Standing there in the store – or staring at a homepage online – how do you choose what you are going to choose?
In this article, we look at the Business Model of Choice. The Psychology of Choice is a behavioral science, but when you dive deep into it, you realize that it scales right into the heart of the business model in many cases. Offering too much, too soon, is one of the most common mistakes historically across multiple categories of businesses, so let’s dive in and find out why.
- Rule of 3s
- Information or Content Architecture
- The Biases Within
- Relevance to the Business Model
If potential customers are overwhelmed with information, or have trouble finding the key information they need to make a decision, they are likely to get frustrated and delay the decision or just look elsewhere.
There are multiple subconscious and conscious forces at work within our own minds; this, in addition to the way that the information is presented to you in order to make a decision. Think about a menu, or a standard shelf at the grocery store.
There is an entire science dedicated to these types of ideas, most commonly behavioral science, or the science of decision-making.
The Rule of 3s
The basic starting point when looking at the behavioral science of trying to choose is to start with the Rule of 3. This is just one of those common sense rules that is hard to explain scientifically, yet checks out in speech (‘3 things to keep in mind …’), writing (‘Top 3 Reasons to …’), and especially pricing, where you will notice most software has 3 pricing tiers. The simplest explanation is that we humans prefer having 3 choices over 2 because we get more choice; but we also prefer 3 choices over 4 because we find it simpler to break down.
An obvious limitation for many – especially in these years – is budget. No budget, no choice. But what if all of the items on a list of possible items are within someones’ budget, hypothetically. Now imagine that one of those same items is discounted.
Suddenly, there is an incentive to choose the higher priced item. Even though it still remains the highest-priced item on the list – relative to the others – it suddenly looks like it is offering great value.
What if we take that 25% discount a level further, and said “Today Only,” a very common psychology when looking at sales of goods and services. Now there is an incentive, to buy now!
We could add color, larger fonts, really anything to direct consumers towards making the choice we want them to make. That doesn’t mean that they will make that specific choice, as it has to be matched to buyer’s intent, expectations, needs, and budget, among other factors. But if there are only 3 choices, and we guide people towards one choice through various mechanisms – including time-limited incentives – they are more likely to make that choice.
Limiting choice and then guiding users to make certain decision using certain incentives is one of the easiest ways to direct decision making. When there starts to be more choices to be made, then the decision-making starts to become more complex.
Information or Content Architecture
Let’s say there are now 15 possible choices for a basket of items. Below is presented one basic way the info. could be presented to potential customers without any ‘sequencing.’
This type of information architecture is very common on a restaurant menu, for example. The lack of any real ‘architecture’ around decision making just means that people usually end up ‘staring at the menu’ for minutes, typically, thinking through various permutations and combinations. Thus, it is common to see this type of information broken down into:
- Categories based on the different types of products/services
- Pricing is usually done in some type of hierarchy within each Category, maybe from highest to lowest
- Color-coding helps guide attention to enable quick filtering
Within a 15 item basket of choices, the below becomes much easier to filter visually compared to the top one. Choice can be made by Category, and within each Category, choices can be filtered based on product/service-specific factors.
If we start to add certain ‘tags’ to the information, like “Most Popular” or “Best Value” then it starts to aid in the decision making.
When we start thinking about how this plays out online, it usually revolves around ‘menu-ing’ key products to get people to see the various items in sort of sequences. Product and/or Service Categories can be further broken down into Sub-Categories. This helps customers browse multiple products, in multiple possible Categories, relatively quickly.
Within Sub-Categories, we can see specific information about certain Products. Reviews add a whole layer of information to the decision-making matrix, adding a layer of ‘social proof‘ to the view of what products and services are on offer.
Information or Content Architecture combines formatting, color-coding, language, and different sources of information into a specific type of format in order to ease the decision-making process for prospective customers. If potential customers are overwhelmed with information, or have trouble finding the key information they need to make a decision, they are likely to get frustrated and delay the decision or just look elsewhere.
Nowadays, there is an interplay between the online and offline worlds, where consumers will find information they are looking for in-store, but search online to see Reviews or other product-specific information.
All of the combined Information Architecture can be used to not only make decision-making more streamlined amid the complexity of multiple items, but also:
- address decision-making gaps relative to intent
- answer commonly held objections
- assuage or sway customers based on their personal biases
This is achieved by trying to (1) understand the basic ‘psychology of choosing’ and limit the number of choices or categorize the choices intuitively (2) surface the most relevant information first and address objections in a hierarchical manner relative to the consumer.
The Biases Within
Companies spend $Millions trying to understand what their customers are thinking at any given moment in time. Understanding values, beliefs, motivations, and objections of a customer group is the key to understanding how to shape the product/service to their desires.
“Sell Me This Pen” is the famous Hollywood line to get anyone in sales thinking about the best way to address a prospect in a given moment:
- do you sell them on a problem?
- do you sell them on a solution?
- do you sell them on an experience?
Well, to each their own. Google “Sell Me This Pen” and you will see multiple different sales experts weigh in with multiple different answers to the question. The thing is, most people aren’t selling pens. It is simply a metaphor to get you thinking about what the consumer wants.
The question is, does the consumer know what they want at any given moment?
Sometimes yes, sometimes no. There is a spectrum.
Someone walking into a store may have the intent to buy something next week and be ‘just browsing.’ Someone else may be wanting to buy something at a specific store and have no idea what to buy, they are waiting to be sold on something. They will have conscious thoughts that can be addressed in that moment. But they will also have subconscious thoughts that may take more time to address.
The subconscious thoughts are usually more accurately conveyed as biases. Here are 3 commonly held biases that pertain to the science of choice (there is a great list of all the other possible biases here).
Confirmation Bias
The confirmation bias describes our underlying tendency to notice, focus on, and give greater credence to evidence that fits with our existing beliefs.
Source – The Decision Lab
In a nutshell, a potential customer is likely to seek out information that confirms what they already believe. A lot of this is subconscious, so drilling into their beliefs on the spot is impossible. To rewire decision-making heuristics takes a clever mix of information, persuasion, and emotional intelligence (EQ).
Ownership Bias (Endowment Effect)
The endowment effect is usually explained as a byproduct of loss aversion—the fact that we dislike losing things more than we enjoy gaining them.
Source: The Decision Lab
Succinctly, a customer will tend to overvalue what they already own compared to if it wasn’t their own. This theory can go deep into the subconscious of ‘self-concept,’ a powerful psychological motivator for both buying and selling. The major triggers are around the perceived risks/harms of any product/service (ie. loss aversion) and the envisioned gains (ie. opportunity cost) relative to self-actualization. Owning something can make us feel powerful, but that power sometimes make us irrational in the marketplace relative to supply/demand.
Choice Overload Bias (Paradox of Choice)
Choice overload, also known as overchoice, choice paralysis, or the paradox of choice, describes how people get overwhelmed when they are presented with a large number of options to choose from.
Source: The Decision Lab
This whole post deals with the Choice Overload Bias, or decision fatigue. Mentally, we will riddle ourselves with anxiety and or what-could’ve-been analysis if we are overwhelmed. The internet and its infinite possibilities can further compound these anxieties. When there are more choices, expectations are higher and when there are less expectations are lower. Overpromise and underdeliver, or underpromise and overdeliver? Most prefer the latter, yet cognitive biases will have a large impact on how customers feel despite the best effort of a brand.
Going back to “Sell Me This Pen.” It is good to understand the various emotional triggers relative to certain subconscious, cognitive biases before answering for any product or service.
Relevance To The Business Model
A lot of businesses swim in a sea of complexity. This complexity tends to be masked when things are rolling and times are good, but it then tends to blow up all at once when then things head south and times become challenging. One of the major attributes of the Business Model + Value Proposition Canvas’ respectively, is to create a shared language that enables simplification of this complexity.
If you read through multiple cases studies of Business Models/Analytics on this blog or other blogs, you will see a phenomena that most accurately relates to Power Laws. Sales or entire business models are mostly driven by one product or service being sold initially into a ‘niche,’ which is then expanded into other products/services and other larger segments. But even with additional expansion, typically 70-80% of sales or profit will still come from one product/service category or one customer segment.
Looking at consumer markets like Retail, Grocery, Fintech, and others right now, we have seen the following ‘trends’ in recent years as recurring themes:
- Rapid Category expansion.
- Over-complicating core value propositions
- Stretching resources too thin
Rapid Category Expansion
Look at how Thrive Market has performed relative to many other big ‘startup’ names in Grocery Delivery. They have focused on Organics with a gradual expansion into Clean Beauty and Supplements, but still don’t offer ‘fresh foods’ and are not playing the Q-Commerce (Quick Commerce) game. They service middle-income American families and have done much better than the vast majority of competition who went hard after fresh food, instant delivery, and rapid category expansion.
Grocery & Strategy – Thrive Market + Membership
Over-complicating Core Value Propositions
Look at how most Fintechs (not all) started off doing one thing really well. An example is Transferwise (Wise) offering the best service/rates on forex and scaling-that into a global, $Billion dollar brand. They became known for something. Compared to a large majority of ‘Challenger Banks’ who wanted to compete directly against banks and start offering everything. Nowadays, the Fintechs have mostly all taken a big hit to their market caps in 2022 (along with tech in general) but the strongest brands remain those who offer at least one specific value proposition that is many times better than competing banks. Maybe Revolut (and the Super App Strategy) bucks the trend, but they’re the only major anomaly in the sector at this juncture.
Business Model Canvas – Transferwise
Stretching Resources Too Thin
Look at what has happened in D2C (Direct-to-Consumer) in Retail this year. So many red-hot D2C brands – the poster boys of growth and success in 2020 and 2021 – have either been forced into massive layoffs or gone bankrupt These are companies whose margin compression was so dramatic that sudden market changes in multiple different directions (advertising costs, supply chain, inflation, etc.) made them hemorrhage cash on a per customer basis. They assumed they were the ‘new retail’ and they were – just like the ‘retail apocalypse’ hitting Big Box Brands over the last 5 years. D2C stretched their resources to the max to ramp up top-line revenue and had no strategy in place to deal with margin compression. Remember Avon? They are the perfect example of what happens when stretching too thin.
Case Study – How Avon’s Business Model Lost its Luster
The common thread between all three is the desire to be dominant across the entire category. Raise Money – Growth At All Costs – Raise More Money – Grow More – Repeat. This leads to complex business models that very few fully understand or can communicate – fueled by vanity growth metrics – and a “sudden” collapse.
KISS (Keep it Simple Silly) applies as much to menu formatting as it does to a business model. Try to be everything to everyone, go for “world domination,” and scale across Categories – be prepared to blow-up previously successful businesses in a matter of months.
Value Propositions are designed to be simple. If they already are validated (ie. Product Market Fit) with a customer segment then their inherent simplicity helps them to be communicated and sold to other segments. If they are not yet validated, they need to simplified in order to be tested on various prospective customers.
Anchoring the ‘choice’ on whether to buy or sell around principles like the Rule of 3s helps with the communication. Presenting the information in a streamlined way using Information or Content Architecture principles helps streamline the decision-making process. Addressing the cognitive Biases Within – both conscious and subconscious – helps to address and/or reaffirm their value, beliefs, motivations relative to a product or service.
The Founder Movie – Harnessing ‘the Paradox of Choice’
Overall, the behavioral science of ‘how we choose what we choose’ deals with a complex array of conscious value, beliefs, and motivations, mixed with a subconscious set of cognitive biases and emotional triggers. Understanding how these relate to selling and customer intent has huge relevance to business models and their corresponding value propositions.