eMarketer recently reported the results of a University of Iowa study that suggests that consumers who have only a little information about a product are much happier with that product than people who have more information. It’s kind of an interesting commentary in a world increasingly dominated by information from a variety of sources on just about anything there is, and more choice than consumers have ever had before. This phenomenon has been building for some time…Barry Schwartz in his famous book, The Paradox of Choice, published in 2004, recounts his dismay over his inability to buy Levis without having to sort through one of the more than 27 possible combinations of cut and color.
Marketers, in their zeal to offer the customer “what they want,” have nearly paralyzed customers by offering too many choices and too much information about those choices; there are just too many variables for them to process in this time-constrained world. Marketers forget that too much choice actually costs customers in terms of the time it takes to process their options, not to mention elevating their risk of being wrong. Rather than feeling empowered by having choice, customers feel paralyzed and often stick with “the devil they know” instead of trying something new, even if it might be a better option for them in the long run.
There are really three cardinal rules for marketers to consider when trying to navigate the choice costs/choice benefits paradox for their customers and still turn a profit. First, customers say they want it all but will only pay for what they value – even if they only value part of the offer. You may like the sports section and I might like the local section of the daily paper, but for $1.00 a copy, it is costless to take out the section I want and toss the rest. On the other extreme, it is why digital downloads of single music tracks are so popular – people only want the song they heard on the radio and not the 8 or 9 other songs that they probably won’t like as much.
Second, companies usually take too narrow a view of the cost to deliver choice. Every option provided to a customer costs time in packaging, shelf space, the complexity of training people or retooling assembly lines – it all adds up. So at the same time we are confusing customers with too much choice, we are also incurring indirect costs that impinge profitability. Back in the day, American auto makers offered literally hundreds of versions of their cars, until Toyota came along with fewer options and less complexity (okay, and a better product, but still) and ultimately more profits. It was not long before American auto makers followed suit, but unfortunately not in enough time to salvage their operating margins and consumer appeal.
Third, getting the price preference dimensions in alignment means knowing how to trade off choice with demand by customer segment. This is a classic demand segregation strategy that tiers pricing schemes with product offers suited to those customers. Not everyone gets the same offer – and therefore doesn’t have to sort through all of the options, which in turn reduces complexity. A basic cable package appeals to a certain set of customers, a package with HBO and NFL Season tickets appeals to another.
At the moment, marketers seem fixated on cranking out more choices and more information about those choices instead of stepping back to evaluate what choice makes sense. Yes, feedback mechanisms on sites can help consumers sort through their options, and so can aggregators that actually serve to help us narrow our choices. But in the end, it has to be about getting the optimal product/customer strategy right. For more of our thinking on how to strike that balance and design profitable product bundles, read our article in the MIT Sloan Management Review.
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Filed Under: New Business Models, consumers, Economics