How Businesses Win By Shortening The Customer Decision Process
A Case Study Using Westwing AG (WEW)
“You can buy a person’s time; you can buy their physical presence at a given place; you can even buy a measured number of their skilled muscular motions per hour. But you cannot buy enthusiasm… you cannot buy loyalty. You cannot buy the devotion of hearts, minds, or souls. You must earn these.” – Clarence Francis
Whether buying a pair of shoes, a loaf of bread, or a new house, consumers intuitively use a simple framework to make decisions. This framework, discovered by John Dewey in 1910, is The Consumer Decision Process.
The Consumer Decision Process (or CDP) explains how customers subconsciously identify a need, filter information, and make the final purchase.
As investors, the CDP is an important framework because it offers a first-principles understanding of the economics of every business through the individual purchase decision.
There are five stages to the CDP:
Problem Recognition
Information Search
Alternative Evaluation
Purchase Decision
Post-Purchase Evaluation
Each stage presents unique opportunities for companies to capture customers’ wallets and mind share.
Here’s the exciting part. The speed at which customers iterate through the CDP varies depending on a host of factors, including:
Type of product
Familiarity with industry
External network of family and friends
Purchase history
This difference makes intuitive sense. Consumers don’t think about which toothpaste to buy but will spend weeks deliberating between oak and cedar bed frames.
Our goal as investors is to take new information, develop a model, and use that model to place company-specific bets.
Today’s Model: The best businesses shorten the time needed for customers to iterate through the Consumer Decision Process.
We’ll use Westwing (WEW), one of our portfolio holdings, as a case study to show how CDP can be used to model investment decisions.
Problem Recognition: The Most Important Factor
The first step in the CDP is Problem (or Need) Recognition. Customers buy products to fill the gap between their actual state and their desired state. In other words, to solve an internal or external problem.
Internal problems, for example, are things like hunger, thirst. They also involve psychological conditions like loneliness or depression.
External problems germinate from advertising, chatting with friends, or window-shopping.
Let’s apply this to our Westwing (WEW) investment example.
WEW is a European leader in Home & Living eCommerce. The company is a curated, shoppable magazine.
The company provides a full range of Home & Living categories, making Westwing a place where everyone finds their favorite pieces in an inspirational environment.
As a furniture and home decor retailer, WEW has easily definable Customer Problem Recognition points. Most consumers buy new furniture when they’re moving, upsizing/downsizing an existing space, newly married, or having children.
Buying furniture solves an external need (i.e., you need a couch to sit on in your new home). Yet concurrently, furniture purchases solve deep-rooted internal needs.
Nicole Ponder explains this phenomenon in her paper, Consumer Attitudes and Buying Behavior for Home Furniture (emphasis mine):
“A large 72.7% of respondents agreed that, “the design of my furniture reflects my personality,” 67.0% of respondents agreed with the statement, “A lot can be said about a person from the furniture s/he owns,” and 60.7% agreed that they express themselves with the furniture they buy. Regarding furniture as an expression of one’s personality, there were no differences across generational groups, but, not surprisingly, females were more likely than males to agree with this statement.”
The combination of external and internal need recognition results in a lengthy research process before purchase.
Information Search & Evaluation of Alternatives
Information Search is the second stage of the CDP framework. Here, the customer gathers all the necessary data to make an informed purchase decision. It’s also where the time bottleneck occurs.
As we mentioned earlier, customers iterate through the CDP at varying speeds depending on different factors. The source of that speed differential lies in the Information Search stage.
Shoppers, for example, spend little time deciding which loaf of bread to buy.
They don’t need to research bread because they know which one they want.
In our WEW investment example, we know customers want to buy furniture. Yet furniture is one of the least-impulsive products consumers purchase.
A 2017 KPMG study noted that only 14% of consumers buy new furniture less than a week after identifying problem recognition.
There are two main reasons for the extended research process. First, furniture is expensive relative to other consumer goods purchases. The more expensive the item, the more thought (i.e., research) goes into the final decision.
Second, consumers expect their furniture to last a long time. Ponder’s research shows that 95% of respondents expect their furniture to last “for many years.”
Consumers engage in two types of information searching:
Non-personal
Personal
Non-personal information searching includes TV ads or noticing specific pieces when browsing shopping malls. Personal information searching involves asking friends and family and weighing each opinion before purchase.
This is another area where furniture/home decor presents unique characteristics.
Brands, for example, command little influence in a consumer’s information search process. Ponder notes that (emphasis mine):
“Similar to results obtained five years ago, consumers are not particularly loyal to specific furniture brands. A majority of respondents (77.9%) either disagreed or were neutral about the statement, “I am very loyal to specific brands of furniture.” Respondents also tended to disagree with the statement, “I stick with just a couple of brands of furniture that I know I like.” 76.3% of respondents disagreed with this, and only 3.1% strongly agreed with this statement (down from 5% in 2008).”
How does this translate into competitive advantages for Westwing? WEW is a personally curated online shoppable magazine. Platform users don’t care about the brand, but about the piece’s style, how it looks in a room or how it makes them feel.
WEW exploits the customer’s desire to find furniture that expresses their personality. Here’s an excerpt from our Collective-only write-up (emphasis mine):
“Inspiration leads most home decor purchases. Yes, you need a coffee table. But you don’t want just any run-of-the-mill table. You want something unique. A table that makes guests ask, “wow, where did you get this?” Conventional search-based e-commerce fails to deliver inspiration-led purchasing. A personalized online shopping magazine enables users to scan designs they love and hate, then choose ones that best fit their space. In turn, each product they buy makes the personalized curation feed that much better the next time they use it.”
Westwing’s platform also makes it easy for customers to Evaluate Alternatives, the third step in the CDP. Users can compare products via WestwingNOW, the company’s permanent furniture listing platform.
After gathering information and comparing alternatives, our shopper is finally ready to purchase their furniture.
Purchase Decision: The Part Everyone Sees
Purchasing the product is the fourth step in the CDP.
At this point, the shopper makes a clear intention to purchase a specific product. Still, two factors can disrupt a customer’s intent to buy:
Negative network feedback
Negative external shocks
Negative feedback includes last-minute opinions from close family and friends on specific product features or losing a job during an economic recession.
Westwing creates a better purchase decision environment to buy furniture. Here’s how.
The company doesn’t push hard sales tactics. They’re a marketplace showcasing furniture that’s algorithmically curated to each shopper’s style. So even if the customer doesn’t buy, they still enjoy browsing the latest selections and Daily Themes for potential inspiration.
It’s one of the reasons why 85% of WEW’s revenue comes from users that use the platform 100 times or more during the year.
Westwing’s customer retention and obsession fly in the face of industry-wide data. Currently, less than 5% of WEW’s addressable market buys furniture/home decor online. As of 2016, only 4% of shoppers preferred to buy furniture via smartphone applications.
WEW’s platform expedites the CDP while simultaneously making it a more enjoyable, inspirational experience.
Post-Purchase Evaluation: Cognitive Dissonance & Buyer’s Remorse
The final stage in the CDP evaluates whether the purchase fills the gap between a consumer’s real condition and their desired state.
It’s here that consumers ask, “Did this purchase solve my problem?” and where Buyer’s Remorse emerges. Buyer’s remorse is multiplied by two factors: the price paid and time spent researching.
Furniture is both expensive and research-intensive. As such, you’d expect a higher percentage of buyer’s remorse. But that’s not true.
Ponder’s study found that only 13% of furniture shoppers experienced buyer’s remorse. Such low rates have significant implications for companies like Westwing.
Fewer cases of Buyer’s Remorse lead to higher overall shopping experiences.
WEW customers are delighted to shop on the platform because they know they’ll make the right purchase decision that reflects who they are as a person.
And since WEW’s platform constantly curates to each shopper’s unique taste, users experience even better CDPs with every login.
A First-Principles Consumer Decision Framework
Westwing is one example of using the CDP to gain a first-principles understanding of how consumers buy products. The best part about the CDP is applying it to any industry, customer, and geography. Additionally, you can use it on B2B, B2C, and C2C business models.
Through CDP Analysis, we were able to show the power of WEW’s personally curated shopping experience. The company creates a faster and more enjoyable CDP for its shoppers, resulting in higher retention and usage frequency.
Next week we’ll feature a company that’s creating the best CDP experience in the cosmetics industry. In the meantime, what company do you think fits this model?