A Report on the Rationality & Irrationality of

Consumer Behaviour & Its impact on Organisations

July 3, 2014

Great Lakes Institute of Management
Group 1 - PGDM 2015
Contents

Defining Rationality ............................................................................................................................. 2

The Consumer - Why do they behave the way they do? ................................................................. 2
The factors influencing consumer behaviour ............................................................................... 2
Classification of buying behaviour ................................................................................................. 3
Models of purchase decision making: ........................................................................................... 4

The Marketers Perspective ................................................................................................................. 6
Who wants rational customer? ....................................................................................................... 6
Irrational Customer An Alternative ........................................................................................... 6
The Middle Path ............................................................................................................................... 7

Conclusion ............................................................................................................................................. 9

Acknowledgements ............................................................................................................................ 10


Defining Rationality
Rationality can be defined as possessing the ability to reason. Classical economic theories state that
consumer rationality is the maximization of utility, as per explicit utility maximization standards.
However, in marketing, rationality refers to taking the best action and this in turn is based on a set
of decision variables & interrelationships between these variables.
Signalling is the process in which companies convey & communicate information regarding their traits
to consumers, by engaging in building a believable & reliable image. This process of information
transmission, when used in the context of marketing requires highly rational consumers, whereas
certain other forms of marketing such as loyalty-building require consumers to be irrational (Kirmani
and Rao, 2000).

The Consumer - Why do they behave the way they do?

The factors influencing consumer behaviour
A consumers buying behaviour is influenced by Cultural, Social and Personal factors.
Cultural Factors:
Culture, subculture and social class are the most important influences on consumer behaviour of a
person. A person growing up in a certain country would have a different values and behaviour than
the person in some other country. For example a child growing up in India would have completely
different set of values than a child growing up in America.
Within a culture there are smaller subcultures. Take for example a country like India where a value
like respect for elders is found everywhere but there are certain values and traits unique for people
living in different states.
Within every society social stratification is exhibited. Social Classes are a way to represent this
phenomena. In India, Socio-Economic Classification is done to classify buyers in urban areas which
represents people of different social class.
Social Factors:
Social factors such as reference groups, family, role in society also play an important role in a
consumers behaviour.
Reference groups are the groups which a person interacts with on regular basis. They have a direct
or an indirect impact on attitudes and behaviour. There are primary groups with which a person
interacts on a daily/regular basis. Family and friends comes under primary groups. Then there are
secondary groups such as professional, religious groups. Reference groups play important role in
shaping up behaviour and attitudes as an individual is exposed to different lifestyles, value systems.
Family is the most important and influential primary reference group. There are two families in buyers
life
1. Family of Orientation which consists of parents and siblings
2. Family of Procreation which consists of persons spouse and children.
The values that a person gets from these two are different. While most of the fundamental values such
as religion, politics etc. are shaped by the Family of Orientation, the everyday buying behaviour is
influenced by the Family of Procreation.
Roles and Status Roles in society dictates the behaviour. A vice president of an MNC would have
different status than that of a sales manager and hence their attitudes and behaviour would be very
different
Personal Factors
Age and Stage in the Life Cycle, Economic Status, Personality, and Lifestyle are the personal factors
which influence a buyers decision.
Age and Stage in the Life Cycle: The buying behaviour of a person in the teenage and a person in the
60s would be very different.
Economic Status: An affluent family/person would have different buying patterns than someone who is
from a lower income group.
Personality: By personality, we mean certain psychological traits of a person which play an important
role in a buying decision.
Lifestyle: The pattern of living of individuals maybe different even if they are from a same subgroups,
social class, occupation, status. This pattern of living also plays a part in consumers buying behaviour.
Classification of buying behaviour

1. Dissonance-Reducing Buying Behavior
Customers show dissonance reducing buying behavior when they are highly involved in the
purchase but see little difference between brand alternatives. For instance, if the customer is
purchasing a lawn mower or a diamond ring, he/she will exhibit this type of behavior. Here, after
making the purchase, the consumer notices that the purchase of any other brand would have been
just as good.

2. Routine Response Behavior / Habitual Behavior
Customers exhibit routine response behavior when they have past experience of purchasing a
product/ service and automatically make the decision to purchase again. This type of buying
behavior is also called habitual behavior as a consumer purchases habitually. Here, brand
recognition plays a large part.

3. Complex Buying Behavior
A type of purchasing scenario when the consumer is highly involved with the purchase and there
are significant differences between brands. For instance, while purchasing a new home or a laptop
computer, consumers exhibit this type of buying behavior. Such transactions are complex as they
involve significant financial commitment and there are large differences between brands (requiring
a large amount of information search).

4. Variety-Seeking Buying Behavior
Consumers show variety-seeking behavior when the consumer is less involved with the purchase,
yet there are significant differences between brands. Since the cost of switching products is low
here, consumers easily switch from one brand to another. For instance, while buying frozen
desserts and soft drinks consumers exhibit this type of buying behavior.

When it comes to marketing strategies, both dominant players as well as challengers follow different
strategies. The market leader will promote habitual buying behavior (so as to retain consumers)
while the challenger will promote variety-seeking behavior (so as to break loyalty) and gradually
move towards habitual buying behavior.
Models of purchase decision making:

Models of Purchase Decision Process: How consumers make purchase decisions can be explained by
following models. These models are based on differing views of consumers psychology.
Economic View:
In this case the consumer is assumed to be highly rational. As per this model, consumer has to have
a complete knowledge of all the available alternatives; he should be able to rank them in terms of
their benefits & features; and finally should be able to identify the best among the alternatives.
However, realistically speaking, such kind of perfect world does not exist.
The classic economic model is also unrealistic as consumers are:
i. Bound by their pre-existing habits, reflexes & skills.
ii. Constrained by their values & goals.
iii. Constrained by limited knowledge
The economic model has been rejected often for being too idealistic & simplistic.
Passive view:
This model establishes that consumers are irrational (impulsive) in their decision making and can be
manipulated into purchase decisions. Therefore, they are highly amenable to aggressive promotional
efforts of the sales people.
However, this view fails to recognize that the consumers play a crucial role in buying decisions.
Although, they can make an impulsive purchases at times, they also collect all the relevant
information and carefully evaluate every alternative before arriving at the purchase decision.
Therefore, in the real world the consumer cannot be considered as passive and hence susceptible
manipulation. Hence this simplistic view can also be considered as unrealistic.
Cognitive View:
According to this model, the consumer is considered as a rational problem solver. As per this view,
it is believed that consumers actively search for all the information when they have to select a
product/service. However, this process doesnt happen each time the consumer wants to buy a
product. The model predicts that the consumer will stop seeking information at a stage when he/she
feels that they have enough information to take that particular purchase decision satisfactorily.
The cognitive view is somewhere between the economic view where a perfect consumer makes
perfect decisions and the passive view where consumer is believed to be easily manipulated. The
consumer in this model does not possess total knowledge, but he actively seeks and evaluates
information on various alternatives.
As per this model, goal setting is of major concern for the consumer. For instance, while purchasing
a detergent he may want a detergent that not just gives a good wash but is also good for clothes.
Emotional View:
In reality a consumer goes through various emotions while purchasing a product or a service & these
feelings or emotions can be highly involving to the consumer in many situations. A large number of
the purchases made by consumers are quite impulsive, based on their emotions at the time of purchase
& in such cases there is no careful searching, deliberations & evaluation of various alternatives before
buying. This does not mean that such decisions are totally irrational. Products which offer emotional
satisfaction are also perfectly rational consumer decisions. Many designer products make use of this
factor to market their products by stressing that the consumer deserves this product although very
expensive. So, there are many consumers who actually feel better when they make such expensive
purchases on an impulse based on their emotions.


The Marketers Perspective

Who wants rational customer?

Companies introducing new product categories
When an organization is introducing new products that are pioneer in their fields i.e. when a company
is introducing a new product category, it wants its customers to understand the need of the product
and realize it rationally. It is important to look at rational customers as they have to set the benchmarks
for comparison.
For example, when Nokia introduced its first camera phones into the market, it aimed at customers
who are looking for cheaper phones with cameras as it came as a perfect crossover between digicam
& the reel cameras.
The Underdogs
In an almost monopolistic market, underdogs are the products that run successfully and create a niche
for their own. Such products usually rely on rational customers to judge and use their products from
a long term perspective.
For Example, Nirma in an HUL dominated market, Micromax and Lava in a Samsung & Sony dominated
Android phones markets, Fogg Deo in an Axe dominated market etc. They used rational pitches like
less rates, better processors and count of usage times to appeal to the consumers.
The Service Industry
The service industry is dominated by services that appeal rationally to the consumers. They rely on
facts like fast and efficient, cost effective, easily accessible service etc. for marketing their services.
Thanks to social networking, services driven industries today are at the mercy of the all-knowing
customers. For example: logistics industry.

Irrational Customer An Alternative

Hedonic or Luxury
They are typically the products that provide instant pleasure or gratification. They usually do not have
defined utilities. They largely depend on irrational aspects of any situation to market themselves. They
dont want their consumers to think. It is rather the emotional aspects of the product that they are
more interested in. For Example: Chocolates, high end perfumes, fountain pens.
Auction Houses: Art & Memorabilia
You cannot put a price on art. This perhaps is not true. Art like paintings and memorabilia are over-
priced. These products have no utility attached to them. They are just status symbols.
Alcohol & other narcotic substances
It is universal that alcohol is injurious to health but still consumers are addicted to it. The beverage
manufacturers rely on the macho-ism associated with the product to market it. The paradigm is not
about attributes of the products. They need irrational consumers who are guided by the idea of fun
with alcohol.

The Middle Path

FMCG
Typically FMCG companies want both the type of consumers.
From a long term perspective, they need consumers who understand their products and are loyal to
them. These consumers find the products relevant and shall consume it over a period of time remaining
brand loyalists.
At the same time, FMCG companies want the irrational consumers to be a part of their loyal group.
These irrational consumers can be the ones bound by habits, who are not concerned with the
attributes. They are also important because they are the first ones to try a new product.
Thus, during the early stages, irrational consumers are as important, but eventually it is the aim of the
organization to convert these trials to a rational loyal consumer.
Banking Industry: The Age of the Company & Industry
When an industry is old and has several established players, the trust and appeal of the major players
has already been established. They focus on irrational customers on the basis of emotional pitch. But
the newer players that come into that industry with better products, focus on the rational benefits.
They tend to convince people about the actual benefits, thus profiting from rational behavior. The
banking industry in India is one of the oldest and is one of the few sectors which has undergone
multitude of changes in terms of ownership, regulation, products and the services offered. Today, the
banks can be broadly slotted into 3 categories:
1. Legacy Banks: These are the public sector banks many of which have been in existence since
before independence and a vast majority of them were privately owned before the nationalization
drive in the 1970s. To name a few: SBI, Canara Bank, Andhra Bank, Punjab National Bank,

2. Private Sector Banks: The liberalization and the opening up of the Indian economy in the 1990s
ushered in an era of private banks whos predecessors were primarily operating in a controlled
environment and in most cases for the benefit of a particular segment of the society. For example:
ICICI, HDFC, IDBI, UTI Axis, etc.

3. New Age Banks: These are the ones which were started in the recent past and have been operating
for less than a decade now. Many of these focusing specifically on the service and a banking
experience like none other. Yes Bank, Ratnakar Bank, and Kotak Mahindra.
So how does the age of the company & industry matter? The banks in each of the above mentioned
three categories have adopted different strategies which are as follows:
1. Legacy Banks: The eroding customer base, has been a worrying factor. Many of these banks are
well known but with the advent of the newer banks and the ease of access offered by them have
induced them to come up with advertisements with an emotional appeal.

2. Private Sector Banks: These banks have focused on the ease of use and banking being more
customer friendly. The focus of the advertisements being on the accessibility and the features such
as online or mobile banking offered by these banks.

3. New Age Banks: Poaching the existing customers of other banks and capturing the first time users
of banking services has been the primary focus of these banks, and one of the ways that they have
been doing this has been by focusing on the key factors such as the interest rates. Case in point
being the Kotak Mahindra Bank Advertisement on 6% interest on a Savings Bank Deposit.
Therefore it can be concluded that the age of the company and the industry in which they operate
have a bearing on whether the focus would be on rational or irrational consumers.


Conclusion

From the above analysis, we can conclude the following things:
a) It is not only the rational behaviour or irrational behaviour that is important to the marketer,
more important point is what leads to such behaviour. Whether it is the public v/s private
behaviour, the stakeholders in the decision-making and parties involved, the constraints in
decision making etc., that contribute to the rationality aspect of the consumer behaviour.

b) From a marketers perspective, introspection has to be done and therefore the following factors
have to be considered:
i. Age of the company v/s Age of the industry
ii. The marketing mix for the product i.e. STP & 4Ps
iii. The long term plans for the company & products.

c) From a long term perspective, rational customers are always better as they know the utility of
the products and understand their needs.
In the end, rationality or irrationality of a consumer is not just the organizations choice, they need
to serve every consumer right.

Acknowledgements

This project has been conceptualized and prepared by the team members of group number 1 of
PGDM-15 batch. Following are the details of the team members:
Adarsh P B DM15204
Arshiya Das DM15110
Sakshi Sharma DM15248
Nishanth M DM15235
Gundeep Singh DM15220
Vaibhav Agnihotri DM15262