How People Really Make Decisions

Recent research has documented for the first time how people actually make decisions. An interdisciplinary team, based at the Max Planck Institute for Human Development (Berlin and Munich) and the University of Chicago, has published results of extensive inquiries into the methods people use in all kinds of situations. This study, Simple Heuristics That Make Us Smart (Oxford University Press, 2000), documents the specific techniques people use for making decisions quickly based on a minimal amount of information.

It turns out that people use a limited set of decision-making strategies or techniques. We use them from the time we're children (kids who are taking "multiple-guess" tests in school resort to these techniques for narrowing their choices), in college, in our personal lives, and of course in our business activities.

The researchers speculate that these techniques, or "fast and frugal heuristics" as the authors of Simple Heuristics call them, are hard-wired into our brains, part of our evolutionary survival package. Our ancestors didn't have the biggest teeth or the sharpest claws, so they needed to make good decisions. Those decisions helped them survive, and they help us function today.

To determine whether people use these techniques in making a proposal-related business decision, I conducted experiments for over a year in which I distributed a proposal for Internet security services to groups of business professionals. I asked them to evaluate the proposal, noting the time when they reach a decision either in favor of or against the offer being made in the proposal.

They are looking at a real proposal, one that deals with a complex, important problem and offers a solution priced at approximately $250,000. So how long does it take people to make a "keep/discard" decision? On average, a little over six minutes.

Fast and frugal, indeed!

By understanding how people gather and process information, we can gain good insight into the best way to organize our proposals. Also, we can structure our evidence for maximum effectiveness and can prioritize the content to match the kind of information the customer is looking for, based on the decision techniques he or she is using.

In Simple Heuristics the authors describe seven heuristics of choice, but of those there are three that are particularly important for making business decisions.

Recognition

The first and simplest technique relies on recognition as a simple cue to make decisions. The basic principle is that given two objects, one recognizable, the other not, we infer that the recognized object has higher value.

Here's an example: Suppose your laptop computer suddenly died. You go to your I.T. manager and tell her that you need a new one. She says, "Well, you're in luck, because I happen to have two brand new laptops with all the software installed. You can have either this IBM ThinkPad or this Kretzenheimer Millennial. Which one do you want?"

Chances are you'll take the IBM. Why? Because you've never heard of the other one.

To test this principle, I have often distributed a "lunch menu" at the outset of seminars. The so-called menu gives attendees two choices: a turkey club sandwich or baked gravlox with cremora sauce. As you might expect, over 90 percent of participants will choose the turkey club sandwich. A few adventurous souls choose the gravlox, and a few will complain that there's no vegetarian option. But people for the most part are not willing to eat something for lunch that they've never heard of.

So what does this mean for our proposal efforts?

First, it suggests how important pre-proposal activities are. If the evaluator has never heard of us and our proposal lands on his or her desk, chances are we won't get much more than a cursory glance. (Conversely, if you work for a Fortune 500 company, you may get passed along to the next stage of evaluation based on recognition alone.)

The recognition heuristic indicates the importance of repeated exposure, in the form of advertising and branding activities at the corporate level, and repeated contacts, in the form of phone calls, e-mails, and other forms of what the marketing guru Jim Cecil calls "nurturing" the account. Our pre-proposal activities lay the foundation for choice by establishing recognition.

What else does the recognition heuristic tell us? Well, it certainly suggests that if we represent a small or new company and our prospects have never heard of us, we may have a difficult time winning deals. Conversely, if we receive an RFP from a potential client we have never heard of and with whom we have absolutely no relationship, we probably ought to "no bid" it. Our chances of winning are minimal.

Finally, it means that if you are a sales professional, you can't depend solely on the corporation to handle recognition building activities. You should make the effort to communicate with your prospects and leads on a regular basis to maintain recognition. Send the prospect a clipping, drop the prospect an e-mail with an interesting Web link, leave a voice mail, and make other efforts to communicate something of interest or value every six weeks or so. That way, when the customer is ready to buy, you won't be relegated to the discard pile because the decision maker doesn't recognize you.

Single-Factor Decision Making

But how do customers decide if they recognize both us and our competitors? Or if they have never heard of any of us?

Typically, at that point they move to a slightly more complex heuristic and choose among the options based on a single criterion or factor. This single factor is assumed by the decision maker to be a useful indicator to sort among the options. (Sometimes there are as many as two or three criteria, but seldom more than that.)

For example, suppose a company issues an RFP and receives twenty proposals in response. Someone at that company has to sort through those submissions to quickly eliminate most of them. At this stage of the evaluation, there is not much in the way of careful analysis, no real weighing of the evidence. An initial set of "no names" will be discarded. That's the recognition heuristic in action. Then the evaluator will begin to apply a decision factor or two. For example, some of the proposals will be eliminated because they did not follow the RFP instructions. Some will be cut because they didn't answer all of the questions or indicated by their answer that they were noncompliant with a key requirement. The decision process will move very quickly until the evaluator has the pile down to something more manageable.

Even if your customer has not issued an RFP, he or she will probably evaluate competitive offers on the basis of a key criterion. It might be price. It might be timeline. It might be references or relevant experience or the "business fit" of your solution.

What if you and your competitor are roughly equal on the first criterion? Then the customer moves on to a second and compares. If you are roughly equal there, the customer will choose a third. But decision makers seldom go beyond two or three factors before reaching a decision.

There are three varieties of single-factor decision making that your customer may use. At the simplest level, he or she may use what the experts call "minimalist" criteria, but which we might call arbitrary. The programmers who work at my company provided a rather amusing example of this kind of decision making when it comes to choosing a lunch destination. They used to waste a sizable portion of their lunch period arguing and debating about where to go. Finally, they resolved it as only programmers would—they wrote a piece of software that makes the decision for them. At first, it was a random lunch generator, but then they got a bit more sophisticated. Now they enter a single factor, such as proximity or price, and click the mouse. The system generates a lunch destination based on that factor. And off they go, content with the choice.

A slightly more sophisticated version of single-factor decision making involves asking ourselves what criterion we used the last time we made the same or a similar decision and whether that produced a good outcome. This is called "using the last," and some examples might be:

• "The last time I entered the office pool, I chose teams by flipping a coin and I won $20. I'll do the same thing again."

• "When we bought our annuals for planting last spring, we chose specimens with dark green leaves and they did really well in the garden."

• "Whenever we've hired a vendor who has done the same kind of project before, things have turned out pretty well."

Finally, decision makers sometimes go a step further and develop a limited set of criteria by thinking back over several situations in which similar decisions were made. Which criteria produced the best results? Which didn't work? This heuristic, called "taking the best," assumes that some criteria will produce better results than others.

What does this mean for our sales efforts?

First, it suggests that during our sales contacts with a prospect, we should probe to find out what factors they will use to make a decision. We can uncover their decision criteria rather simply. We just have to ask:

• "When you compare different vendors, what is the most important factor for you in choosing one?"

• "The last time you made this kind of decision, what factors did you use to guide your decision? What did you look for? Did that work for you?"

Second, this technique opens up opportunities for us to help the decision maker during the sales process. A na ve or inexperienced customer may take a simplistic approach, looking only at price. By using the sales process to educate the buyer, we can introduce other factors beyond price that may be more helpful to the buyer in making a good decision and that may give us more of a competitive position.

Third, we need to differentiate between opportunities where we are reacting to the customer's request for a proposal and opportunities where we are offering a solution proactively. When we submit a proposal in response to an RFP, we must recognize that our first job is to avoid elimination based on some arbitrary or trivial issue. That means following directions carefully, answering all of the questions and requirements, and making our compliance to the bid as obvious as possible. An effective tool in this area is the compliance matrix, a table in which you list each of the customer's requirements, give your level of compliance with that requirement, and possibly offer a brief comment or explanation. (An evaluator who works for the U.S. Postal Service told me that he looks at all the proposals and sets the ones that do not include a compliance matrix on the floor. That leaves him with a manageable few.) It's also a good idea to highlight your proposal so the customer can quickly find the high-value content that directly addresses the factors he or she thinks are important.

For proactive opportunities, customers tend to search on their own key criteria until they find a differentiator. Then they stop and make a decision. This implies that it's vital that we organize our sales presentations and proposals to focus right away on the criteria that the customer thinks are most important. Often, these factors will address issues such as:

• Are we getting what we need? Does this solve a significant business problem? Will the proposed solution work in our environment?

• Can this vendor really do it? Do they have the experience and resources to perform on time and on budget? Are they competent?

• Does this represent good value for the money? Is the proposed pricing fair? What kind of return on our investment will we receive?

Estimating the Rate of Return

For thousands of years, the Inuit people of Alaska and Canada have hunted whales as their primary source of food. They go out into the ocean in small boats, and pound on drums and the sides of their boats to drive the whales toward shore (whales have very sensitive hearing, you know). Then, when the whales are in shallow water, they attack and kill them. Now they use harpoon guns and more advanced weapons, but they used to do it with little more than spears.

Now why on earth would they do that? There are much simpler and less dangerous game they could hunt—geese, rabbits, seals, walruses even. They could fish. Why go after the largest, most powerful mammal on earth?

For that matter, why did primitive humans hunt mastodons? We've all seen the "artist's recreations" of a tribe of scantily clad Neanderthals surrounding a wooly mammoth the size of a beachfront condo, attacking it with little more than sharpened sticks.

Okay. So why did they do that? Why not pick on something your own size?

The experts who contributed to Simple Heuristics have come up with an answer. Their research suggests that one of the built-in decision heuristics people use is an innate capacity to calculate the "rate of return" for their efforts, particularly as they pertain to the group as a whole. In other words, hunting a whale or a wooly mammoth has a bigger ROI for the tribe than hunting a rabbit does.

These researchers even went so far as to calculate the calories required to kill a whale compared to the calories the community will get from that animal, then calculated the calories expended versus the calories obtained for other prey. The result: The whale was by far the best investment of the tribe's energies.

The fact is that when people are making decisions on behalf of a group, they instinctively want to make a decision that gives their organization the best possible ROI. They'll even buy something more expensive and complex if they're convinced it's the best choice for their company.

How can we help them use the estimation heuristic to our advantage?

First, every proposal should include calculations and graphic displays of ROI, total cost of ownership, payback period, productivity improvements, speed of delivery, or other measures of gain.

Second, provide your decision maker with case studies that show how other customers got big rewards from selecting your products or services. Quantify the impact your solutions had for those customers whenever possible.

Third, find out what kind of outcome the key decision maker thinks is most important for his or her company. Is it increased revenue? Regulatory compliance? Greater customer loyalty? Extended useful life for critical equipment? Elimination of downtime? Whatever the customer thinks is important defines the value proposition.

Finally, emphasize your differentiators and explain how they add value for the customer. Customers want to know what makes us different from our competitors. They also want to know why those differences will matter to them and their companies.

If we provide the right information in the right way, one that corresponds to the processes our customers use to make decisions, our chances of winning business will soar. And, after all, winning business is what writing proposals is all about.