues that define this first wave – information asymmetries, the high costs of choice etc – are not set in stone.

Why is this important? Because, if we don’t understand the underlying dynamics of the ‘first wave’ consumer empowerment, we won’t be able to see, or grasp, how and why these dynamics are changing. And they are.

Key take outs

•    ‘Status quo’ mechanisms of choice impose significant costs and leave significant value gaps for consumers.

•    Many consumers’ go-to-market habits have evolved as ‘work-arounds’ to the high costs of choice. They are designed to manage down the high costs of decision-making.

•    Many corporate go-to-market strategies have evolved in response to these consumer behaviours and habits.

•    Conclusion: if and when the costs of consumer-decision making change, consumer attitudes and behaviours are likely to change with it. And as consumer attitudes and behaviours change, corporate go-to-market strategies designed to ‘fit’ the old environment begin to lose their relevance. Enter ‘Wave Two’.