It’s generally believed that a consumer will become interested in a proposal and remain engaged in the sales process if he perceives that the benefit he will receive is worth the cost of obtaining it. This premise seems plausible, but it often leads to an assessment that fails to consider the breadth of costs involved, or at best a superficial monetization of benefit and cost that seems mathematically sound but still fails to explain or predict consumer behavior.
So while it is plausible that an opportunity in which benefit exceeds cost has the potential to be interesting and engaging to a prospect, benefit and cost are only two factors and are often considered superficially and out of context of the prospect’s entire portfolio of needs and resources. A broader, deeper, and less quantifiable assessment is necessary to improve the accuracy of prediction and of strategy development.
The benefit is the total motivation of the prospect to obtain and use a product (good or service), which itself has a number of factors:
- Functional Benefit – The practical results of using the product.
- Psychological Benefit – The feelings that are generated by the use of the product.
- Esteem Benefit – The way that others will perceive the person who uses the product.
- The Benefactor – The value of the relationship between the purchaser and the user of the product.
Each of these dimensions of benefit is imaginary and subjective. They are imaginary because the benefits have not been experienced yet and may not be what the prospect imagines (even if it is a repurchase, he imagines the benefits will be the same as before. They are subjective because each person places a different value on the same benefit, e.g. esteem is more important (hence valuable) to some than others.
The benefits that the prospect predicts are first assessed against the cost of obtaining them, but this is often considered in a superficial and limited manner. The seller may consider the money-price as his revenue, but the prospect considers the full scope of costs:
- Money Price – The amount the buyer expects to pay the seller, plus any additional money costs that the prospect will incur (taxes, delivery fees, etc.) that require an expenditure of cash.
- Method and Terms of Payment – In some instances, the prospect may consider the methods and terms of payment unacceptable or inconvenient, particularly when hey violate expectations.
- Time Required – This includes both the time required to make the purchase and the time required to use the product to obtain the benefit.
- Effort Required – Likewise, this includes the effort required to make the purchase and that required to use the product to obtain the benefit.
Of all these costs, only the money-price is quantifiable: the rest remain subjective and tend to be of much greater importance to the buyer than to the seller, who is prone to be dismissive of them. Hence, the most common mistake made by those who wish to compete on price is figuring that the money price is the only element that will be considered by the buyer.
Most experienced customers have been disappointed in one way or another by a purchase they have made in the past, and are likely to be leery of future purchases. Specifically, they are likely to consider the possibility that the deal will not work out as expected. Factors of risk include:
- Certainty of Benefits – The assessment of whether the functional, psychological, and esteem benefits of the purchase will be satisfactory to both the purchaser and the benefactor
- Certainly of Costs – The prediction of whether the expected costs (price, terms, time, and effort) are accurate, and the fear that there will be additional costs involved.
- Certainty of Abilities – The consideration of whether the purchaser and benefactor have the ability to obtain the product and derive the desired benefits from it
All risks are imaginary and subjective. The prospect imagines what might go wrong and performs an assessment of whether they will be encountered. Where the prospect has experience with both vendor and product, the fear of risk is mitigated, but uncertainty still remains because past performance is not a guarantee of future results.
External to the purchase, but implicit in the buying situation, is the consideration of opportunity costs: the money, time, and effort that is required to obtain and use a product is deducted from the total budget of the purchaser, user, and beneficiary of the product. An assessment of opportunity cost should consider these factors:
- Competing Needs – The estimation of the value of the fulfillment of one need is seen in the context of all needs that the prospect has. The benefit of this purchase may be relatively unimportant.
- Competing Costs – The money, time, and effort of obtaining a product are considered in terms of the overall impact to the prospect’s budget. Even if the need is important, the cost may represent too great a sacrifice.
- Proportion of Resources – In some instances, a prospect may consider the proportion of his available resources that must be devoted to a given need. To spend a significant portion of one’s budget on one purchase creates a heightened level of anxiety about the purchase.
In all instances, opportunity costs involve the assessment of sacrifice, which is defined as the loss of a greater value for the sake of a lesser one. Rational individuals do not make sacrifices, but instead seek to pursue the greatest value even if it means foregoing lesser values (which is not by definition a sacrifice). The opportunity must therefore be seen in the context of other values.
Interest and Engagement
Each of the factors above have largely been considered in the process of obtaining a product – but the purchase of the product is not the end a buyer seeks to achieve. The buyer’s need is satisfied when the product is purchased and used, and only then is the value delivered. Much can go wrong along the way.
Neglecting the totality of the experience is a very common mistake, made by buyers and sellers alike. For the seller, neglecting engagement leads to dissatisfied customers and loss of repeat business. For the buyer, neglecting engagement leads to wasted money, disused products, and a general sense of dissatisfaction.
Engagement is maintained by reinforcement of the assessment of the factors that led to interest: whether the prospect still believes the benefits will be received as expected, that only the costs expected will actually be incurred, that the risk remains moderate, and that the opportunity costs are acceptable. If this fails at any point, the result will be abandonment: the customer will “drop out” of the sales funnel, or he will discontinue use of the product before receiving the benefits.
Conclusion and Caveat
The application of a broader and more detailed assessment of cost, benefits, risks, and opportunity costs can serve to improve marketing strategies: consider each of the factors and subfactors listed above from the perspective of the prospect (or prospects, where buyer and user are separate).
At the same time, this is a work in progress: what is presented here is the result of some research and meditation on the topic, and may not be comprehensive: additional factors will be identified and more granular details will arise. This is not the ultimate answer, but merely a better one for the time being.