The decision before the decision might be the more important one for marketers.  Marketers need to learn about the opportunities inherent in influencing what are called second-order decision strategies. 

Cass Sunstein, co-author of Nudge, created this idea which is about deciding how we are going to decide.  As an example (mine, not his), let’s say you want to buy a smart phone but know there are an overwhelming number of options.  You might manage this by doing a lot of research ahead of time (online, ask friends, observe what others have) to make it easier to decide when you get to the store.  That decision STRATEGY is your second order decision and what you actually buy when you get to the store is your first order decision.

Shoppers can be segmented and targeted based on their second-order decision strategies. When we can repeatedly observe how a shopper decides, like in packaged goods, it is likely that a shopper mostly exhibits the same path to purchase for a given type of product, as their underlying decision strategy is likely to be very stable for a given product category. For example, if you know there are sales to be had on bottled water and you wait until an acceptable brand is on sale, you are a “system beater” (a term I helped to create in 1994).  That strategy of searching for sales becomes the core of the shopper’s second-order decision. The first-order decision becomes greatly simplified with that strategy (buy/not buy, how much).  Not all shoppers are system beaters (for example, some are highly brand loyal) suggesting that shoppers can be segmented on their decision strategies and marketed to in that way.

Second-order decision making can be affected by marketing and the economy.  During the recession, I believe that many shoppers changed their second-order decisions.  People’s shopping patterns were greatly affected (more planned purchases and acceptance of store brands increased.) imagine the heuristic at point of purchase becoming “see if a national brand is on sale; compare price to the store brand”.  Dramatic increase in the use of coupons has been documented (highly intensive second-order decision-making/searching for sales that then simplifies the first order decision).  It is the changes in second-order decision strategies that have challenged the value proposition for national marketers. 

Do you want the brand decision in or out of the store? A national marketer with strong brands wants the brand decision to be made at the time the shopping trip is being planned, not in the store.  In other words, they have a strong preference for people using a PARTICULAR second-order decision. What are marketers doing to encourage the second-order strategy that benefits them?  How are their packaging and website encouraging consumers to simply use habit and replenishment as their decision strategy? If you are the new brand or a price brand, how are you DISCOURAGING people from doing that and encouraging shoppers to be more explorative?

What type of second-order decision do you want people to use? I imagine that AT&T and iPhone do not want people to have a high-effort second-order decision strategy.  They want people to just go to the AT&T store and get the leading smart phone (iPhone).  Verizon and Motorola Droid should want people to get curious and to engage in much more information search; a highly engaged second-order decision approach.  In other words, the marketing battle needs to be fought on shaping people’s strategies for deciding and targeting those who have the preferred second-order decision strategy.

One way to get people to engage in a more evolved second-order decision process starts with the realization that it is a coping mechanism when people perceive many available choices.  This idea turns the Schwartz Paradox of Choice concept on its head.  Choice is NOT bad; people want choice to reflect their individuality (that’s why there is a long-tail of choices.) However, when there is a lot of choice, people cope by employing heuristics and second-order decisions to simplify the first-order decision.  Hence, more PERCEIVED choice leads to involved pre-planning. That is what iPhone COMPETITORS should want; get people to see the choices out there.  On the other hand,Apple should want to convince people there is really only one choice.  The battle is waged over the second-order decision strategy.

How can Apple (or any market leader) take a marketplace where there are many choices and make it one with few perceived options? Own the one thing that people should really care about. Taversky pioneered the concept of “elimination by aspects”; all items that don’t possess a certain desired feature are immediately put out of consideration. Dr.  Gerd Gigerenzer has documented many simplifying heuristics that people use, including “take the best” which describes an approach of focusing first on the attribute that is both the most important AND that differentiates the choices. We become blind to other choices.  That’s why Schwartz’ Paradox of Choice is misleading for marketers. 

How do we recognize? The final point I want to make today is the importance of understanding how we recognize things.  When the second-order decision carries the entire load, the planned purchase becomes a foregone conclusion.  Then, the retailer and manufacturer challenge shifts from influencing decisions to influencing recognition.  Gregory Bern, in his book “Iconoclast” talks about perception as a predictive system, where low level visual stimuli are interpreted via retained images and concepts. What cues will best connect your brand to this “predictive system” that people use to recognize things?

Behavioral economics has given us a new path to marketing opportunity.  Let’s study how people decide.

This is the second of two posts on applying behavioral economics to marketing issues.  The first posting is here.