1 MKT201 – Buyer Behavior Chapter 9&11 Supplementary Examples

2 Decision Making Games (1) 1.Let's assume, for example, you decide to buy the television after all. But just before paying $500 for it, you realize it's $100 cheaper at a store down the street. Will you make that trip down the street and buy the less expensive television. 2.If, however, You're buying a new set of living room furniture and the price tag is $5,000. It is $100 cheaper at a store down the street, selling it for $4,900. Will you make that trip down the street and buy the less expensive furniture?

3 Decision Making Games (2) if you purchased expensive theater tickets only to learn prior to attending the performance that the play was terrible. Will you attend the play? Assume the expensive ticket was given to you by a friend, will you attend the play if you learn prior to attending the performance that the play was terrible.

4 Decision Making Games (3) Imagine that Hong Kong is preparing for an outbreak of a disease which is expected to kill 600 people. Given the choice between two vaccination schedules, 1.Program A which will save 200; Program B which will save all 600 with probability 1/3 If you are the decision maker, which program will you choose? 2.Program C which will allow 400 people to die; Program D which will let no one die with probability 1/3 and all 600 will die with probability 2/3 Which program will you choose?

5 Biases in Decision Making Process 1.Mental Accounting (framing effect) Let's assume, for example, that we decide to buy that television after all. But just before paying $500 for it, we realize it's $100 cheaper at a store down the street. In this case, we are quite likely to make that trip down the street and buy the less expensive television. If, however, we're buying a new set of living room furniture and the price tag is $5,000, we are unlikely to go down the street to the store selling it for $4,900. Why? Aren't we still saving $100? Unfortunately, we tend to view the discount in relative, rather than absolute terms. When we were buying the television, we were saving 20% by going to the second shop, but when we were buying the living room furniture, we were saving only 2%. So it looks like $100 isn't always worth $100 depending on the situation. The best way to avoid the negative aspects of mental accounting is to concentrate on the total return of your investments, and to take care not to think of your "budget buckets" so discretely that you fail to see how some seemingly small decisions can make a big impact.

6 Biases in Decision Making Process 2.Sunk cost fallacy Another factor driving loss aversion is the sunk cost fallacy. This theory states that we are unable to ignore the "sunk costs" of a decision, even when those costs are unlikely to be recovered. One example of this would be if we purchased expensive theater tickets only to learn prior to attending the performance that the play was terrible. Since we paid for the tickets, we would be far more likely to attend the play than we would if those same tickets had been given to us by a friend. Rational behavior would suggest that regardless of whether or not we purchased the tickets, if we heard the play was terrible, we would choose to go or not go based on our interest. Instead, our inability to ignore the sunk costs of poor investments causes us to fail to evaluate a situation such as this on its own merits. Sunk costs may also prompt us to hold on to a stock even as the underlying business falters, rather than cutting our losses. Had the dropping stock been a gift, perhaps we wouldn't hang on quite so long.

7 Biases in Decision Making Process 3.Loss Aversion Imagine that your country is preparing for an outbreak of a disease which is expected to kill 600 people. Given the choice between two vaccination schedules, Program A which will save 200 and Program B which will save all 600 with probability 1/3, most will choose Program A. However, if the question is framed as: Imagine that your country is preparing for an outbreak of a disease which is expected to kill 600 people. Given the choice between two vaccination schedules, Program C which will allow 400 people to die and Program D which will let no one die with probability 1/3 and all 600 will die with probability 2/3, most people will choose option D. This is an example of loss aversion: the two situations are identical in quantitative terms, but in the second one the decision maker is losing instead of saving lives, thus setting 0 lives lost as the status quo from which losses are measured, making the sure loss of 400 people more loathsome than the probable loss of 600.

8 Discussion Question If a consumer has already rejected a product from his/her evoked set, how hard would it be for a marketer to place it back in there and how would they go about it? It is difficult to place it back because consumers are “cognitive misers”. This means that people conserve their mental resources and expend only a minimum effort required to solve a problem. Once a product has been eliminated from consideration on the basis of some evaluation process, consumers are not likely to expend additional cognitive resources to re-evaluate that product. Promotional strategies can be used to get consumers to reconsider product, e.g., price discount, coupons, special offers, rebates, or free samples will increase the possibility of reconsideration by the consumers.

9 Strategic Implications of Product Categorization Product categorization is how consumers organize their beliefs about products or services. 1.Product positioning – the conception of the product relative to other products in the consumer’s mind; convincing consumers that product should be considered within a given category; comparative ad is a good way to position - Orange juice: “it is not just for breakfast anymore” reposition orange juice as a drink tat could be enjoyed all day long. - Pepsi A.M. contains more caffeine than a regular Pepsi; was positioned as coffee substitute. The company successfully categorized the drink as a morning beverage that consumers wouldn’t drink it at any other time and the product failed. - Sunkist lemon juice attempts to establish a new category, reposition it as a salt substitute.

10 Strategic Implications of Product Categorization 2.Identifying competitors – Products/services different on the surface can actually compete on super-ordinate level for consumer dollars - Entertainment memberships for bowling or ballet; they are substitutes at the superordinate level 3.Exemplar products – means the most known, accepted product or brand; brand strongly associated with a category get to “call the shots” by defining evaluative criteria (for imitator, copycat to follow); but “moderate unusual” products may stimulate more information processing and positive evaluations - Locally micro-brewed beers – a distinct position within the category (small surprise, small discrepancy is good)

11 Strategic Implications of Product Categorization 4.Locating products – Consumers often expect to find certain products within certain places within the store environment; products that do not fit clearly into categories confuse consumers - Frozen dog food – consumers could not adapt to the idea of buying dog food in the “frozen food for people” section in the grocery store, the product failed.

12 Decision Rules Compensatory Decision Rules: Give a product a chance to make up for its shortcomings; Evaluate all attributes, give weight for each attribute. (Fishbein Model) Non-compensatory Decision Rules: A product with a low standing on one attribute cannot make up for this position by being better on another attribute.