I’ve audited hundreds of strategies, and here’s what I saw – part 3
Will an office clerk from a low-income country shell out $2,000 for a foldable smartphone? Will the mom-and-pop bakery invest in a high-end AI automation package?
Marketers are obsessed with segmentation. They love sorting people into segments, cohorts, and strata. Consumers? They refuse to fit the templates.
Behavioral economics suggests that customers are no more rational than a gambler who bets it all on zero.
Starting your strategy with customer segmentation is a costly mistake.
You can read previous parts here and here.
Mobile app, wine, and iPhone 16
A few years ago, I got a new mobile app. I liked it, but the full version was $9.99. The app promised to help me manage my projects, but the price threw me. $9.99 for an app? That’s insane! Later that evening, while buying wine at a store, I realized I hadn’t even checked the shelf with wines under €10. I wasn’t about to drink that cheap swill.
Three months ago, I started having my apartments renovated. There was a married couple on the crew. They were immigrants working hard to make ends meet and provide for their kids. Their car looked older than I was, but they both had iPhone 16s.
20th-century economists assumed that consumers had a fixed budget—“disposable income”—and would allocate it rationally across things like rent, utilities, food, gas, etc. Economists believed that consumers kept a kind of wallet with multiple compartments in their heads. Each compartment was dedicated to a particular type of expense.
But that hyper-rational model doesn’t explain why people struggling to pay their utility bills still buy smartphones, get a Netflix subscription, wear fitness trackers, carry selfie sticks, or purchase capsule coffee machines.
People on Earth haven’t become much wealthier since 2000. Yet we now pay for things we barely considered in the 1990s—we’ve quietly folded those costs into our budgets.
The point isn’t that we believe we can’t live without these things—we can (just remember the Nobel Prize winner the committee couldn’t reach because he was living a “better life off the grid”).
The question is how we’ve managed to squeeze so many new expenses into our tight budgets. Behavioral economists know how that happened.
Mental accounting
Behavioral economists—Richard Thaler, Daniel Kahneman, Colin Camerer, and others—introduced the idea of mental accounting, a kind of psychological budgeting.
We don’t carry a single “wallet.” We keep separate mental accounts: “food,” “kids,” “comfort,” “pleasure,” “status,” and so on. These accounts don’t always compete directly.
When a product creates a new meaning category, consumers open a new mental account.
Example: a smartphone isn’t a “telecom expense.” It’s a tool for life, work, communication, and entertainment. It sits across several accounts at once—so it doesn’t compete head-to-head with bread or gas.
So, when you know your monthly mortgage payment is coming up, but you still buy a new gadget you barely need, that’s mental accounting at work.
The Paradox of Subjective Income
Income is subjective. People gauge what they can spend not by an absolute sum, but by how emotionally “necessary” a purchase feels.
When something seems indispensable or socially mandatory (say, mobile service), people don’t just “cut something else.” They rebuild the spending mix.
They might:
• eat out less;
• take on fewer loans;
• skip the smaller, less visible treats.
And they don’t experience it as “giving something up” — more like rationalizing.
The Social Layer: the “New Normal”
Once something becomes a social norm, people will pay for it—even at the expense of other needs.
You see it most vividly in poorer countries:
- smartphone = a lifeline and a link to the world;
- internet = a way to work, learn, and chase opportunities;
- streaming = a symbol of “life like everyone else’s.”
This isn’t classical economics so much as the social psychology of status and belonging. People aren’t just buying a service—they’re buying a ticket to the modern world.
I know someone with a Tesla; he drives it for DoorDash.
Low-friction payments
Low-friction payments all but erase the pain of paying.
- Mobile plans auto-debit each month.
- Netflix feels like “just a few dollars.”
- Apple Music is “about the price of a coffee.”
Psychologically, these charges sit outside the mental budget—so they barely compete with other spending.
Temporal Rationalization (Deferred Costs)
“Spend now — save later”
This is classic present bias—favoring the present.
People downplay future costs, telling themselves, “I’ll handle it later.”
Result: new expenses land now; the “offset” never does.
B2B industries
It might seem that end consumers are as irrational as spoiled children, while people in the expensive suits always make rational, well-calculated business decisions.
That’s not the case.
As someone who’s worked with many CEOs and business owners, I know that they are human, too. They suffer from FOMO, often make emotional decisions, and chase shiny new toys even when they don’t need them.
Just look at the AI bubble—about to pop any moment—or think back to the ones we’ve seen before.
Nobody shows up at the office and hangs their personality up like a coat. B2B decision-makers aren’t immune to irrationality.
What’s in it for CEOs?
If you start your strategic thinking with customer segmentation and chasing “open niches,” you skew your thinking from the start:
- You assume the customer’s “wallet” is finite, so to carve out space, you have to push something else out. That shifts the focus from creating to competing.
- You preemptively write off customers who “have no room in the wallet” for your product—even though they could be highly valuable.
Start your strategic thinking by identifying the core customer needs you can address to drive growth.
You’ll have plenty of time to segment them later.
Mental accounting cuts both ways. Some people buy what they can’t afford because they feel they must. Others skip real value—even when it costs less than their daily coffee, like a paid subscription to my newsletter.
Not ready to upgrade yet? No problem. You can still take a big step forward:
- Join the “Architects of Business Growth” online bootcamp.
- Visit my website.
Would you like me to review your strategic documents and provide feedback? Drop me a message.
In the next post, we’ll talk about how to segment consumers the right way. Stay tuned!