The Business Models Handbook

Templates, Theory and Case Studies

Paul Hague

• Publisher: Kogan Page
• Year: 2019
• ISBN:
  9780749481889
• Edition: 1
• Topic: Business
• Subtopic: Business Strategy
• Index: Business

Enhance your business and marketing planning and overcome common challenges, with this collection of the most valuable and reliable business frameworks and models. Business frameworks sit at the heart of every successful business. They add structure and clarity to business problems and can help practitioners overcome the everyday challenges they face. The Business Models Handbook brings together the most helpful and widely used templates and frameworks into a single, invaluable resource. Each chapter focuses on an individual business framework, giving an overview of 50 of the best known frameworks and how it will help an organization grow and be profitable. Each supported by a real-world case study, these include ANSOFF matrix, Price-Quality-Strategy model, Stage-Gate model, Service Profit Chain and many more. Authored by a leading global market researcher with a background working on over 3, 000 different research projects, The Business Models Handbook is an invaluable resource for any student or professional. Online resources include lecture slides that align with each chapter.

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System 1 and System 2 thinking

Identifying the emotional forces that drive decisions

What the model looks like and how it works

It is now widely accepted that emotions play a big part in decision making. Understanding how emotions work within the decision-making process has become important to marketers.

Behavioural economists recognize two levels of thinking when it comes to decision making. The first level of thinking is called System 1. It is fast, automatic and arises out of the subconscious. It is a natural reaction to dealing with a situation. Humans are programmed to respond quickly and automatically for safety. If we were in the jungle and saw a tiger in front of us, we would not spend much time analysing the situation, we would react immediately. Whether or not it is the right thing to do, we would most probably run.

System 1 thinking is not confined just to decisions related to safety. System 1 thinking is driven by emotions. The problem with System 1 thinking is that people often do not recognize that they are thinking. The process occurs in the subconscious and so it is difficult to unpick and describe. Even if we are prepared to admit that the choice of a product is driven by emotions we may find it difficult to say exactly what those emotions are and how they are working.

System 2 thinking is easier to analyse. It is the slow, calculating, conscious and logical way in which decisions are made. People find it easier to recognize and describe them. System 2 thinking is how most of us think we make decisions when in fact it could be a post-rationalization that follows the true driver, which was emotions.

Our System 1 thinking, and the actions we take, are influenced by biases. These are also referred to as heuristics. What has happened in the past will almost certainly shape how we think and our actions in the future. There are a number of factors that influence the biases:

Anchoring

Reference points help us in our decision making. If we mention a fact or a figure to someone, it could influence their answer. For example, if we say to people ‘How likely are you to buy this product at a price of more than $100?’ We have introduced the idea that the product could be worth $100. We may get a much higher proportion of people saying they are likely to buy it at a price of more than $100 than if we were simply to say ‘At what price would you buy this product?’ The $100 is the anchor.

Availability

We are influenced by things we can quickly and easily recall. Something that has happened recently or something of critical importance will be readily available in our minds and could bias our response. Asking someone how happy they are with a supplier immediately after they have suffered a problem with that supplier is likely to get a strong negative reaction; possibly a harsher reaction than is justified.

Optimism and loss aversion

There is an old saying in business that ‘everything costs more than you thought and takes longer than you thought’. This is because of the prevalence of us overestimating the benefits and underestimating the costs. It results in us sometimes taking on projects that are risky, against our better judgement.

Framing

The way a question is asked can materially affect the answer. For example, people could be told that the survival rate of a surgical operation is 90 per cent or they could be told that the mortality rate is 10 per cent. Both figures are correct but people are more likely to happily agree to the operation if they are told that there will be a 90 per cent success rate.

Sunk cost

We are guilty of throwing good money after bad. We make decisions that have a poor outcome and yet we are drawn to continue down the same path, perhaps to try to change the outcome and alleviate any feelings of regret.

The origins of the model

Daniel Kahneman is a psychologist and a professor at Princeton University. He is a Nobel prize winner for his work on behavioural economics. In the 1970s Kahneman worked at Stanford University where, with two other psychologists and behavioural economists – Amos Tversky and Richard Thaler – they developed theories about how we think and to what extent these thoughts are influenced by heuristics and biases. It was not until 2011, when Kahneman published these theories in his book Thinking, Fast and Slow,¹ that they became well known and popular.

Developments of the model

People are still working out how to use System 1 and System 2 thinking in business. We know that emotions drive decisions but how do we use this knowledge practically?

We need to figure out exactly how emotions trigger actions. Department stores have long recognized that it pays to put the perfumery department on the ground floor close to where people enter the store. Nice smells put people in a good mood to linger and shop. Smells are used in supermarkets where the aroma of baking produces a queue at the bread counter.

There are other subtle influences on our emotions, some of which we may not be aware of. The use of colour can convert a powerful message. Blue is the colour of trust and reliability. Red is the colour of speed and courage. Orange and yellow communicate cheapness but also fun.² Using colour in logos, on packaging and in promotions can carry our emotions down a certain path.

People say that they like innovation. ‘New’ is a vitally important word in marketing. However, something that is so new it doesn’t seem familiar may worry people. Not everyone is an innovator. We therefore need to find ways in which we can make a new idea more acceptable so that people understand it and are more likely to buy it.

The model in action

Market researchers have been guilty in the past of assuming that most decisions have some rationality. In part this has been guided by traditional economics, where it is assumed that the rational buyer weighs value and price when making a decision. Certainly some element of rationality is involved in most decisions. People are fairly rational about how much they can afford to spend on a product and they choose within a price range. Within that price range they may be heavily influenced by emotional factors. Simple products such as lipsticks, foodstuffs and items of clothing are chosen quickly. Someone walking around a supermarket usually gives no more than a few seconds of thought to what they throw in the basket. There is a lot of System 1 thinking here.

So too when we want to measure brand awareness, we rely on System 1 thinking. It is the brands that people mention spontaneously and without a great deal of thought that are usually the strongest. We also know that people forget to mention things and so we prompt by reading out a list of brands and ask which they know. Here we are tapping into protracted thought – System 2 thinking.

There are other things that demand more thought and where decision making is extended. Take, for example, the choice of civil engineer to build a major bridge. It may take months of negotiations and procrastinations with a number of civil engineering companies before one is chosen. There will be many people involved and less room for intuitive decision making. This is not to say that factors such as the brand of the civil engineer will be unimportant. However, if there is a choice between two civil engineers, there will be a good deal of rational scoping until the offers from each look reasonably similar. At that point the brand of civil engineer could swing the balance in favour of one of the companies. When there is nothing else to choose between two companies on rational factors, the emotional factors become important.

System 2 thinking is required to generate ideas. If we ask people what improvements can be made to a product or service, an initial reaction may be ‘nothing, it is fine’. System 2 thinking involves effort and people must be pushed to think harder. We could use gamification and say ‘you have 20 seconds to mention as many new applications for the product as possible’. In this way we would be forcing the respondent to make an effort and think in a System 2 way.

Kahneman tells us that when people find it difficult to answer a question, they may substitute their own ideas. For example, if someone is asked how their car can be improved, they may answer by saying they cannot think of any improvements (the lazy System 2 option) or they like their car because it d...