Consumer behavior is the study of why and how people buy things. It’s a mix of psychology and economics, blown up on a massive scale. To understand it is the dream of prophets, wisemen, and hucksters.
We’re going to focus on what consumer behavior is and why it is important to you as a small business owner. You can understand why people don’t always make rational choices. Then you can see why markets tend to show strange qualities on a grand scale.
In this article, we will go over many topics. We will discuss what consumer behavior is and why it matters. We’ll talk about how it scales from individual people to entire markets. Then we’ll discuss the motivations behind consumer behavior and share examples of what it looks like in real life.
The Basics of Consumer Behavior
- What is Consumer Behavior?
- Why Consumer Behavior is Important to Small Business Marketing
- The Importance of Product-Market Fit
- The Mental Shortcuts Behind Consumer Behavior – System 1 & System 2
- Find the Need, Then Make the Product
- The Purchase Decision Process
- Examples of Consumer Behavior
The Influences Behind Consumer Behavior
- Emotion and Motivation
- Beliefs and Prior Experiences
- Culture and Subculture
- Socioeconomic Class
- Reference Groups
- Situations
Consumer Behavior in the Marketplace
- How Consumers Perceive Risk
- Product Adoption
- Switching Brands and Channels
- Impulse Buying
- Customer Loyalty
- Online Consumer Behavior
The Basics of Consumer Behavior
What is Consumer Behavior?
To understand consumer behavior, you need to understand related fields. Consumer behavior is the intersection of psychology, sociology, and behavioral economics.
Like psychology, studying consumer behavior helps us understand why people do what they do. How are they feeling? How do their feelings shape their decisions? Like sociology, consumer behavior helps us understand feelings and behavior on a massive scale. Like economics, consumer behavior helps us understand why people spend money the way they do.
As you can see, this goes deep. Consumer behavior covers everything about purchasing behavior. It starts when a customer decides to buy something. Then it covers the decision-making process (itself big enough for an article). It ends when customers look back and think about their decision.
Why Consumer Behavior is Important to Small Business Marketing
As I’ve described it so far, the study of consumer behavior seems stodgy and academic. This is not the case. Small business owners – and any business owner, really – wants to be able to push people through a sales funnel. You want to draw attention, pique interest, stoke desire, and sell products or services. It’s one thing to draw up plans of how you think people will act. It’s another thing entirely to make a system based around how people actually act.
Naturally, you’ll want to collect data, tweak your systems, and learn as you go. That’s how good marketing works. Frankly, the experimentation makes life interesting. Understanding consumer behavior will help you know what to look for, what kind of data to watch, how to interpret the data, and – most importantly – how to apply it for profit.
The Importance of Product-Market Fit
It’s just not a Marketing is the Product post if I don’t mention product-market fit (PMF). Value is subjective. It’s made up in your customers’ heads based on their feelings, prior experiences, and rational decision-making. No amount of fancy research can save you if you can’t make a product that fits people’s desire.
Yes, an understanding of consumer behavior can help you to achieve product-market fit. The caveat here is that many people immediately think to apply this knowledge to their sales funnel. They use it to gather leads, run better ads, and so on. Be smart: start with your product or service first, and work from there!
The Mental Shortcuts Behind Consumer Behavior – System 1 & System 2
There is a wonderful book by Daniel Kahneman, a Nobel prize-winning psychologist, called Thinking Fast and Slow. In it, Mr. Kahneman describes two modes of thought called System 1 and System 2.
System 1 is brilliant and useful for its speediness and ability to navigate life without conscious, deliberate thought. We use System 1 every single day and life would be unlivable, frustrating, and overwhelming without it.
System 2 is deliberate. It does the calculating, rational, careful thinking you need when you’re planning for retirement, writing a useful blog post for small business owners, or making a purchasing decision. It’s too slow for us to live our life by, but System 2 is a lot smarter and more accurate.
You probably see the problem here. Because life moves faster than the slower, more deliberate System 2 can keep up, we end up making a ton of decisions with System 1. We make snap decisions where rational thought needs to prevail, such as how we spend our money. When making decisions, we tend to fall prey to cognitive biases, or mental shortcuts.
Good marketers know that people aren’t always rational. They use their System 1 far too much to be rational! Great marketers know how to encourage certain types of System 1 thinking to attract and retain customers, while making sure the goods delivered hold up to System 2’s scrutiny later.
Find the Need, Then Make the Product
In first world countries, the people who have the disposable income to buy your products or services largely have their basic needs met. If you’ve taken a basic psychology course, you may be familiar with Maslow’s Hierarchy of Needs, posted below. Once basic needs are met, your mind – looking for a problem to solve – turns toward more abstract needs.
You have food and enough money to get by, so now it’s time to find love. You have a wife, so now it’s time to achieve something worthwhile. You’re an achiever, so now it’s time to really push yourself to your creative limits.
To a small business marketer who is studying consumer behavior, this is a really valuable framework. When you’re creating products, you want to address a specific need your customers have, in a way they would like for it to be addressed. Those of us with the great fortune of living in the USA, the UK, Western Europe, and other wealthy countries often spend our days chasing abstract needs (or, really, wants). Marketers need to remember this!
The Purchase Decision Process
Once people perceive needs, they often seek solutions in the marketplace. This is the purchase decision process, and it’s an important part of consumer behavior that I am going to spend an entire article on in the near future.
For now, let’s go over the basic process:
- Problem recognition: your customer figures out what they need or want. They see a gap between their lives now and their life as they wish it to be.
- Information search: your customer hunts for knowledge, coming across brands or products which may or may not be associated with you.
- Evaluation of alternatives: your customer weighs different factors – rational and irrational – to make a decision.
- Purchase decision: your customer is ready to buy.
- Post-purchase evaluation: your customer thinks about whether that purchase was a good idea or not.
Examples of Consumer Behavior
Let’s leave behind theory for a moment and talk about what consumer behavior looks like in real life. Here are some examples that I’ve made up.
I need to take my lunch to work. This results in me buying plastic Tupperware I see in Walmart because I don’t care about quality. I’m trying to save cash by taking my lunch to work. What’s more, I don’t see a point in glassware.
I play board games because I need an intellectual challenge and an escape from my day-to-day life. This results in me buying Terraforming Mars, which is about exactly what it sounds like.
I love music, but I’m not that price-sensitive. For this reason, I signed up for Spotify because it’s easy-to-use and their Discover feature brings me the novelty of new music every day.
I stopped going to the barbecue restaurant by my house because they cross-contaminated my fiancee’s meal with gluten. As a result, she got sick. Out of petty revenge, I slammed them with a one-star review on Yelp.
As I said, these are all made up, but these are all examples of day-to-day consumer behavior.
The Influences Behind Consumer Behavior
Emotion and Motivation
We love to believe our decisions are made free from outside influence. Sadly, the facts don’t line up with this belief. The simple fact is that you, me, and everybody you know are subject to a wide variety of forces that steer our decision-making. This goes back to System 1 / System 2 thinking and our responses to our own Hierarchy of Needs.
While System 1 thinking exposes us to forces that sway our decision-making, our greatest pressures often stem from inside. That brings us to purchase motivations. Rossiter and Percy’s Purchase Motivations & Emotions says there are eight purchase motivations – five of which are negative, and three of which are positive. These motivations sway consumer behavior. There is a neat table that steps us through the theory on Wikipedia, so let’s take a look at them.
Rossiter and Percy’s Purchase Motivations & Emotions
- Motivation: Problem Removal
Emotion: Annoyance to Relief - Motivation: Problem Avoidance
Emotion: Fear to Relaxation - Motivation: Incomplete Satisfaction
Emotion: Disappointment to Optimism - Motivation: Mixed Approach-Avoidance
Emotion: Conflict to Peace-of-Mind - Motivation: Normal Depletion
Emotion: Mild Annoyance to Convenience - Motivation: Sensory Gratification
Emotion: Dull/Neutral to Sensory Anticipation - Motivation: Intellectual Stimulation
Emotion: Bored (or Neutral) to Excited - Motivation: Social Approval/Conformity
Emotion: Apprehensive/Ashamed to Flattered/Proud
All these feelings drive us to make choices. For example, I hate the musty smell of my basement (Annoyance) so I bought a dehumidifier (Relief). The small fry order was truer to its name than I expected (Disappointment), so I bought a second order (Optimism). The Pixies are playing the Ryman Auditorium in Nashville, so I bought tickets (Neutral to Sensory Anticipation).
Naturally, all this happens to different degrees, so you can be really annoyed or just slightly annoyed. You can be really afraid or just slightly afraid. Plus, you really end up mixing and matching a lot of these emotions and motivations in many purchases. I bought a house because I don’t like paying landlords (Problem Removal), I didn’t feel like the space was truly my own (Incomplete Satisfaction), and because – to be perfectly blunt – society expected me to by a house in my 20s (Social Approval/Conformity).
Beliefs and Prior Experiences
If we used our System 2 thinking all the time, our heads would glow red hot from all the thinking. As a result, we fall back on our beliefs and prior experiences very often. This changes our perception of products, services, and brands we interact with, and alters our consumer behavior.
Here are some examples of how our tricky perceptions can mess with our decision-making:
- Selective exposure: you decide how much you want to learn in the first place. Your level of ignorance or intelligence changes the whole interaction.
- Selective attention: sometimes you pay attention, sometimes you don’t. According to my loved ones, I’m the king at this.
- Confirmation bias: you interpret new information in a way that ultimately reinforces your own preconceived beliefs. You learn but do not change your mind.
- Selective retention: you remember some things and not others.
Your consumers will fall back on beliefs and prior experiences a lot. Honestly, you can’t judge them for it either. It’s pure human nature, and as a small business owner and marketer, you will have to respond to it.
Culture and Subculture
Defining culture is a Sisyphean task that I’d prefer to leave to the anthropologists. In fact, I will – here is their definition from Dictionary.com:
[Culture is] the sum total of ways of living built up by a group of human beings and transmitted from one generation to another.
For you, as a small business owner interested in applying your knowledge of consumer behavior, here is what you need to know. Life in the US, UK, or Australia is very different from China or India. Indeed, life in California is very different from life in Tennessee. Because we make so many decisions on an automatic System 1 basis, culture is really important. It sets our default behaviors.
Subcultures are exactly what they sound like. Small cultures within cultures formed around shared interests. Want to see subcultures at work? Watch the Breakfast Club. In it, “the Athlete”, “the Brain”, “the Princess”, “the Criminal”, and “the Basket Case” share a detention room and engage in very Generation X conversation. Every high school stereotype is a subculture, as is every fanbase, and every club or organization.
Socioeconomic Class
For better or worse, most societies have a noticeable class system. In the US, for example, you have the rich (i.e. the 1%), the upper middle class, the regular middle class, the lower middle class, and the poor.
As you go through each class motivations and emotions differ. Of course, each socioeconomic class will have different purchasing needs and wants too. You’re not going to sell first-class plane tickets to the poor. The 1% does not want to go to Walmart.
Family is a big part of social groups too. Even now, family provides the strongest social ties most of us have and it impacts our purchasing decisions as well. If my wife doesn’t like the house I’m looking at, you can bet I won’t buy it!
Reference Groups
We don’t always refer to our own subculture when making decisions. As an example, if you’re in the market for some great headphones, you may turn to “audiophiles” online. Reference groups can include family and friends, clubs, sports teams, political parties, and religions. Any group you aspire to be a part of or aspire not to be a part of can be a reference group.
Situations
The time and place you’re thinking about purchasing something can also swing your decision. For example, there is some evidence that the hot summer in 2018 made people more likely to believe in man-made climate change. Regardless of how you feel about climate change and humanity’s level of contribution to it, you can see the silliness of this. We put CO2 into the air at all times of the year by driving cars and heating our homes.
If I’m frustrated about my job and it’s raining outside, you’ll have a tough time selling me a Honda Accord on the lot. Let’s say I got a phone call that my brother is in the emergency room. I probably won’t buy that Colgate toothpaste. On a more optimistic note, if I’m hungry, I’ll buy more at the grocery store. In essence, situational factors drive our consumer behavior in lots of subtle ways.
Consumer Behavior in the Marketplace
At this point, I’d like to help you see how individual consumer quirks look when scaled to the marketplace level. You can already imagine it to some extent by seeing how individuals draw from culture, subculture, and reference groups – and in turn, contribute back to all of them. To further refine our understanding, we’ll go over some examples and talk about how folks like you and me act in groups.
How Consumers Perceive Risk
So many of our fears and anxieties, as well as our hesitations to purchase, are based on how we view risk. This could be as concrete as the risk of losing money or getting hurt. Likewise, this can be as abstract as the risk of embarrassment or loss of self-esteem.
I used to work at a company that sold disability insurance. People buy disability insurance to protect their income when they get hurt. People are motivated to purchase when their perceived risk of injury goes up. Enrollment rates or group policy enrollment was entirely driven by how our consumers perceived risk. Nobody buys disability insurance on a lark.
It’s not always about buying products or services to reduce risk. Often, consumers seek to reduce risk by researching things before buying or by playing it safe in the store. That includes comparison shopping, sticking with known brands or stores, reading reviews, trying before buying, looking for money-back guarantees, and asking around for referrals.
Product Adoption
If I knew the secret to getting people to adopt products quickly, I would live on a private island in the Pacific. As it turns out, we all respond at least a little to monkey-see, monkey-do when it comes to unknown products or services. The first person you knew with an iPad was weird. Now you might very well have one along with a broken one in your household.
As a small business owner, you probably know quite well that successful businesses tend to snowball. You work, work, work and then eventually it pays off and pays off really well and shockingly quickly. A lot of that is because you’re convincing innovators and early adopters to buy your product, which can be very difficult because they are the enthusiasts. Enthusiasts have high standards.
Switching Brands and Channels
Convincing people to change their mind is no easy task! People tend to buy from the same brands and the same channels (brick-and-mortar stores, the internet, etc.). People like familiarity because it requires only System 1 thinking and because confirmation bias is very strong when making decisions.
I’ve heard people say Apple products aren’t giving them the same thrill they used to. Some say the software is getting glitchy. On the other hand, some people hate the hardware changes, such as the “notch” introduced at the top of the screen on the iPhone X. Yet they continue to use iPhones.
Sometimes their friends are using it and they want to keep using iMessage. Other times, they simply don’t want to learn new software. Therefore, a smartphone manufacturer would need to provide a sleeker experience to pick up these potential customers.
A lot of people I know still go to department stores, especially those in older generations. They were really sad to see Sears go bankrupt. Some people switched to online channels like Amazon because they valued the “all in one place” benefit of department stores. Others have simply switched to remaining department stores like JC Penney and Macy’s because they value “physical experience” instead.
Impulse Buying
You ever walk into a store, buy something, leave, and say “why did I buy that?” I sure have. When something is cheap, on sale, bright and shiny, or popular, it’s a lot easier to do.
Think back to the year 2017 for a moment. Fidget spinners were all the rage. It seemed like you couldn’t go into a gas station without seeing those silly toys at the checkout counter. Even today, I probably still have five of those goofy things sitting around.
Customer Loyalty
Remember how I talked about how it was tough to get people to switch brands or channels? As it turns out, it’s tough to get people to become loyal customers too. In general, people have default opinions and behaviors. We, as marketers, only have a limited ability to influence consumer behavior.
There are loyalty marketing programs built around the idea that getting new customers is expensive. As a small business owner, that’s no surprise to you. I’m currently sitting on a Delta SkyMiles card because their flights are good and they have a hub near me in Atlanta. Delta wants me to use that card so I can rack up SkyMiles to spend on their flights. Thus, I become their loyal customer.
If Delta’s flights go downhill, I might still be loyal to use up my SkyMiles, but I would start looking at other airlines. That’s called “spurious loyalty”, instead of “true loyalty.” Once I found a better airline and switched, that would mean I no longer have loyalty toward them.
Let’s say that even with my SkyMiles card, I still like Hawaiian Airlines. I can only fly with them when going to Hawaii. Because I’m not a Rockefeller, I don’t go to Hawaii often. As a result, my loyalty for Hawaiian Airlines would be limited but still present. This is sometimes called “latent loyalty.”
Online Consumer Behavior
Last but not least, consumer behavior becomes really interesting once you see it online. Social media and sites like Kickstarter give us great insight. They allow us to see people’s motivations and decision-making processes in ways we’ve never seen before. All you have to do is read. It differs greatly by industry.
My caution to you is simple. When using online resources to identify the consumer behavior of your target audience, consider two sources of information. First, consider what people say. Customers are reasonably good at describing what they need and want.
However, don’t take customers purely at face value. The second thing you need to consider is what people actually do. Watch how people spend their money on crowdfunding campaigns or on Amazon. Take out some Facebook ads and see what gets attention. Perform some tests and see what people truly respond to in real life. Ultimately, you don’t want your decisions to be made based on what some online loudmouths say. That would be availability bias!
To understand consumer behavior is to understand ourselves and others. We use different forms of thinking in different situations. In addition to that, our emotions and motivations, as well as other factors, are unique who we are and the situations we are in.
Your job as a small business marketer is to find a group of people with similar needs. Understand their behavior – why do they do what they do? When you know the answer to that question, share your work and watch the magic happen.
Do you have questions about consumer behavior? I’d love to see them in the comments below 🙂
