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Stanford GSB News

 

The Limits of One to One Marketing

August 2000

STANFORD GRADUATE SCHOOL OF BUSINESS—THE VISION OF ONE-TO-ONE MARKETING,a concept that has gained new vigor in the interactive age of online marketing, has captured the imagination of managers, students, and educators. Although target marketing and segmentation based on usage profiles, loyalty, and benefits are not new, the Internet has made it much easier to reach individual customers. The idea is that a firm learns the preferences of each customer, thereby creating an insurmountable barrier to competition. Theoretically, a firm can predict what customers will want before the consumers are even aware of their own needs. But that, warns marketing professor Itamar Simonson, is unrealistic.

Recent studies on buyer decision making suggest that these predictions are exaggerated and create overblown expectations, says Simonson. One-to-one marketing would be the ultimate approach if customers made clear, consistent choices. But not only are buyers frequently unable to explain their own buying decisions, a great deal of research reveals that people's preferences are often fuzzy and unstable. "The weak link in this vision of the future is buyer preferences," Simonson says. "Unfortunately, advancements in technology and the Internet are unlikely to change some basic limitations of those preferences."

Why? First, we now know that buyer preferences are often determined by the options customers are shown and the way in which products are presented. In one study, Simonson and a colleague asked a group to choose between $6 cash and an elegant Cross pen. They asked a second group to choose between $6, the pen, and another less attractive pen. Almost no one in the second group chose the less attractive pen, but it made the first pen look like a bargain. A significantly higher number of consumers in the second group chose the Cross pen over the $6.

Second, customers frequently don't know the value of products and must rely on comparisons set up by the retailer to determine if an offer is "a good buy." Williams-Sonoma, a San Francisco mail-order and retail business, used to offer one $275 home bread maker. Later, a second bread maker, which had similar features except for its larger size, was added. The new item was priced more than 50 percent higher than the original. Not many of the new, relatively overpriced items sold, but sales of the cheaper bread maker almost doubled.

Third, shoppers tend to compromise. In another study, Simonson had a group of consumers choose between two Minolta cameras, one more elaborate than the other. A second group chose among three cameras, including an even higher-end Minolta. In the first group, buyers were evenly split between the two choices. But the addition of the third camera in the second group boosted the share of the mid-priced camera at the expense of the cheapest camera, demonstrating that a company can steer buyers to higher margin products by adding expensive products to the mix.

Fourth, the manner in which products are presented also affects preferences. When products are shown together, consumers tend to choose more on price than brand. When products are displayed sequentially, consumers rely more on brand and less on price. Thus, less expensive products will do better if presented on the store shelf next to more expensive, better-known brands, rather than on end-of-aisle displays.

Consumer confusion due to information overload is even more likely to occur on the Internet. In yet another study, Simonson and a colleague examined 500 online auctions of new DVDs, CDs, and books. In 494 of the 500 auctions, the winner would have paid less by buying the identical product from online retailers.

Marketers will be ill-advised to assume that simply adopting one-to-one marketing via the Internet will dramatically change the basic rules of competition. Results are likely to be more impressive if they combine customer knowledge with an understanding of what influences buyer decisions. A wine seller who not only relies on a consumer's demographics and purchase history but also manages the set of wines presented on a screen or catalog page is likely to have greater success.

—by Barbara Buell

Related Information

The Role of Effort Advantage in Consumer Response to Loyalty Programs: The Idiosyncratic Fit Heuristic, Ran Kivetz; Itamar Simonson,GSB research paper #1738, 2002

The Effects of Incomplete Information on Consumer Choice, Itamar Simonson; Ran Kivetz; GSB research Paper #1609, 2000

The Effect of Product Assortment on Consumer Preferences, Itamar Simonson, Journal of Retailing (Vol. 75, No. 3), 1999

Research

Chip Heath, Ideas that Stick Without Advertising Dollars
Chip Heath Faculty Profile

Jennifer L. Aaker, Matching the Pitch to the Perspective
Jennifer L. Aaker Faculty Profile

Sonya Grier, Selling Violence to Children
Sonya A. Grier Faculty Profile

Itamar Simonson, Earning the Right to Indulge
Itamar Simonson Faculty Profile