What are the differences between compensatory and noncompensatory decision rules?

Understanding consumer information-processing strategies and purchasing behaviour.

Contrary to what some might think, consumer buying decisions are not random. There are a distinctive set of steps that consumers go through when making purchases. This also means that there is a formula which marketers can use to target audiences with more precision (Jones, 2014).

The Five Steps

1. I’ve Got a Problem.

Problem recognition is the first step. Consumers realize there is a problem when there is a discrepancy between their actual state and their desired state. Consumers are then motivated to act or purchase as a way to resolve this discrepancy (Perreau, 2015). There are a number of sources for a problem:

• New products or features
• Dissatisfaction of current product
• Ran out of product and need a new one
• Marketer-induced

By identifying specific stimuli or situations that trigger need in potential customers, businesses can create marketing strategies that generate a discrepancy between states (Brown, 2008).

2. Google to the Rescue!

Information search or pre-purchase search is the second step. Once people are aroused by stimuli, they look for information that can satisfy their sense of need. There are four main channels for search: personal (e.g. friends and family), commercial (e.g. advertisement), public (e.g. consumer ratings), and experimental/personal experience with a product.

How can marketers influence their potential consumers at this stage? This stage has implications on a business’s promotional strategy. What channel of information is most appropriate for the brand or the product? What type of message or media strategy will lead to the most exposure and impressions? What should the message be? Will they understand the message? Will they even pay any attention to it (Albarasin, 2013)?

3. Pros and Cons lists.

The third stage is alternative evaluation. Simply put, this is when consumers compare products based on a variety of criteria from the list of alternatives from the previous step. What is important to marketers here is the formation of an attitude or “learned predispositions” towards the brand, product or service. Attitudes incorporates both cognitive and affective elements. In other words, consumers evaluate alternatives based on what they think and feel about them. Marketing organizations have to be mindful of how consumers evaluate alternatives and can influence what consumers may consider a salient criterion (Albarasin, 2013).

4. Time to Buy.

Finally, the action: the purchase decision phase. There are a number of steps between the evaluation of alternatives to the actual purchase decision. One may be that purchase intention may not result in actual purchasing. In this case, businesses want to focus on steps to facilitate the consumer to act on their purchase intent. Another step includes perceived risk or the negative consequences consumers believe they will face after the purchase. This includes functional risks, physical risks, social risks, financial risks and time risks. Marketers can form strategies to deal with these perceived risk such as offering warranties (Albarasin, 2013).

5. The Aftermath.

Lastly is the post-purchase behaviour. Some businesses may believe that once their product is bought, they’ve won! It’s over! But maintaining a good relationship and open communication with consumers even after they have invested is critical. Consumer satisfaction is a strong influencer of repeat purchase behaviour and loyalty, as well as referrals. Someone who has had a good experience with a product will likely suggest it to their friend. On the other hand, someone who is disappointed with their experience might warn their peers not to invest in the same product (Albarasin, 2013). Additionally, consumers often doubt their purchasing decisions and wonder if they made the right choice. This is known as cognitive dissonance. Marketing organizations then have to strategize ways to minimize post-purchase dissatisfaction and cognitive dissonance (Brown, 2008).

Decision Rules

There is tremendous opportunity in influencing consumers at the alternative evaluation and selection phase. This phase, along with research, is often the most time consuming in the decision making process.

Let us dive deeper into step 3!

In August of last year, I bought a car. There are more than 350 car and truck brands on the market and yet a typical consumer only compares 5 or 6 brands. For me, I contemplated between Mazda, Toyota, Honda, Hyundai, and Nissan. This means that if a company could form a strategy that increases their chances of being considered or being included in the “consideration set”, it could increase their odds of cementing a sale from 1/350 to 1/6 (Hauser et al., 2009)!

Why is being in the consideration set so important? Well if your brand is not considered, it cannot be chosen. In 2008, Buick tied with Lexus as the top-ranked automobile on a J.D. Power dependability study. Buick was also the top-ranked American car by Consumer Reports. However, very few Americans even considered buying a Buick. In fact, 50% of all US consumers dismiss GM cars before even evaluating them. All of Buick’s value propositions, such as Onstar quality and safety, are irrelevant if they do not make it to the consideration stage (Hauser et al., 2009).

It is vital for businesses to understand how consumers form consideration sets, n. Simply put, consumers measure the amount of ‘utility’ they get from choosing a set’s maximum element minus the cost of searching for that maximum element. When debating expanding the consideration set, the expected value of choosing from the expanded set, n+1, minus the expected value of choosing from n must exceed cost of searching from n+1 insteadof n products (Hauser et al., 2009).

In other words, in order to include your product in the consideration set:

Marketers can then form strategies to increase the perceived value of the n+1st product by advertising better features or decreasing the search cost with better promotion or sampling (Hauser et al., 2009).

When deciding to buy a car, most people do not examine all the features of the car. Instead, people focus on a relatively small number of features that are most desirable and eliminate options that do not have those features. Cars have a large number of features and several brand choices. It takes extensive effort to search through information and the decision process is long and complex. Car models with great similarity make comparisons difficult (Hauser et al., 2009).

Purchasing a car is an example of extended decision making. It requires a high degree of involvement and investment. More features and more options are evaluated for a longer periods of time. In these cases, consumers use decision rules. Decision rules are information-processing strategies that facilitate consumption-related choices. They help people by providing guidelines for complex decisions, such as reducing risk and evaluating alternatives (Albarasin, 2013).

There are two broad categories of decision rules: compensatory and non-compensatory. Let’s use an example to make this easier to understand.

Compensatory Rule

The compensatory rule dictates that a consumer makes decisions in terms of each relevant attribute and computes a weighted or summated score for each brand. In other words:

So assuming the following importance table:

Mazda = 4(5)+3(3)+2(5)+5(3)+1(1) = 55
Honda = 52
Toyota = 58
Nissan = 50
Hyundai = 53

According to the compensatory rule, Toyota is the best choice. Compensatory rules allow for the positive evaluation of one brand attribute to balance out the negative attributes. Non-compensatory decision rules do not allow for positive and negative attributes to balance out (“Decision and Purchase”, n.d.).

There are 4 main non-compensatory rules:

• Disjunctive
• Conjunctive
• Elimination-by-aspects
• Lexicographic

Disjunctive Rule

In a disjunctive rule, a minimally required performance level is assigned for each important attribute. All brands that meet or exceed that level are acceptable (Hawkins et al., 2007).

Under this rule, Mazda, Toyota, and Hyundai meet the minimum for at least one important attribute and are acceptable.

Conjunctive Rule

The conjunctive rule is the mirror image of the disjunctive rule. In a conjunctive rule, a brand must have all of its features above the minimum acceptability levels to be acceptable (Hawkins et al., 2007).

Mazda, Toyota, Nissan, and Hyundai are all eliminated because they do not meet the minimum standards. Therefore, according to the conjunctive rule, only Honda is acceptable.

Elimination-By-Aspects

With the elimination-by-aspects (EBA) rule, consumers first rank the criterion by importance and then set a cutoff level for each criterion. Brands are eliminated in order of attribute importance if they fail to meet the cutoff (Hawkins et al., 2007).

Step 1: Price eliminates Hyundai

Step 2: Fuel economy eliminates Mazda

Step 3: Ride and Handling eliminates Nissan

Step 4: Safety eliminates Honda

This leaves Toyota.

Lexicographic Rule

Lastly, with the lexicographic decision rule, consumers first rank the attributes in terms of perceived importance. Then, the consumer selects the brand that performs best on the first attribute. If two or more brands tie, they are evaluated on the next most important attribute until one brand outperforms all the others (Hawkins et al., 2007).

Using the same ranking as the previous rule, Mazda is the best brand option based on best price, the consumer’s most important attribute.

Summary

The following is a table showing the resulting choices based on different decision rules:

How is this relevant?

In a study by Hauser et al., they analyzed the consideration for portable GPSs. The two brands that they looked at were Magellan and Garmin. When calculated using a compensatory rule, Magellan scored higher. Therefore, in a compensatory market simulator, a switch from Garmin to Magellan would increase market share. However, when estimated non-compensatory models, researchers found that 12% of participants screened based on brand. Of those 12%, 82% preferred Garmin. For the other 88%, brand was not considered in their screening. Therefore, using this model, it would predict that switching from Garmin to Magellan would reduce market share. These two models resulted in different predictions (Hauser et al., 2009).

The same study showed that, according to the compensatory rule, an “extra bright display” was the most important feature for a GPS. The market simulator predicted that adding this feature for an additional $50 would increase market share by 11%. However, a non-compensatory rule identified that those who screened for extra bright displays also screened for lower prices. Therefore, a non-compensatory market simulator predicted a 2% increase in market share, 9% lower than that predicted by a compensatory simulator (Hauser et al., 2009).

It is important to understand consumer behaviour and what types of decision models or rules people are likely to apply in their evaluation process. For example, compensatory rules are more often applied to simple choice sets with few alternatives, low search costs, and with new products with novel features. Non-compensatory rules are used more often when there are many products, more effort is required for making the decision, there is more time pressure and there are more features to be evaluated (Hauser et al., 2009). Understanding which rules are most likely to be used by consumers allow marketers to make better simulations, more accurate predictions and provide guidance for more effective marketing strategies.

References:

Albarasin, Z. (2013). Consumer Behavior: Decision Making process. Retrieved February 24, 2016, from http://www.slideshare.net/zenaidaalbarasin/entrepreneurial-mngt

Brown, A. (2008). Chapter 6 Class Notes. Retrieved February 24, 2016, from http://www.udel.edu/alex/chapt6.html

Consumer Decision Making Process [Infographic], Retrieved from http://internet-marketing-management.com/consumer-decision-making-process/

Decision and Purchase: Consumer Decision Rules, Output, Relationship Marketing. (n.d.). Retrieved February 25, 2016, from http://www.zeepedia.com/read.php?decision_and_purchase_consumer_decision_rules_output_relationship_marketing_consumer_psychology&b=86&c=38

Hauser, J., Ding, M., & Gaskin, S. P. (2009). Non-compensatory (and compensatory) models of consideration-set decisions. 2009 Sawtooth Software Conference Proceedings, Sequin WA.

Hawkins, D. I., Mothersbaugh, D. L., & Best, R. J. (2007). Consumer behavior: Building marketing strategy. Boston: McGraw-Hill/Irwin.

James, S. (Publisher). (2014). Consumer Decision Making Process [Infographic]. Retrieved from http://visual.ly/consumer-decision-making-process

Jones, S. (2014). The Six Stages of the Consumer Buying Process and How to Market to Them. Retrieved February 24, 2016, from http://www.business2community.com/consumer-marketing/six-stages-consumer-buying-process-market-0811565#EYV3LjycAmQIZsLM.97

Perreau, F. (2015). The Consumer Factor, Consumer Insights, Market Research, Consumer Behavior & Neuromarketing. Retrieved February 25, 2016, from http://theconsumerfactor.com/en/5-stages-consumer-buying-decision-process/

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