The Secret to Consumer Decision Making: Value

What if I told you there was a universal reason behind every decision in the world- an underlying formula which is used again and again? This formula not only dictates what products we buy or what services we seek out- but also all other aspects of your lives.

The formula is simple: maximising perceived value. In this context, value can be defined as benefits divided by costs. If the result is greater than 1 (eg. Benefits >= Costs), we could say that the value would be good. If the result is less than 1 (eg. Costs > Benefits), then there would be inadequate value. Put simply, we purchase if the total benefits outweigh the cost of the product. If costs exceed benefits, we do not buy.

Costs vs Benefits

In this context, value also takes into account non-financial variables such as emotional and social pressures. The full list will be expanded on later, but the important takeaway here is that every decision hinges on whether the perceived benefits at the moment outweigh the costs.

Let us say that one day Belinda wakes up to find that her hairdryer stops working. This would be the stimulus which starts the decision making process. Belinda recognises the problem: she would be unable to dry her hair. She searches on the internet for stores near her which sell hairdryers. This complements what she already knows about her neighborhood. Once she is satisfied, Belinda gets into her car and drives to the local supermarket.

Along the way, she sees a billboard advertisement for a brand of razors. That particular brand, she remembers, was also mentioned on the radio the other day- thus must be pretty good quality. She thinks to herself that her old razors are getting a little dull, and may need replacing soon. As such, Belinda decides to buy razors in addition to her hairdryer.

At the supermarket, as Belinda was walking to the beauty care section, a big sign catches her eye: mentioning a discount on raspberries. While she does not normally buy raspberries, she reasons that they would be an excellent addition to breakfast, and in addition were pretty cheap as well- she may as well try them out. Belinda thus decides to purchase them as well as the other two items.

Finally, on the way to the checkout she remembers she needs to buy a gift for her friend’s birthday. She remembers that her friend especially enjoys flowers, so browses the flower section of the store. While there, however, she found that even though they were all relatively inexpensive, none of the flowers caught her eye. She decides not to get them at this particular store, and go to a local florist instead.

In the previous examples, we see four decisions are made. One decision was to solve a problem which Belinda had and was aware of before she left the house: the broken hairdryer. The decision to buy a hairdryer would be pretty simple: a hairdryer would be able to provide her with the benefits of being able to dry her hair faster. In addition, because Belinda was in great need for one, this benefit would be very high. When shopping for a hairdryer, she would simply compare the benefits and costs of each model to what her needs were, and purchase the hairdryer which was perceived to maximise value for her.

In the second example, while she was driving Belinda saw a brand of razors being advertised. While this was not in her mind, she was made aware of a problem: her razors may be getting old soon. Here, it is also the benefit which the razors would give- the ability to trim hair- that motivated Belinda to buy it. Moreover, the quality of the specific brand of razors convinced here that there was value in buying it. It can be noted here that even though another brand may be even better in quality- because Belinda perceives this specific brand to be so, she does not consider the others. This is the key in why “perceived” is specified. Unfortunately, because we are not all-knowing, we may not make the best decisions, but we do try to make the best of what we know.

In the third example, while raspberries would have health and taste benefits for Belinda, it was the low cost which ultimately convinced her to buy. In this case, because costs were reduced, the raspberries became a better value item, which explains her decision. In this case, one could argue that many other fruits were also low in price. Belinda chose the raspberries because of the sign. She could, for example, realise that the blueberries were even lower in price and that she liked them just as much. Here then, would that not contradict our rule? The explanation is thus: if Belinda remembered the blueberries being a lower cost than raspberries and that they provided the same amount of benefits, she would have bought them too. The caveat is unless Belinda saw that the raspberries were on sale for a limited time only. This would impose greater benefits on the raspberries due to the urgency imposed (a rarity benefit). In addition Belinda does not have raspberries often. This would also increase the value (novelty benefit).

In the final example, we see that even though cost was low and flowers would serve a basic benefit to improve her relationship with her friend, Belinda judged the value of the flowers to be low due to a lack of aesthetic appeal. This would not provide her with much benefit. She decided that there were flowers elsewhere which would provide her with even more benefit, and still be within her budget. Even though they may be more expensive, because of the potential risk of ruining her friendship by buying ugly flowers, she decides that the benefit outweighs the financial cost. Here, we can see Belinda is reducing how she perceives costs so that money is not a major concern. This affects our formula, and predicts Belinda’s decision. If it were someone else who did not value the friendship as much and valued their own money more, the outcome may be different.

From Belinda’s quest for a hairdryer, it could be seen that a judgement of value revolves around all of our decisions. Sometimes, this could even be subconscious. We are so used to making decisions that for most small items this comes naturally. For items where a large cost is involved, our benefit/cost comparison may be more overt. Ultimately, however, this judgement underlies all of our decisions.

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