CH-5-6 Creating Customer Value, Satisfaction, and Loyalty – Marketing Management: A South Asian Perspective : Chapter Notes

This Document Contains Chapters 5 to 6 Chapter 5 Creating Customer Value, Satisfaction, and Loyalty LEARNING OBJECTIVES In this chapter, we will address the following questions: What are customer value, satisfaction, and loyalty, and how can companies deliver them? What is the lifetime value of customers and how can marketers maximize it? How can companies cultivate strong customer relationships? How can companies both attract and retain customers? What is database marketing? CHAPTER SUMMARY Customers are value maximizers. They form an expectation of value and act on it. Buyers will buy from the firm that they perceive to offer the highest customer-delivered value, defined as the difference between total customer benefits and total customer cost. A buyer’s satisfaction is a function of the product’s perceived performance and the buyer’s expectations. Recognizing that high satisfaction leads to high customer loyalty, companies must ensure that they meet and exceed customer expectations. Losing profitable customers can dramatically affect a firm’s profits. The cost of attracting a new customer is estimated to be five times the cost of keeping a current customer happy. The key to retaining customers is relationship marketing. Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. Marketers play a key role in achieving high levels of total quality so that firms remain solvent and profitable. Marketing managers must calculate customer lifetime values of their customer base to understand their profit implications. They must also determine ways to increase the value of the customer base. Companies are also becoming skilled in customer relationship management (CRM), which focuses on developing programs to attract and retain the right customers and meeting the individual needs of those valued customers. Customer relationship management often requires building a customer database and doing data mining to detect trends, segments, and individual needs. A number of significant risks also exist, so marketers must proceed thoughtfully. OPENING THOUGHT Although most students understand the concept of “buying,” some will have difficulty in understanding the differences between total customer value and total customer cost. It will be beneficial for long-term understanding and retention to cover what the definition is and what it is not. Secondly, the distinction between satisfaction and total customer satisfaction for the consumer might be challenging for some students. Some students may have a hard time understanding the distinction between perception and expectation. Finally, it might be necessary to reemphasize the concepts of Customer Relationship Management (CRM), customer databases, and database mining often in the lecture. Students may confuse the concept of mailing lists with databases. However, most of the students today are proficient in Internet usage and can cite examples of relationship marketing from their own favorite Internet sites such as Amazon.com. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS At this point in the semester-long marketing plan project, students should have completed their value proposition for the fictional product, defined how they will deliver satisfaction and maintain customer loyalty. Have students (in groups or individually) select a local firm in their community, or a local division of a national firm, and seek permission to interview their corporate executives on their corporation’s definition of customer satisfaction, loyalty, and what their particular firm does to foster such customer relations. This project can be combined with the project on marketing research and as such, students can create questionnaires suitable for mailing to these executives. The students can then present these findings to the class in a group or by individual presentations. This could be a full-semester project or limited to a few weeks of the semester. Get students to consider focusing on total customer satisfaction, because studies have shown that customers who are “completely satisfied” with the product or service are much more likely to buy more from the company than customers who report they are “satisfied.” They should decide on how to measure total customer satisfaction and write the recommended approach in the marketing plan or enter into the Positioning section of Marketing Plan Pro. ASSIGNMENTS Key manufacturers and others must be concerned with how customers view products (customer satisfaction perceptions) being disseminated throughout the “electronic world” via the Internet. No longer can one discount the “power of the mouse” for affecting potential customers. In small groups, students are to select a particular firm or product and are to research what is being said on the Internet regarding this company/product. What affects/effects does this type of dissemination of consumer opinions via the Internet have on the company’s marketing strategies? What can the company do to stem the tide of such comments? How does a company defend itself against blatantly untrue consumer opinions? Have each of the students read the Web article, “The Best Book Reviews Money Can Buy” by David Streitfeld, The New York Times, August 25, 2012 (http://www.nytimes.com) and share their views about the ethical implications of purchased reviews. Customer relations management is a current business “buzz word.” Students can be directed to do an Internet research project from named marketing/business journals on the subject of customer relations management (the chapter’s endnotes can provide a good source of leads for the students). Each student can be directed to research, read, and compile a report on their findings from a minimum of five articles from five different marketing (and business magazines such as Fortune). The student’s report is to comment on how these articles compare, complement, or contrast the material contained in this chapter. END-OF-CHAPTER SUPPORT MARKETING DEBATE—Online Versus Off-Line Privacy As more and more firms practice relationship marketing and develop customer databases, privacy issues are emerging as an important topic. Consumers and public interest groups are scrutinizing—and sometimes criticizing—the privacy policies of firms. Concerns are also being raised about potential theft of online credit card information or other potentially sensitive or confidential financial information. Others maintain that the online privacy fears are unfounded and that security issues are every bit as much a concern in the offline world. They argue that the opportunity to steal information exists virtually everywhere and that it is up to the consumer to protect his or her interests. Take a position: Privacy is a bigger issue in the online world than the offline world versus privacy is no different online than offline. Pro: Privacy is a larger issue in the online world than the off-line world simply because the information has a greater opportunity to be exposed to more people than off-line transactions. The transmission of private information electronically travels through electronic channels each of which presents opportunity for misdirection or computer “hacking” activities. In many of these cases, the person, or firm transmitting this information, redirecting this information receiving this information and storing this information is unknown to the consumer. In the offline world, the consumer has the opportunity to know the company, personnel, or firm receiving this information and has the opportunity to accept or decline sharing their personal information. Con: Transmission of personal information in the off-line world still travels electronically, in many cases. The act of paying with a credit card still involves the transmission of data electronically at some point in the transaction. What differs is the fact that the consumer is initially interfacing with a person (or firm). Although this does not mitigate the risks involved to the consumer, it does present some concrete knowledge of the people, or firm involved in the transaction. MARKETING DISCUSSION: Using CLV Consider the lifetime value of customers (CLV). Choose a business and show how you would go about developing a quantitative formulation that captures the concept. How would organizations change if they totally embraced the customer equity concept and maximized CLV? Suggested Response: CLV describes the net present value of the stream of future profits expected over the customers’ lifetime purchases. Each student’s example will differ but the main tenets of each report should include the following: 1) Add: Profit from a sale (dollar or percent). Number of sales per customer per year. Average age of a customer. Average expected lifespan of a customer. 2) Subtract: Appropriate discount rate. Costs of attracting one customer. Selling one customer. Servicing one customer. Organizations would change by beginning to take a long-term perspective rather than a short-term (quarter-to-quarter view). No longer viewing a customer as a “transaction” but rather as a “lifetime value” solidifies and demonstrates the impact that a single consumer has to a firm in a language they understand—dollars. Firms would begin to customize offerings and messages to each customer, ensure that retention strategies are in place, differentiate customers in terms of needs and value to the company, and build stronger relationships with key customers. Because of a change in the loci of focus for the firm, strategies, and actions based upon which would provide the best return on its marketing investments would be implemented. For an e-commerce business, developing a quantitative CLV formulation involves calculating average purchase value, purchase frequency, and customer lifespan to estimate the total revenue generated by a customer over their lifetime. Embracing customer equity and maximizing CLV would lead organizations to focus on customer retention strategies, personalized marketing, and long-term relationship building, ultimately enhancing profitability and customer loyalty. Marketing Lesson: HELLO KITTY What is the appeal of Hello Kitty? What needs does it fulfill? Suggested Answer: Appealing to kids, teens and women who like the sweet, cute and feminine image, Sanrio ascribes Kitty’s appeal amongst kids, teenagers, and women to their need to feel connected; to have a good friend. Hello Kitty’s allure may also draw from the trend towards things kawaii, or cute. Tesco can expand by focusing on e-commerce and digital initiatives, targeting urban areas and younger demographics with personalized shopping experiences and sustainable products. What made Hello Kitty distinctive in its early years from other dolls, and what made it nondistinctive in later years as its sales declined? Suggested Answer: Kitty’s expressionless face, which is intentionally left blank to enable her to become whatever people want her to be, made her distinctive. Without the mouth, Kitty acts as a canvas which people can personalize by projecting their feelings onto the character—they can be happy or sad with Hello Kitty, and internalize Kitty into their lives, true to creator Tsuji’s philosophy of having a friend for social communications. In the later years, with markets maturing, Kitty perhaps being oversold as well as the ever present threat of counterfeits and competitors, Hello Kitty has become non-distinctive. Tesco can enhance customer loyalty programs by integrating AI for personalized recommendations, expanding rewards across partners, and leveraging data analytics for targeted promotions. How have the needs of children change over the years in terms of what they look for in a doll? Suggested Answer: With the emergence of electronic gadgets and the Internet, children and teenagers are more lured by the visuals and sounds offered by these new media than the simplicity of a mouthless cat. Children now seek dolls that offer interactivity, diversity, and educational value, reflecting broader societal shifts towards inclusivity and technology integration. Marketing Lesson: TESCO What’s next for Tesco? Where and how can it grow? Who will it target? Suggested Answer: Student answers will vary but it is suggested that Tesco could move further into non-food retailing (home improvement stores, departmental stores, and specialty stores like arts and crafts) or totally out of retailing into more service related industries. Tesco can “target” all segments of the consumer market using their rewards program. That program allows Tesco to specifically manage and reach consumers at all income and taste levels. Tesco's future growth could involve expanding its online grocery and delivery services, targeting convenience-driven consumers in urban areas, and enhancing sustainability efforts to appeal to eco-conscious shoppers. How can Tesco take its customer loyalty programs to the next level? Suggested Answer: Student answers will vary but it is suggested that Tesco can/could increase the usage of their “loyalty program” to include non-consumerables such as housing, durable goods, travel, entertainment, casual dining, and other “partnered” services. Tesco can enhance its customer loyalty programs by personalizing rewards based on purchase history and preferences, leveraging mobile apps for seamless engagement and offering exclusive perks like early access to promotions and events. DETAILED CHAPTER OUTLINE Today, companies face their toughest competition ever. Moving from a product-and-sales philosophy to a holistic marketing philosophy, however, gives them a better chance of outperforming competition. And the cornerstone of a well-conceived holistic marketing orientation is strong customer relationships. Marketers must connect with customers— informing, engaging, and maybe even energizing them in the process. Customer-centered companies are adept at building customer relationships, not just products; they are skilled in market engineering, not just product engineering. The Ritz-Carlton hotel chain, owned by Marriott International, is known throughout the world for its singular focus on providing guests with luxurious amenities and exceptional service. As Ritz-Carlton’s experience shows, successful marketers are those that carefully manage their customer base. BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY Managers who believe the customer is the company’s only true “profit center” consider the traditional organization chart in Figure 5.1a—a pyramid with the president at the top, management in the middle, and frontline people and customers at the bottom—obsolete. Successful marketing companies invert the chart (Figure 5.1b). At the top are customers; next in importance are frontline people who meet, serve, and satisfy customers; under them are the middle managers, whose job is to support the frontline people so they can serve customers well; and at the base is top management, whose job is to hire and support good middle managers. We have added customers along the sides of Figure 5.1b to indicate that managers at every level must be personally involved in knowing, meeting, and serving customers. Some companies have been founded with the customer-on-top business model, and customer advocacy has been their strategy—and competitive advantage—all along. With the rise of digital technologies such as the Internet, increasingly informed consumers today expect companies to do more than connect with them, more than satisfy them, and even more than delight them. They expect companies to listen and respond to them. Customer Perceived Value Consumers are more educated and informed than ever, and they have the tools to verify companies’ claims and seek out superior alternatives. Customers tend to be value-maximizers within the bounds of search costs and limited knowledge, mobility, and income. Customers estimate which offer will deliver the most perceived value and act on it Customer-perceived value (CPV) is the difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and the perceived alternatives. Total customer value is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering because of the product, service, people, and image. Total customer cost is the bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market offering, including monetary, time, energy, and psychological costs. Customer-perceived value is thus based on the difference between benefits the customer gets and costs he or she gives for different possible choices. Applying Value Concepts A) Managers conduct a customer value analysis to reveal the company’s strengths and weaknesses relative to those of competitors. These steps are: Identify the major attributes and benefits that customers’ value. Assess the quantitative importance of the different attributes and benefits. Asses the company’s and competitor’s performances on the different customer values against their rated importance. Examine how customers in a specific segment rate the company’s performance against a specific major competitor on an individual attribute or benefit basis. Monitor customer values over time. Choices and Implications Some marketers might argue the process we have described is too rational. Suppose the customer chooses the Komatsu tractor. Here are three possibilities. The buyer might be under orders to buy at the lowest price. The buyer will retire before the company realizes that the Komatsu tractor is more expensive to operate. The buyer enjoys a long-term friendship with the Komatsu salesperson. Customer perceived value is a useful framework that applies to many situations and yields rich insights. The seller must assess the total customer value and total customer cost associated with each competitor’s offer to know how his or her offer rates in the buyer’s mind. The seller who is at a customer-perceived value disadvantage has two alternatives: to increase total customer value or to decrease total customer cost. The former calls for strengthening or augmenting the offer’s product, services, personnel, and image benefits. The latter calls for reducing the buyer’s costs by reducing the price, simplifying the ordering and delivery process, or absorbing some buyer risk by offering a warranty. Delivering High Customer Value Consumers have varying degrees of loyalty to specific brands, stores, and companies. Loyalty is defined as “a deeply held commitment to re-buy or re-patronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.” Table 5.1 displays brands with the greatest degree of customer loyalty according to one 2010 survey. The value proposition consists of the whole cluster of benefits the company promises to deliver; it is more than the core positioning of the offering. The value-delivery system includes all the experiences the customer will have on the way to obtaining and using the offering. Total Customer Satisfaction Satisfaction is a person’s feelings of pleasure or disappointment that result from comparing a product’s perceived performance (or outcome) in relation to his or her expectations. If the performance falls short of expectations, the customer is dissatisfied. If the performance matches the expectations, the customer is satisfied. If the performance exceeds expectations, the customer is highly satisfied or delighted. C) How do buyers form their expectations? Expectations result from past experience; friends’ and associates’ advice; and marketers’ and competitors’ information and promises. Monitoring Satisfaction Many companies are systematically measuring how well they treat customers, identifying the factors shaping satisfaction, and changing operations and marketing as a result. Wise firms measure customer satisfaction regularly, because it is one key to customer retention. The link between customer satisfaction and customer loyalty is not proportional. The company needs to recognize that customers vary in how they define good delivery. Measurement Techniques Periodic surveys can track customer satisfaction directly. Companies can monitor their customer loss rate and contact those who have stopped buying or who have switched to another supplier to find out why. Companies can hire mystery shoppers to pose as potential buyers and report on strong and weak points experienced in buying the company’s and competitors’ products Influence of Customer Satisfaction For customer-centered companies, customer satisfaction is both a goal and a marketing tool. Companies need to be especially concerned today with their customer satisfaction level because the Internet provides a tool for consumers to spread bad word of mouth — as well as good word of mouth — to the rest of the world. Customer Complaints Some companies think they’re getting a sense of customer satisfaction by tallying complaints. Customers are dissatisfied 25% of the time Only 5% complain The other 95% either feel complaining is not worth the effort, or they do not know how or to whom to complain, and they just stop buying. It is critical that marketers deal with negative experience properly. The following procedures can help to recover customer goodwill: Set up a 7-day, 24-hour toll-free “hotline” (by phone, fax, or email) to receive and act on customer complaints. Contact the complaining customer as quickly as possible. The slower the company is to respond, the more dissatisfaction may grow and lead to negative word of mouth. Accept responsibility for the customer’s disappointment. Do not blame the customer. Use customer-service people who are emphatic. Resolve the complaint swiftly and to the customer’s satisfaction. Some complaining customers are not looking for compensation so much as a sign that the company cares. Product and Service Quality Satisfaction will also depend on product and service quality. Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. It is important to distinguish between conformance quality and performance quality (or grade). Impact of Quality Product and service quality, customer satisfaction, and company profitability are intimately connected. Higher levels of quality result in higher levels of customer satisfaction, which support higher prices and (often) lower costs. Marketing Memo: Marketing and Total Quality Marketers play several roles in helping their companies define and deliver high-quality goods and services to target customers: They correctly identify customers’ needs and requirements. They communicate customer expectations properly to product designers. They make sure customers’ orders are filled correctly and on time. They check that customers have received proper instructions, training, and technical assistance in the use of the product. They stay in touch with customers after the sale to ensure they are, and remain, satisfied. They gather customer ideas for product and service improvements and convey them to the appropriate departments. MAXIMIZING CUSTOMER LIFETIME VALUE Marketing is the art of attracting and keeping profitable customers. A) The 20–80 rule says the top 20% of customers generate 80% or more of the company’s profits. Customer Profitability A profitable customer is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling, and servicing that customer. Customer Profitability Analysis A useful type of profitability analysis is shown in Figure 5.3. A) Customer 1 is very profitable. Customer 2 is mixed profitability. Customer 3 is a losing customer. 1) What can the company do about customers 2 and 3? It can raise the price of its less profitable products or eliminate them. It can try to sell them its profit-making products. It can encourage them to switch to competitors. Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called Activity-Based Costing (ABC). Companies that fail to measure their costs correctly are also not measuring their profit correctly and are likely to misallocate their marketing effort. Measuring Customer Lifetime Value Customer lifetime value (CLV) describes the net present value of the stream of future profits expected over the customer’s lifetime purchases. CLV calculations provide a formal quantitative framework for planning customer investment and helps marketers to adopt a long-term perspective. Marketing Memo: Calculating Customer Lifetime Value Shows the formula for calculating customer lifetime value for a company. CULTIVATING CUSTOMER RELATIONSHIPS Companies are using information about customers to enact precision marketing designed to build strong long-term relationships Information is easy to differentiate, customize, personalize, and dispatch over networks at incredible speed. Customer empowerment has become a way of life for many companies that have had to adjust to a shift in the power with their customer relationships. Customer Relationship Management (CRM) Customer relationship management (CRM) is the process of carefully managing detailed information about individual customers and all customer “touch points” to maximize customer loyalty. A customer touch point is any occasion on which a customer encounters the brand and product, from actual experience to personal or mass communications to casual observation. Personalizing Marketing Personalized marketing is about making sure the brand and its marketing are as relevant as possible to as many customers as possible. An increasingly essential ingredient for the best relationship marketing today is the right technology. Companies are also recognizing the importance of the personal component to CRM and what happens once customers make actual contact with the company. Employee can create strong bonds with customers by individualizing and personalizing relationships. To adapt to customers’ increased desire for personalization, marketers have embraced concepts such as permission marketing and one-to-one marketing. Permission marketing is the practice of marketing to consumers only after gaining their expressed permission, is based on the premise that marketers can no longer use “interruption marketing” via mass-media campaigns. It is “anticipated, personal, and relevant.” Presumes consumers know what they want. “Participatory marketing” may be more appropriate—marketers and consumers work together to find out how the firm can best satisfy consumers. A four-step approach to one-to-one marketing: Identify your prospects and customers. Differentiate customers in terms of their needs and their value to your company. Interact with individual customers to improve your knowledge about their individual needs and to build strong relationships. Customize products, services, and messages to each customer. Customer Empowerment Consumers are beginning in a very real sense to own brands and participate in their creation. Marketers are helping consumers become ambassadors for brands by providing them resources and opportunities to demonstrate their passion. It is true that only some consumers want to get involved with some of the brands they use and then only some of the time. Customer Reviews and Recommendations Although the strongest influence on consumer choice remains recommended by relative/friend,” an increasingly important decision factor is “recommendation from consumers.” Attracting and Retaining Customers Companies seeking to expand their profits and sales must spend considerable time and resources searching for new customers. Different acquisition methods yield customers with varying CLVs. Reducing Defection To reduce the defection rate, the company must: Define and measure its retention rate. Distinguish the causes of customer attrition and identify those that can be managed better. Compare the lost profit equal to the customer’s lifetime value from a lost customer to the costs to reduce the defection rate. Retention Dynamics The marketing funnel identifies the percentage of potential target market at each stage in the decision process, from merely aware to highly loyal (Figure 5.4). By calculating conversion rates the funnel allows marketers to identify any bottleneck or barrier to building a loyal customer franchise. The funnel also emphasizes how important it is not just to attract new customers, but to retain and cultivate existing ones. If the company were sold, the acquiring company would pay not only for the plant and equipment and brand name, but also for the delivered customer base, the number and value of customers who will do business with the new firm. Managing the Customer Base A key driver of shareholder value is the aggregate value of the customer base. Winning companies improve the value of their customer base by excelling at strategies such as: A) Reducing the rate of customer defection. Increasing the longevity of the customer relationship. Enhancing the growth potential of each customer through “share-of-wallet, cross selling, and up-selling.” Making low-profit customers more profitable or terminating them. Focusing disproportionate effort on high-profit customers. Building Loyalty Creating a strong, tight connection to customers is the dream of any marketer and often the key to long-term marketing success. Companies that want to form strong customer bonds need to attend to a number of different considerations: Create superior products, services, and experiences for the target market. Get cross-departmental participation in planning and managing the customer satisfaction and retention process. Integrate the “Voice of the Customer” to capture their stated and unstated needs or requirements in all business decisions. Organize and make accessible a database of information on individual customer needs, preferences, contacts, purchase frequency, and satisfaction. Make it easy for customers to reach appropriate company staff and express their needs, perceptions, and complaints. Assess the potential of frequency programs and club marketing programs. Run award programs recognizing outstanding employees. Interacting with Customers Listening to customers is crucial to CRM. Some companies have created an ongoing mechanism that keeps senior managers permanently plugged in to frontline customer feedback. (See textbook for examples) Developing Loyalty Programs Frequency programs (FPs) are designed to provide rewards to customers who buy frequently and in substantial amounts. They can help build long-term loyalty with high CLV customers, creating cross-selling opportunities in the process. Club membership programs can be open to anyone who purchases a product or service, or it can be limited to an affinity group, or to those willing to pay a small fee. Creating Institutional Ties The company may supply customers with special equipment or computer links that help customers manage orders, payroll, and inventory. Nestlé in Asia has supported its retailers with several activities to help them in inventory management. Win-Backs Regardless of the nature of the category or how hard companies may try, some customers inevitably become inactive or drop out. The challenge is to reactivate dissatisfied customers through win-back strategies. It is often easier to re-attract ex-customers (because the company knows their names and histories) than to find new ones. CUSTOMER DATABASES AND DATABASE MARKETING Marketers must know their customers. And in order to know the customer, the company must collect information and store it in a database from which to conduct database marketing. A customer database is an organized collection of comprehensive information about individual customers or prospects that is current, accessible, and actionable for such marketing purposes as lead generation, lead qualification, sale of a product or service, or maintenance of customer relationships. Database marketing is the process of building, maintaining, and using customer databases and other databases for the purpose of contacting, transacting, and building customer relationships. Customer Databases Customer databases are not customer mailing lists. A customer mailing list is simply a set of names, addresses, and telephone numbers. Ideally, a customer database also contains the consumer’s past purchases, demographics, psychographics, mediagraphics, and other useful information. A business database contains business customers’ past purchases, past volumes, prices, and profits, buyer team member names, and other useful information. Data Warehouses and Data mining Savvy companies capture information every time a customer comes into contact with any of their departments. These data are collected by the company’s contact center and organized into a data warehouse. Through data mining, marketing statisticians can extract from the mass of data useful information about individuals, trends, and segments. In general, companies can use their databases in five ways: To identify prospects. To decide which customers should receive a particular offer. To deepen customer loyalty. To reactivate customer purchases. To avoid serious customer mistakes. The Downside of Database Marketing and CRM Five main problems can prevent a firm from effectively using CRM. Building and maintaining a customer database requires a large, well-placed investment in computer hardware, database software, analytical programs, communication links, and skilled personnel. It is difficult to collect the right data, especially to capture all the occasions of company interaction with individual customers. This problem is accentuated in Asia, where there are at least four major differences in the nature of customer relationships compared to the West: Language preferences are complex but important. The issue of identifying customers uniquely by name poses challenges in a racially diverse society. Some jurisdictions allow for more than one marriage, and wealthy male customers may have several addresses in intricate arrangements. There is also a bias against flaunting wealth and a reluctance to declare it to strangers (particularly if there is a perceived link to a government authority). The second problem is the difficulty of getting everyone in the company to be customer oriented and to use the available information. The third problem is that not all customers want a relationship with the company, and they may resent knowing that the company has collected that much personal information about them. A fourth problem is that the assumptions behind CRM may not always hold true. For example, it may not be the case that it costs less to serve more loyal customers. Chapter 6 Analyzing Consumer Markets LEARNING OBJECTIVES In this chapter, we will address the following questions: How do consumer characteristics influence buying behavior? What major psychological processes influence consumer responses to the marketing program? How do consumers make purchasing decisions? In what ways do consumers stray from a deliberative, rational decision process? CHAPTER SUMMARY Consumer behavior is influenced by three factors: cultural (culture, subculture, and social class), social (reference groups, family, and social roles and statuses), and personal (age, stage in the life cycle, occupation, economic circumstances, lifestyle, personality, and self-concept). Research into these factors can provide clues to reach and serve consumers more effectively. Four main psychological processes affecting consumer behavior are motivation, perception, learning, and memory. To understand how consumers actually make buying decisions, marketers must identify who makes and has input into the buying decision; people can be initiators, influencers, deciders, buyers, or users. Different marketing campaigns might be targeted to each type of person. The typical buying process consists of the following sequence of events: problem recognition, information search, evaluation of alternatives, purchase decision, and post purchase behavior. The marketers’ job is to understand the behavior at each stage. The attitudes of others, unanticipated situational factors, and perceived risk may all affect the decision to buy, as will consumers’ levels of post purchase product satisfaction, use and disposal, and the company’s actions. Consumers are constructive decision makers and subject to many contextual influences. They often exhibit low involvement in their decisions, using many heuristics as a result. OPENING THOUGHT This chapter perhaps might be the most difficult of all for some to grasp as it delves into psychological theories surrounding our understanding of our own minds. It can be, however, an interesting one for class discussions as it opens up and fosters student participation (as consumers). This is a good chapter for such discussions on how students buy, what they buy, how they buy, and so forth. Students new to marketing or new to psychology as a science need a full and comprehensive review of the theories and ideas expressed in this chapter. The instructor is encouraged to spend a great deal of class time with the four main psychological processes outlined in this chapter: motivation, perception, learning, and memory. Repeated review of the key terms and definitions presented in this chapter is necessary for complete student understanding and knowledge of these concepts. The second challenge found in this chapter is that of the consumer buying process. It has been shown to be helpful to have the students talk about their buying processes for goods or services that are of interest to them and to then outline these processes on the blackboard. Having the students “talk through” how they buy and then relating these actions to the steps in the consumer buying process seems to make these concepts easier for them to understand and accept. The instructor is encouraged to spend a great deal of class time on the concepts of the consumer buying process and the necessity of marketers to fully understand their consumers’ preferences and motivations as it forms the basis of all marketing strategies and concepts. TEACHING STRATEGY AND CLASS ORGANIZATION PROJECTS At this point in the semester-long marketing project, students should present their definitive data on the consumer for the product/service including all demographic and other pertinent information obtained and ready for instructor’s approval. A consumer products company “knows” its consumers—it has to in order to be competitive and to market successfully. During the course of the semester, students should choose a consumer product (one sold in supermarkets, mass-merchants, or in drugstores) and contact the manufacturer regarding their definitions, characteristics, demographics, etc. of their consumer. Students should identify themselves as students working on a marketing research project and for this assignment, it may be necessary for the instructor to write an introduction letter on official school letterhead. Students should be ready to present their findings during the latter part of the semester. Every company has to study customer markets and behavior prior to developing a marketing plan. Marketers need to understand who constitutes the market, what and why they buy, who participates in and influences the buying process, and how, when, and where they buy. Get students to research and analyze the consumer market for their chosen product or service. These are the questions they need to answer: What cultural, social, personal, and psychological factors have the most influence on target consumers? What research tools will help better understand the effect of these factors on buyer attitudes and behavior? What consumer buying roles and buying behaviors are particularly relevant for their product or service? What kind of marketing activities should coincide with each stage of the consumer buying process? Document their findings and conclusions in a written marketing plan or type them into the Market Demographics and Target Markets sections of Marketing Plan Pro. ASSIGNMENTS Assign students to survey their local business environment (city, town, campus area) and collect examples of how local area businesses are trying to capture these cultural market segments. For example, the students should collect information regarding the number of cultural restaurants in the area and then compare these numbers to the total amount of eating establishments and the percentage of the population that is of that ethnicity. How do the numbers compare, contrast, and what marketing strategies do they hint at? Consumers often choose and use brands that have a brand personality consistent with their own actual self-concept, ideal self-concept, or others self-concept. Have the students review their recent purchases of a car, computer, furniture, or clothing and ask them to comment on, why they purchased this product, who influenced their purchase, and what does this purchase say about their own self-concept ideas. What is their definition of the “brand personality” of this recent purchase—as compared to the definitions stated in the chapter by Stanford’s Jennifer Aaker? Figure 6.1 defines the model of consumer behavior. In an examination of each of these segments, ask the students to rank the importance of each of these characteristics in their purchase behavior. For example, under the box entitled, Marketing Stimuli, some students will rank price ahead of products and services as their primary stimulus. We all belong to some sort of reference group. Students that are members of social clubs are influenced by their members and through their participation. Students should investigate (within their own reference group) who the opinion leaders are, how these opinion leaders affect the overall dynamics of the group, and most importantly, how these opinion leaders affect consumption decisions. Answers should be specific in their definitions of how these opinion leaders influence specific consumption/purchase decisions and students should share their observations with the class. END-OF-CHAPTER SUPPORT MARKETING DEBATE—Is Target Marketing Ever Bad? As marketers increasingly develop marketing programs tailored to certain target market segments, some critics have denounced these efforts as exploitative. For example, the preponderance of billboards advertising cigarettes, alcohol, and other voices in low-income urban areas is seen as taking advantage of a vulnerable market segment. Critics can be especially harsh in evaluation of marketing programs that target African Americans and other minority groups, claiming that they often employ clichéd stereotypes and inappropriate depictions. Others counter with the point of view that targeting and positioning is critical to marketing and that these marketing programs are an attempt to be relevant to a certain consumer group. Take a position: Targeting minorities is exploitative versus targeting minorities is a sound business practice. Suggested Responses: Pro: When marketers use their advance knowledge of specific target markets, such as minorities that preys upon the target market’s weaknesses and lack of information, then marketing can be said to be exploiting the said target market for gains. Marketers should always be aware that information is a powerful tool that has to be used responsibly and prudently. Products and services that cater to minorities that cause adverse health effects or pejorative social action(s) because of their usage need to be marketed in a socially responsible way. Just because a marketer has information on the buying habits, social styles, motivation, perception, and purchase criteria specific to a target market does not automatically permit the marketer to use this information freely. Con: Marketers do not create social systems nor does marketing create social ills. Marketers cannot assume the responsibility for lack of personal choice, lack of information or knowledge, and lack of personal responsibility. It is the role of marketing to deliver to the target market the goods and services they want and need. Marketing is “amoral” in its delivery of information to target markets and the target markets must decide for themselves the use or non-use of the products marketed. Using advanced research methods to uncover motivation, purchase intent, post-purchase usage, and the like is sound business practice and the marketer owes its stakeholders the responsibility to use this information that increases sales. Targeting minorities can be seen as a sound business practice when done respectfully and ethically, addressing specific needs and preferences while avoiding stereotypes. However, it becomes exploitative if it manipulates vulnerabilities or perpetuates harmful clichés, emphasizing the importance of responsible and culturally sensitive marketing strategies. MARKETING DISCUSSION—What Are Your Mental Accounts? What mental accounts do you have in your mind about purchasing products and services? Do you have any rules you employ in spending money? Are they different from what other people do? Do you follow Thaler’s four principles in reacting to gains and losses? Suggested Response: Each student’s answer will differ in these areas. It is important however, to get the students to realize that each buyer goes through the buying process whether or not they are actually cognizant of it. Thaler’s four principles are to: 1) segregate gains, 2) integrate losses, 3) integrate smaller losses with larger gains, and 4) segregate small gains from large losses. My mental accounts often include budget categories for essentials, discretionary spending, and savings, with rules like prioritizing needs over wants and using discounts strategically. These principles align with Thaler’s concepts of mental accounting, where I track gains and losses relative to these categories, influencing my spending behavior and financial decisions. Marketing Lesson: BARBIE DOLL Using psychological concepts, discuss what Mattel could have done to help Chinese consumers shop more at its stand-alone experiential store. Suggested Answer: Most Chinese consumers go to malls for serious retail therapy and expect to shop, eat, and hit beauty salons in a single place with cool air-conditioning and a clean environment. Mattel could have therefore motivated Chinese consumers to visit its stand- alone experiential store by (i) Offering drink refreshments to visitors for their effort in dealing with the busy road traffic and pollution; (ii) Provide complementary shuttle services from designated pick up points to the store; and (iii) Offering an affordable range of clothing for daily wear. In short, Mattel should have provided for Chinese consumers’ physiological, social and esteem needs (Maslow’s) and satisfiers (Herzberg’s) to motivate a purchase. Mattel could have utilized behavioral economics by implementing scarcity tactics or offering personalized experiences that tap into Chinese cultural values, thereby increasing emotional engagement and encouraging more frequent visits to its experiential store. Chinese girls still clamor for Barbie dolls. What should Mattel do next to reach out to them? Suggested Answer: Cater Barbie Dolls for the Chinese market. Perhaps accessorizing Barbie with cutesy, girlish pink clothes and producing a range of everyday wear clothing in a similar pink color range. Mattel should collaborate with popular Chinese influencers or celebrities to endorse Barbie dolls, localize marketing campaigns to highlight cultural relevance, and innovate with Barbie-themed digital content to engage tech-savvy young consumers in China. Marketing Lesson: IKEA 1) What are some of the things IKEA is doing right to reach consumers in different markets? What else could it be doing? Suggested Answer: IKEA achieved this level of success by offering a unique value proposition to consumers: leading-edge Scandinavian design at extremely low prices. IKEA’s vision is “to create a better everyday life for many people.” Its mission of providing value is predicated on founder Kamprad’s statement that “People have very thin wallets. We should take care of their interests.” IKEA’s stores are located a good distance from most city centers, which helps keep land costs down and taxes low. In China, it stocked 250,000 plastic placemats with Year of the Rooster themes, which quickly sold out after the holiday. When employees realized U.S. shoppers were buying vases as drinking glasses because they considered IKEA’s regular glasses too small, the company developed larger glasses for the U.S. market. IKEA managers visited European and U.S. consumers in their homes and learned that Europeans generally hang their clothes, whereas U.S. shoppers prefer to store them folded. Therefore, wardrobes for the U.S. market were designed with deeper drawers. Visits to Hispanic households in California led IKEA to add seating and dining space in its California stores, brighten the color palettes, and hang more picture frames on the walls. IKEA excels in adapting its product range to local tastes, offering affordable yet stylish furniture, and emphasizing sustainability. To further reach consumers, it could expand digital shopping experiences, enhance local customer service, and focus on cultural sensitivity in marketing. 2) IKEA has essentially changed the way people shop for furniture. Discuss the pros and cons of this strategy. Suggested Answer: Student’s opinions will vary but good students will cite the material from this chapter with regards to analyzing consumer markets and IKEA’S ability to answer consumer commonality worldwide in their purchase of furniture. Pros: IKEA's strategy democratizes home furnishing, offers affordable options, and provides a unique shopping experience. Cons: It may lead to homogeneity in home decor, logistical challenges in assembly and delivery, and environmental concerns with disposable furniture culture. DETAILED CHAPTER OUTLINE The aim of marketing is to meet and satisfy target customers’ needs and wants better than competitors. Marketers must have a thorough understanding of how consumers think, feel, and act and offer clear value to each and every target consumer. Successful marketing requires that companies fully connect with their customers. Adopting a holistic marketing orientation means understanding customers—gaining a 360-degree view of both their daily lives and the changes that occur during their lifetimes so the right products are always marketed to the right customers in the right way. WHAT INFLUENCES CONSUMER BEHAVIOR? Consumer behavior is the study of how individuals, groups, and organizations select, buy, use, and dispose of goods, services, ideas, or experiences to satisfy their needs and wants. Marketers must fully understand both the theory and reality of consumer behavior. CULTURAL FACTORS Culture, subculture, and social class are particularly important influences on consumer buying behavior. Culture is the fundamental determinant of a person’s wants and behaviors. Each culture consists of smaller subcultures that provide more specific identification and socialization for their members. Subcultures include nationalities, religions, racial groups, and geographic regions. Virtually all human societies exhibit social stratification. More frequently, it takes the form of social classes, relatively homogeneous and enduring divisions in a society, hierarchically ordered and with members who share similar values, interests, and behavior. One class depiction of social classes defined seven ascending levels: Lower lowers Upper lowers Working class Middle class Upper middles Lower uppers Upper uppers Social classes members show distinct product and brand preferences in many areas, including clothing, home furnishings, leisure activities, and automobiles. SOCIAL FACTORS In addition to cultural factors, social factors such as reference groups, family, and social roles and statuses influence our buying behavior. A person’s reference groups are all the groups that have a direct (face-to-face) or indirect influence on their attitudes or behavior. 1) Groups having a direct influence on a person are called membership groups. Some membership groups are primary groups such as family, friends, neighbors, and co-workers with whom the person interacts fairly continuously and informally. Some membership groups are secondary groups such as religious, professional groups that tend to be more formal. Reference groups expose an individual to new behaviors and lifestyles, influencing attitudes and self-concept. They create pressures for conformity that may affect actual product and brand choices. People are also influenced by groups to which they do not belong: Aspiration groups are those a person hopes to join. Dissociative groups are those whose values or behavior an individual rejects. Where reference group influence is strong, marketers must determine how to reach and influence the group’s opinion leaders. An opinion leader is the person in informal, product-related communications who offers advice or information about a specific product or product category. Marketers try to reach opinion leaders by identifying demographic and psychographic characteristics associated with opinion leadership, identifying the media read by opinion leaders, and directing messages at opinion leaders. Family The family is the most important consumer-buying organization in society, and family members constitute the most influential primary reference group. A) There are two families in the buyer’s life. The family of orientation consists of parents and siblings. A more direct influence on everyday buying behavior is the family of procreation —namely, the person’s spouse and children. The makeup of the American family has changed dramatically. For expensive products and services, the vast majority of husbands and wives engage in joint decision making. Men and women may respond differently to marketing messages. Another shift in buying patterns is an increase in the amount of dollars spent and the direct and indirect influence wielded by children and teens. Roles and Statuses A) A person participates in many groups—family, clubs, and organizations. We can define a person’s position in each group in terms of role and status. B) Each role carries a status. C) Marketers must be aware of the status-symbol potential of products and brands. Marketing Insight: Face-Saving and the Chinese Consumer In Chinese culture, there are two types of “face.” Lian (脸) is the confidence of the society on an individual’s moral character, while mianzi (面子) is the prestige accorded through success and ostentation. Saving one’s face is important to traditional Chinese. This has implications on consumer behavior: Influence of referent others Ostentatious living Fewer complaints Comparative advertising Negotiation PERSONAL FACTORS Personal characteristics that influence a buyer’s decision include age and stage in the life cycle; occupation and economic circumstances; personality and self-concept; and lifestyle and values. Age and Stage in the Life Cycle Our taste in food, clothes, furniture, and recreation is often related to our age. Consumption is also shaped by the family-life cycle and the number, age, and gender, of people in the household at any point in time. In addition, psychological life-cycle stages may matter. Marketers should also consider critical life events or transitions as giving rise to new needs. Occupation and Economic Circumstances Occupation influences consumption patterns and economic circumstances influence product. Product choice is greatly affected by economic circumstances including: Spendable income (level, stability, and time pattern) Savings and assets Debts Borrowing power Attitudes toward spending and saving Personality and Self-Concept Each person has personality characteristics that influence his or her buying behavior. Personality: A set of distinguishing human psychological traits that lead to relatively consistent and enduring responses to environmental stimuli. Brands also have personalities, and consumers are likely to choose brands whose personalities match their own. We define brand personality as the specific mix of human traits that we can attribute to a particular brand. Jennifer Aaker identified the following seven traits: Sincerity (down-to-earth, honest, wholesome, and cheerful) Excitement (daring, spirited, imaginative, and up-to-date) Competence (reliable, intelligent, and successful) Sophistication (upper-class and charming) Ruggedness (outdoorsy and tough) Passion (emotional intensity, spirituality, and mysticism) Peacefulness (harmony, balance, and natural) Consumers often choose and use brands with a brand personality consistent with their actual self-concept (how we view ourselves). Although in some cases, the match may instead be based on the consumer’s ideal selfconcept (how we would like to view ourselves). Others self-concept (how we think others see us). Consumers who are high “self-monitors” — that is, sensitive to how others see them — are more likely to choose brands whose personalities fit the consumption situation. Lifestyles and Value People from the same subculture, social class, and occupation may lead quite different lifestyles. A lifestyle is a person’s pattern of living in the world as expressed in activities, interests, and opinions. It portrays the “whole person” interacting with his or her environment. Marketers search for relationships between their products and lifestyle groups. Lifestyles are shaped partly by whether consumers are money-constrained or time constrained. Consumers who experience time famine are prone to multitasking, doing two or more things at the same time. Consumer decisions are also influenced by core values, the belief systems that underlie consumer attitudes and behaviors. KEY PSYCHOLOGICAL PROCESSES The starting point for understanding consumer behavior is the stimulus-response model shown in Figure 6.1. The marketer’s task is to understand what happens in the consumer’s consciousness between the arrival of the outside marketing stimuli and the ultimate purchase decisions. Motivation: Freud, Maslow, Herzberg We all have many needs at any given time. Some needs are: Biogenic (arise from physiological states of tension such as hunger). Others are psychogenic and arise from a need for recognition, esteem, or belonging. A need becomes a motive when it is aroused to a sufficient level of intensity to drive us to act. Freud’s Theory Sigmund Freud assumed that the psychological forces shaping people’s behavior are largely unconscious, and that a person cannot fully understand his or her own motivations. A technique called laddering lets us trace a person’s motivations from the stated instrumental ones to the more terminal ones. Motivation researchers often collect “in-depth interviews” to uncover deeper motives triggered by a product. Projective techniques such as word association, sentence completion, picture interpretation, and role-playing are used. Maslow’s Theory Abraham Maslow sought to explain why people are driven by particular needs at particular times. Maslow’s answer is that human needs are arranged in a hierarchy from most to least pressing In order of importance, they are: Physiological needs Safety needs Social needs Esteem needs Self-actualization needs See Figure 6.2. Some argue that Maslow’s theory does not fully apply in collectivistic societies like Asia. It is particularly debatable whether self-actualization is applicable to Asian consumers. These needs may be socially directed instead, given the strong desire of Asians to enhance their image and position through contributions to society. Three types of socially directed needs may be considered the most important for Asians: Affiliation Admiration Status Herzberg’s Theory Frederick Herzberg developed a two-factor theory that distinguishes dissatisfiers (factors that cause dissatisfaction) from satisfiers (factors that cause satisfaction). The absence of dissatisfiers is not enough to motivate a purchase; satisfiers must be present. Herzberg’s theory has two implications: Sellers should do their best to avoid dissatisfiers. Sellers should identify the major satisfiers or motivators of purchase in the market and supply them. Perception A motivated person is ready to act—how is influenced by his or her perception of the situation. Perception is the process by which an individual selects, organizes, and interprets information inputs to create a meaningful picture of the world. It depends not only on physical stimuli, but also on the stimuli’s relationship to the surrounding field and on conditions within the individual. Selective Attention Attention is the allocation of processing capacity to some stimulus. It’s estimated that the average person may be exposed to over 1,500 ads or brand communications a day. Because we cannot possibly attend to all these, we screen most stimuli out—a process called selective attention. A) Selective attention means that marketers have to work hard to attract consumers’ notice. People are more likely to notice stimuli that relate to a current need. People are more likely to notice stimuli that they anticipate. People are more likely to notice stimuli whose deviations are large in relation to the normal size of the stimuli. Selective Distortion Selective distortion is the tendency to interpret information in a way that fits our preconceptions. Consumers will often distort information to be consistent with prior brand and product beliefs. Selective distortion can work to the advantage of marketers with strong brands when consumers distort neutral or ambiguous brand information to make it more positive. Selective Retention Most of us don’t remember much of the information to which we’re exposed, but we do retain information that supports our attitudes and beliefs. Because of selective retention, we are likely to remember good points about a product we like and forget good points about competing products. Subliminal Perception The selective perception mechanisms require consumers’ active engagement and thought. The topic of subliminal perception, the argument that marketers embed covert, subliminal messages in ads or packages and consumers are not consciously aware of these messages, but yet they affect their behavior. Learning Learning induces changes in our behavior arising from experience. A) A drive is a strong internal stimulus impelling action. Cues are minor stimuli that determine when, where, and how a person responds. Discrimination means that the person has learned to recognize differences in sets of similar stimuli and can adjust responses accordingly. Hedonic bias says people have a general tendency to attribute success to themselves and failure to external causes. Emotions Consumer response is not all cognitive and rational; much may be emotional and invoke different kinds of feelings. Memory Cognitive psychologists distinguish between short-term memory (STM)—a temporary repository of information, and Long-term memory (LTM)—a more permanent repository A) The associative network memory model views LTM as a set of nodes and links. Nodes are stored information Connected by links that vary in strength B) Brand associations consist of all brand-related thoughts, feelings, perceptions, images, experiences, beliefs, and attitudes, linked to the brand node. Memory Processes Memory is a very constructive process, because we do not remember information and events completely and accurately. Often we remember bits and pieces and fill in the rest. Marketing Insight: Match to Stick offers some practical tips on how marketers can ensure their ideas — inside or outside the company — are remembered and have impact. Memory encoding describes how and where information gets into memory. In general, the more attention placed on the meaning of information during encoding, the stronger the resulting associations in memory will be. Memory retrieval refers to how information gets out of memory. Three facts are important about memory retrieval: The presence of other product information in memory can produce interference effects. The time since exposure to information at encoding affects the strength of a new association—the longer the time delay, the weaker the association. The time elapsed since the last exposure opportunity, however, has been shown generally to produce only gradual decay. Information may be “available” in memory (potentially recallable) but may not be “accessible” (unable to be recalled) without the proper retrieval cues or reminders. THE BUYING DECISION PROCESS: THE FIVE-STAGE MODEL These basic psychological processes play an important role in understanding how consumers actually make their buying decisions. Marketing scholars have developed a “stage model” of the buying-decision process. The consumer passes through five stages: Problem recognition Information search Evaluation of alternatives Purchase decision Postpurchase behavior Problem Recognition The buying process starts when the buyer recognizes a problem or need. The need can be triggered by internal or external stimuli. Marketers need to identify the circumstances that trigger a particular need by gathering information from a number of consumers. Information Search An aroused consumer will be inclined to search for more information. We can distinguish between two types of arousal. The milder state is called heightened attention where a person simply becomes more receptive to information about a product. The second level is active information search where a person looks for reading material, going online, etc. to learn about the product. Information Sources Personal (family, friends) Commercial (advertising, Web sites, salespeople) Public (mass media, consumer organizations) Experiential (handling, examining, using the product) Generally speaking, consumers receive the most information about a product from commercial sources. The most effective information often comes from personal sources or public sources that are independent authorities. Search Dynamics By gathering information, the consumer learns about competing brands and their features. Marketers need to identify the hierarchy of attributes that guide consumer decision making in order to understand different competitive forces and how these various sets get formed. This process of identifying the hierarchy is called market partitioning. brand-dominant hierarchy nation dominant hierarchy Buyers who first decide on price are price dominant; those who first decide on the type of car (sports, passenger, station wagon) are type dominant; those who choose the brand first are brand dominant. Type/price/brand-dominant consumers make up one segment; quality/service/type buyers make up another. Each may have distinct demographics, psychographics, and mediagraphics and different awareness, consideration, and choice sets. The company must also identify the other brands in the consumer’s choice set so that it can plan the appropriate competitive appeals. In addition, the company should identify the consumer’s information sources and evaluate their relative importance. Evaluation of Alternatives No single process is used by all consumers, or by one consumer in all buying situations. The most current models models of which see the process as cognitively oriented. First, the consumer is trying to satisfy a need. Second, the consumer is looking for certain benefits from the product solution. Third, the consumer sees each product as a bundle of attributes with varying abilities for delivering the benefits. Beliefs and Attitudes Through experience and learning, people acquire beliefs and attitudes. These in turn influence buying behavior. Belief—a descriptive thought that a person holds about something. Attitude—a person’s enduring favorable or unfavorable evaluation, emotional feeling, and action tendencies toward some object or idea. C) Attitudes put people into a frame of mind. Attitudes lead people to behave in a fairly consistent way toward similar objects. Attitudes can be very difficult to change. Expectancy-Value Model The consumer arrives at attitudes toward various brands through an attribute evaluation procedure, developing a set of beliefs about where each brand stands on each attribute. The expectancy-value model of attitude formation posits that consumers evaluate products and services by combining their brand beliefs—the positives and negatives—according to importance. Most consumers consider several attributes in their purchase decisions. Purchase Decisions In the evaluation stage, the consumer forms preferences among the brands in the choice set and may also form an intention to buy the most preferred brand. In executing a purchase intention, the consumer may make up to five sub-decisions: Brand (brand A) Dealer (dealer 2) Quantity (one) Timing (weekend) Payment method (credit card) Non-Compensatory Models of Consumer Choice The expectancy-value model is a compensatory model, in that perceived good things about a product can help to overcome perceived bad things. But consumers often take “mental shortcuts” called heuristics or rules of thumb in the decision process. With non-compensatory models of consumer choice, positive and negative attribute considerations do not necessarily net out. With conjunctive heuristic method, the consumer sets a minimum acceptable cutoff level for each attribute and chooses the first alternative that meets this minimum. With the lexicographic heuristic method, the consumer chooses the best brand on the basis of its perceived most important attribute. With the elimination-by-aspects heuristic method, the consumer compares brands on a attribute selected and eliminates brands that do not meet minimum acceptable cutoffs. Consumers do not adopt only one type of choice rule and may combine two or more decision rules. Intervening Factors Even if consumers form brand evaluations, two general factors can intervene between the purchase intention and the purchase decision (see Figure 6.6). A) The first factor is the attitudes of others. The intensity of the other person’s negative attitude toward the consumer’s preferred alternative. The consumer’s motivation to comply with the other person’s wishes. The second factor is unanticipated situational factors that may erupt to change the purchase intention. A consumer’s decision to modify, postpone, or avoid a purchase decision is heavily influenced by perceived risk. There are many types of risks that consumers may perceive in buying and consuming a product: Functional risk Physical risk Financial risk Social risk Psychological risk Time risk Marketers must understand the factors that provoke a feeling of risk in consumers and provide information and support to reduce it. Post-Purchase Behavior After the purchase, the consumer might experience dissonance about their purchase and be alert to information that supports their decision. Marketing communications should supply beliefs and evaluations that reinforce the consumer’s choice and help him or her feel good about the brand. A) Marketers must monitor post-purchase satisfaction, post-purchase actions, and post purchase uses. Post-Purchase Satisfaction Satisfaction is a function of the closeness between expectations and the product’s perceived performance. If the performance falls short of expectations the consumer is disappointed. If the performance meets expectations the consumer is satisfied. If the performance exceeds expectations the consumer is delighted. Post-Purchase Actions A satisfied consumer is more likely to purchase the product again and will also tend to say good things about the brand to others. On the other hand, dissatisfied consumers may abandon or return the product. Private actions include making a decision to stop buying the product (exit option) or warning friends (voice option). In all these cases, the seller has done a poor job of satisfying the customer. Post-Purchase Use and Disposal Marketers should also monitor how buyers use and dispose of the product. A key driver of sales frequency is product consumption rate. If consumers throw the product away, the marketer needs to know how they dispose of it, especially if it can damage the environment (as in the case with batteries, beverage containers, and disposable diapers). Moderating Effects on Consumer Decision-Making The manner or path by which a consumer moves through the decision-making stages depends on several factors, including the level of involvement and extent of variety seeking. Low-Involvement Consumer Decision-Making The expectancy-value model assumes a high level of consumer involvement, or engagement and active processing the consumer undertakes in responding to a marketing stimulus. Elaboration Likelihood Model A) Describes how consumers make evaluations in both low and high involvement circumstances. Central route. Peripheral route. Peripheral cues for consumers might be a celebrity endorsement, a credible source, or any object that engendered positive feelings. Marketers use four techniques to try to convert a low-involvement product into one of higher involvement. They can link the product to some involving issue. They can link the product to some involving personal situation. They might design advertising to trigger strong emotions related to personal values or ego defenses. They might add important features. Variety-Seeking Buying Behavior Some buying situations are characterized by low involvement but significant brand differences. Brand switching occurs for the sake of variety rather than dissatisfaction. BEHAVIORAL DECISION THEORY AND BEHAVIORAL ECONOMICS As you might guess from low-involvement decision making and variety-seeking, consumers don’t always process information or make decisions in a deliberate, rational manner. Behavioral decision theorists have identified many situations in which consumers make seemingly irrational choices. Table 6.5 Selected Behavioral Decision Theory Findings Marketing Insight: Predictably Irrational In a new book, Dan Ariely reviews some of his own research, as well as that of others, that shows that although consumers may think they are making well-reasoned, rational decisions, that is not often the case. As it turns out, a host of mental factors and unconscious cognitive biases conspire to result in seemingly irrational decision making in many different settings. Decision Heuristics Other heuristics similarly come into play in everyday decision making when consumers forecast the likelihood of future outcomes or events.1 The availability heuristic—Consumers base their predictions on the quickness and ease with which a particular example of an outcome comes to mind. The representativeness heuristic—Consumers base their predictions on how representative or similar the outcome is to other examples. The anchoring and adjustment heuristic—Consumers arrive at an initial judgment and then adjust it based on additional information. Note that marketing managers may also use heuristics and be subject to biases in their own decision-making. Framing Decision framing is the manner in which choices are presented to and seen by a decisionmaker. Marketers can influence consumer decision making through what they call the choice architecture—the environment in which decisions are structured and buying choices are made. Mental Accounting Researchers have found that consumers use mental accounting when they handle their money. Mental accounting refers to the manner by which consumers code, categorize, and evaluate financial outcomes of choices. Formally, it is “the tendency to categorize funds or items of value even though there is no logical basis for the categorization, e.g., individuals often segregate their savings into separate accounts to meet different goals even though funds from any of the accounts can be applied to any of the goals.”2 According to Chicago’s Thaler, mental accounting is based on a set of core principles: Consumers tend to segregate gains. When a seller has a product with more than one positive dimension, it’s desirable to have the consumer evaluate each dimension separately. Listing multiple benefits of a large industrial product, for example, can make the sum of the parts seem greater than the whole. Consumers tend to integrate losses. Marketers have a distinct advantage in selling something if its cost can be added to another large purchase. House buyers are more inclined to view additional expenditures favorably given the high price of buying a house. Consumers tend to integrate smaller losses with larger gains. The “cancellation” principle might explain why withholding taxes from monthly paychecks is less aversive than large, lump-sum tax payments—the smaller withholdings are more likely to be absorbed by the larger pay amount. Consumers tend to segregate small gains from large losses. The “silver lining” principle might explain the popularity of rebates on big-ticket purchases such as cars. The principles of mental accounting are derived in part from prospect theory. Prospect theory maintains that consumers frame their decision alternatives in terms of gains and losses according to a value function. Consumers are generally loss-averse. They tend to overweight very low probabilities and underweight very high probabilities. 1 Frank R. Kardes, Consumer Behavior and Managerial Decision Making, 2nd ed., (Upper Saddle River, NJ: Prentice Hall, 2003). 2 Gary L. Gastineau and Mark P. Kritzman, Dictionary of Financial Risk Management, 3rd ed., (New York: John Wiley, 1999). Instructor Manual for Marketing Management: A South Asian Perspective Philip Kotler, Kevin Lane Keller, Abraham Koshy, Mithileshwar Jha 9789810687977, 9780132102926