MKT100 Module 4

Understanding Buyer Behaviour

Getting Closer to the Customer

Product Designer

Product Designer

Market Executive

Research Firm Analyst

Telephone Interviewer

Customer Visit User Market Research

Customer Traditional Market Research

Increasingly, listening-to-the-customer processes are being simplified to make them more timely and useful in rapidly evolving markets. This requires the use of common sense, such as eliminating the number of people between the designer and the customer in product development research. Of course in many situations, experts are needed to undertake consumer research, but common commercial sense also needs to be applied in assessing the relative utility, value and timeliness of various market research methods. Sometimes companies become fixated on their spending on a particular research method, such as focus groups or supermarket scanner data analysis. The means or method should never dominate the goal, which is to understand your customers better than other suppliers. Such knowledge is market power.

Peter R. Dickson
Backbone Press 2009

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1. Researching Customers
In microeconomics there is a concept called private information which states that a firm profits from unique information and insights it has about production techniques and trade secrets. An important trade secret is the unique insight a business has about the behaviour of customers that is not common knowledge, particularly knowledge about changing consumer preferences and buying behaviour. This is even more important when innovations such as the Internet are dramatically changing customer search and shopping behaviour. Private information and insightful interpretation of such information about customer behaviour can be a powerful driver of competitive success and profitability. This module introduces you to the major tools used to study customers, particularly for new product development. It then provides you with some general insights into customer buying behaviour and the cultural and social influences on such behaviour. When done simply and sensibly, consumer research can provide insights worth millions of dollars. It is an important marketing capability that all business students should know something about. The first and most important consumer research activity of a current business is to track customer satisfaction and dissatisfaction. Firms keep track of customer dissatisfaction by tracking returns and customer complaints. This should be a given, and in some markets (such as prescription drugs), is sometimes required by law. Many firms also survey their own customers or have someone else survey customers to measure customer satisfaction. This identifies what it is about the firms product or service that most delights the consumer and what it is about the product or service that they dislike. Tracking customer satisfaction/dissatisfaction and trends in demand is what a lot of modern market research is about.

ow do companies put their market orientation into practice in listening to and understanding their customers? This module teaches ways of listening to the customer and the basic drivers of consumer behaviour; culture, the economy, social influence, consumer beliefs and customer satisfaction. Such knowledge about the customer and context is an important competitive knowledge advantage. It exercises the Knowledge-is-power principle from behavioural economics and the economic theory of imperfect competition.

Firms also undertake special consumer research studies to test product concepts in new product development, particularly in global markets where the company has never operated and products need to be redesigned. Such special consumer research studies are a major way that the new players in the global marketplace learn about consumers. They employ local market research firms to study local consumers. Such learning about demand by suppliers is a good thing for market efficiency. This module, rather than providing a general survey of all listening to the consumer research techniques, concentrates on a few basic techniques, such as in-depth study of individual consumers, focus group methodology and survey research, mainly employed in product development or commercializing innovation. Many different research methods can be used and their effectiveness will be discussed. But whatever the specific research methods, the market research process typically includes the following logical steps: 1. 2. 3. 4. 5. Problem Definition/Question to be Answered (the most difficult step) Research Design Data Collection Data Analysis and Interpretation Presentation of Results 1.

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Often, an informal study is carried out to identify the real problem and frame the questions to be addressed (and this can take a lot of discussion and politics). Market researchers and product developers then develop a research plan and design to address the questions. This is likely to involve one of the following three types of research and data.

Types of research
Exploratory research and data collection are undertaken when the problem or research question is still fuzzy and management wants additional information before undertaking further research. It is likely to include the study of internal records, customer complaints, financial analysis trends, and discussions with distributors and suppliers. It is likely to involve the consulting of experts and environment analysis described in the Market Orientation module. This is the sensible way of boiling the problem down to its essence; what is the real question that needs to be answered, the real problem that needs to be studied? Most importantly, is it fundamentally a problem with product or service design? If it is, it needs to be addressed immediately because it may take months or years of new product development to fix. Descriptive survey research is typically used to describe customers, either small numbers of customers in-depth, or large numbers of customers by survey research. It typically gathers descriptive profiles of customers and is used to measure customer satisfaction, study product use and segment customers. It answers the who, what, here, when, and why of consumer behaviour. It can be cross-sectional or longitudinal. Cross-sectional research studies a cross-sectional sample of customers responses at a specific point in time. For example, if business students were asked How satisfied are you with the college of business? the responses would reflect a cross-section of student satisfaction. In contrast, longitudinal research involves the repeated measurement of the same customer and addresses customer responses over a period of time. Longitudinal research is almost always undertaken in modern company customer database mining so as to measure changing customer purchase behaviour, channel use, satisfaction and, of course, profitability. Cause-and-effect research is used to explore the question Does X cause Y? such as the effects of a price decrease on sales and the effect of TV advertising campaign spending on sales. This sort of applied research is done on the metrics dashboards of managers.

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2. Qualitative Consumer Research

Qualitative research includes methods such as observation and in-depth interviews with customers, suppliers and middlemen. Many anthropology majors trained in appropriate observation and interview methods are now employed in market research and design firms. They study ethnography, the way of life of people. The details on using observational research to understand how the customer uses the product or service are described and examples are presented in the next Segmentation and Positioning module. Talking directly to customers and observing their use of the product or service seems so obvious, yet some firms do not do enough of it. Instead, they may rely on survey research where too many steps and interpretative judgments separate customers and decision makers. The vivid impact on managers and engineers who listen to customers own words and see how they use a product in their homes, in their office or on their production lines is lost if customers are not observed using the product. As a consequence, the voice of the customer is not heard clearly enough throughout the organization and has less impact on informal and formal decision-making. In short, the organization is less market oriented. Plastering photos taken during the customer visit around the room keep this voice heard in decision-making. The heading of a cover story in Marketing News, February 2006, was The implications of a photograph of a home are countless. For a marketer; an image is worth several hours spent in focus groups or interviews. In the 1990s, Whirlpool took photos of several hundred refrigerator interiors across several hundred randomly sampled households. They found that the modern refrigerator was used much more as a beverage cooler than they had thought and much less for storing meat and vegetables. Their interior design of their refrigerators did not meet the needs of their customers. The new refrigerators have much more beverage space and have been very well-received by consumers. The Swedish furniture retailer IKEA employed anthropologists in Japan to study 100 families over several months. This is after their first attempt to enter the Japanese market failed. It led to a redesign of the furniture sold and a successful second entry attempt into the Japanese market. But why didnt they do the in-depth observational study first? They initially assumed that the way Japanese live in their homes was no different from anywhere else. Fisher Price, the toy manufacturer, has a special play laboratory and a long waiting list of children wanting to participate in their new product testing (observed through one-way mirrors). Other toy manufacturers visit daycare facilities and watch children play with toys. Daycare employees are obviously good sources of ideas for product improvements. In general, the millions of salespeople whose business it is to observe consumers and shoppers are great sources of information. Many market researchers and ethnographers, when undertaking product development research, encourage consumers to take photos that describe how they use the product, and then tell the story the photo illustrates. This explains the deeper meaning and significance of the product in their lives. Called motivational research, it can sometimes reap very rich insights and rewards when done by skilled field researchers and interpreters. But it can be taken too far in its insights, such as when engaging rich and fanciful stories of a minority of customers highlighted in brilliantly written research reports. It may create a view that customers are much more involved and interested in the product than they really are.

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Customer visits
Below are several guidelines for planning direct visits with customers: Never confuse a customer research visit with a sales call. It destroys customer trust and selling replaces listening. But the customer visit should be arranged by the sales representative so they lead the setting up of the initiative and everything is transparent. No going behind the back of sales. Their commissions depend on customer trust and goodwill and salespeople have every right to be possessive about their customer relationship. Ten to twenty randomly chosen customers should be visited, including some who are leaders in adopting new technology. This number reduces an extreme, atypical customer opinion from having too much influence in later decisions. Listen to how the customer talks about the product or service. It tells you what they think about the benefits, the problems they have and how to improve product design. You should adopt the customers words and metaphors. It is the way a team changes its thinking about the customer and its problem solving for the customer. Learn to listen and observe; again, do not treat the visit as a sales call. Do not disparage the competition, and listen rather than be defensive when the customer praises them. Be open to quickly adopting competitors behaviours that customers really like. Avoid changing the subject as customers may interpret this as a lack of interest or as being too controlling. Clarify what you have heard, confirming that you have understood. Ask questions to clarify. Be a good listener. Think before you speak. Use a discussion guide based on what you want to learn. Report separately on the serendipitous insights. Observe the product in use in every usage situation. Photograph innovative customer adaption of your product, package or service to improve its performance in a particular usage situation. This may suggest a new design feature. Two or three team members should make the visit together. In the car or on the plane back, time spent talking while the memory is fresh is invaluable. Shared expectations, perceptions and insights are best when made soon after the customer visit. In such discussions, team members will discover what they did not notice and thus learn from each other, becoming better listeners and observers.

Focus group research

Focus groups are far and away the most common market research method used today because they are very useful. A focus group consists of a group of six to 12 carefully selected people who focus on a particular question or issue in a free-wheeling discussion for about two hours. Often, it is also used to test products and product concepts, advertising creatives and political messages. It is observed by managers through a one-way mirror and/or videotaped. Focus group transcripts are often made, read later and the content analyzed. Smaller focus groups can be conducted in more casual locations, such as hotel suites. Recent marketing graduates often spend one or two weeks a year crisscrossing the country doing three or four such focus groups a day. Many focus groups involve an independent moderator who is a skilled and engaging conversationalist. Focus groups can be used successfully by following these best-practice processes: 4.

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First, identify who you want to talk to and then recruit participation. Expect to pay at least $50-$100 per participant to cover travel expenses and two to three hours of his or her time. Professionals such as doctors and architects may have to be paid several hundred dollars for participating. Choose a moderator who will relate to your focus group participants. It is generally not wise to conduct them yourself unless you have observed a lot of focus groups and can be objective and independent. Hold a debriefing with the moderator immediately afterwards to obtain her fresh insights and perspectives. Note the body language, interest or emotion that accompanies the discussion. It is good to have management in attendance, as new questions can be passed to the moderator in process. Conduct focus groups until no new insights surface: this sometimes takes about three to four focus groups, sometimes a lot more. Take the concept of focus groups a step further and run focus groups with experts, recruited to participate in high-level product development focus groups.

The purpose of focus groups is to learn about the beliefs, attitudes, preferences and behaviour of the target customers. But it can be risky to use focus groups to statistically represent target customer behaviour. Sometimes firms base important go/no-go decisions on the results of a sample of say 40 customers across half a dozen focus groups. There is nothing wrong with doing this if, and only if, the response is extreme, (if 90 percent+ hate the concept/campaign or if 90 percent+ love the concept and campaign). It is also wise to test a major competitors successful concept at the same time and campaign to provide a validation benchmark on participant reactions to your product or product concept. But if the response to your new concept or ad campaign is mixed, say 60 percent in favour, 40 percent against, you need a larger sample, a consumer preference survey study. The forty customers across six focus groups telling you 60:40 are telling you that you do not have a clear winner, and you may have a dud on your hands.

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3. Survey Consumer Research

Since descriptive research is far more common in business than cause-and-effect experimental research, we focus our discussion on descriptive listening-to-the-customer research methods. Survey research involves the sampling and surveying of a population of customers using a carefully prepared set of questions. Surveys of individuals or households are normally taken to study and categorize the variation in buyer values: lifestyles, product usage, benefits sought and beliefs about product performance. They can also be used to evaluate concepts. Two of the major fundamental issues in survey research are sampling and questionnaire design. To determine if the opinion expressed in focus groups and in-depth interviews represents the opinions, attitudes, interests, beliefs and behaviours of the larger population of customers, market researchers may survey a sample of the population. But how is a sample drawn, and what are the advantages of the different methods (processes) of selecting a sample of the overall population?

Probability sampling
A probability sample is a sample where all of the respondents in the population or segment to be studied have a known (non-zero) chance of being chosen to be in the sample from the population/segment being studied. Companies are often interested in finding out whether their profitable customers are very satisfied, how the customer service they experienced could be improved, and what other goods or services might be sold to them. In this case, the company might generate a simple random sample of customers from the companys customer database by selecting those customers who have purchased $1,000 or more worth of goods and services in the last year. A simple random sample is a probability sample where respondents are randomly chosen from a complete list of the population. Simple random samples are often generated through the assistance of computer programs that use random number generators. Typical samples range in size from 400 to 1,000 participants. The primary advantage of random probability samples is that they greatly reduce the potential for sampling error showing up in the results. In addition, sampling can be much more cost effective than surveying the whole population (a survey of a whole population is called a census) and has the additional advantage of not repeatedly bothering the entire population of customers for feedback. Random samples allow you to develop confidence limits around the results. If a random sample of 400 segment customers indicates that 50 percent are satisfied (that is, proportion satisfied p=0.5), then in the entire segment population of customers we can be 95 percent confident that between 45 and 55 percent of the customers in the segment will be satisfied. 1 For a larger random sample of 1,600 that reports 50 percent satisfaction, then in the entire segment of customers we can be 95 percent certain that between 47.5 and 52.5 percent of all the customers will be satisfied. Notice the increased precision and confidence that a larger sample gives in the samples answer, but it takes four times the sample size to double the precision (that is, halve the 95 percent confidence interval).
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From your business statistics course you will recall that you can be 99% sure the true value is between p minus 2 x (p.(1-p)/n)1/2 which in our example is = 0.5 minus 2x(0.5x0.5/400)1/2 which is 0.5 minus 2x(0.5/20) = 0.45 and 0.5 plus 2x(0.5x0.5/400)1/2 which is 0.5 plus 2x(0.5/20) = 0.55. That is, we can be 95% confident that between 45% and 55% of the entire segment population will be satisfied. For the large sample, the 95% confidence range or interval either side of 0.5 is 2x(0.5x0.5/400)1/2 = 2x(0.5/40) = 0.025. That is, we can be 95% confident that between 47.5% and 52.5% of the entire segment of customers will be satisfied.

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The best source of a random sample is to draw it from your customer database. Sometimes friendly distributors will allow you to sample competitors customers from their databases of customers. But note that the results may only generalize to customers of a particular distributor. When managers wish to study product-category non-users, they need to find a list of this population of interest. That may be hard to do. More generally, what companies do is use a market research company panel that has a mix of users and non-users. Then they draw a random sample from such a panel. You can also buy individual questions in an omnibus survey for several hundred dollars each. An omnibus survey is where several firms participate in a survey. Companies such as Zoomerang.com offer random samples from their online customer panels, and a national study of 400 completed surveys can cost as little as $2,000 and be completed within a week. A convenience sample is a sample that is gathered from a convenient pool of customers or potential customers. To get a sense of demand for a new iced tea, how might a marketer undertake a taste test against a premium supermarket brand? A convenient approach would be to survey 200 adults intercepted in a shopping mall by a research firm that rents a testing facility in the mall. But notice that this sample might under-represent working adults and students (resulting in sampling bias). It would also only generalize to the adults who shop in that mall and/or in that region of the country. However, a convenience sample of high-performing stores may be a more valid sample than a representative sample of all stores if the goal is to understand the beliefs, preferences and behaviour of only high-performing stores and not all stores.

Sampling problems
The major problem with sampling is the risk of non-response error or participation bias, which occurs when a particular customer group is under or overrepresented in a sample. For example, in an effort to study what Americans eat, the U.S. Environmental Protection Agency (EPA) hired the market research firm National Analysts. The firm scientifically selected 6,000 households of all incomes and 3,600 low-income households. Accurate results were important because EPA planned to use the results to measure ingestion of pesticides through consumption of different agricultural products (e.g., corn and potatoes) and, based on the results, set agricultural pesticide regulations that might cost farmers billions of dollars. But the households were offered $2 to complete a three hour long survey and only 34 percent responded! This led to questions as to the non-response bias of the results and this became a political hot potato. If the households had been paid $50, the response rate would have been more than 80 percent, maybe 90 percent and there would be no questioning of the results. For $300,000 more, decisions involving billions would have been better made because they were based on better information. When billions are at stake it may be worth spending millions on high quality market research. This is also a good example of the problems created by non-response biases. Another example would be using online consumer research and online sampling when you know it does not represent the responses of households that cannot afford an Internet connection or are not Internet literate. A more general problem is that households are tired of being duped by sales pitches that pretend to be a market research study, online and offline. The Council of American Survey Research Organizations estimates that more than one third of households now refuse to participate in phone surveys because of a suspicion that the call is really sugging (selling under the guise of research).

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Online research
An obvious dimension of listening-to-the-customer research is to be listening systematically to the online chatter about your products, services and marketing. This source of information and online conversations about customer beliefs, feelings and preferences (sometimes called word-of-mouse rather than word-of-mouth) can be found in customer review sites and across social networking sites. Trying to manage this is a large part of modern product launch marketing campaigns Market researchers have also been quick to embrace the Internet as a tool for conducting, planning and reporting market research. About a third of all consumer market research is now undertaken online because: 1. Online market research has increased the quality of the research by reducing errors in several research processes. For example, direct data entry from the Web site reduces random and systematic errors in the data and statistical analysis. Online market research has significantly reduced the cost of research by 20-50 percent. Online research has sped up the whole market research process, from taking weeks to days. Comparative studies suggest that online open-ended questions elicit a lot richer response and less inhibited responses than open-ended questions asked in mail or telephone surveys. 2

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An issue associated with the quality of online market research has been how representative the sample is. In other words, are online respondents representative of the firms target market? We know that online respondents do not represent the population at large, as low-income households and older households are under-represented. Twenty percent of Canadians do not use the Internet. 3 But do we want the online sample to be representative of the population at large if we are not marketing to the population at large? We want it to represent the target segment. So if the target segment is high-income, high-education households, an on-line sample will probably be fine. Properly conducted, online studies are as good at sampling specialized markets as any other method. 4 Online research enables a much richer multimedia presentation and information environment for testing product concepts and product extensions. Dell has taken online product promotion testing right to their customer Web site where they test new promotional campaigns for advanced Intel chips. One thing they learned from such testing is that a mild promotional message was just as effective as a harder sell when encouraging customers to trade up to a more powerful chip in their computer. There is more of a concern over controlling who is participating in online market research. For example, online research often needs appropriate question checks to make sure that children are not participating in studies targeted to the family head-of-household. Early online market research studies that did not insert respondent check questions ran into problems. 5 Finally, perhaps the most important advantage of online market research is that it allows firms to quickly study a segment of the target market and test new ideas. This rapid response from customers provides a dynamic link between customers and management in a timely, cost-effective
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Thomas W. Miller and Peter R. Dickson, On-line Market Research, International Journal of Electronic Commerce, Spring 2001, (5.3): 139-168. Canadian 2009 Internet Use Survey at http://www.statcan.gc.ca/daily-quotidien/100510/dq1005110a-eng.htm Miller and Dickson, ibid. Miller and Dickson, ibid.

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Knowledge is power manner. P&G has been able to undertake a national new product concept test in 48 hours using online market research processes and techniques. Brilliant process time compression really accelerates the product development testing cycle. We now turn to a brief review of what decades of consumer research has learned about how customer preferences and demand is formed. You will surely connect many aspects of your own behaviour, past and present, to what is discussed. This broad overview also prepares you for the following module on segmentation of consumer variance and positioning products to serve market segments.

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4. Cultural and Social Influence

According to Websters dictionary, culture is the sum total of the ways of living built up by a group of human beings and transmitted from one generation to another. It is also defined as a stage of civilization of a certain nation or period, and thirdly the behaviours and beliefs of a particular social, ethnic or age group. Anthropologists study the culture of tribes, which includes how tribes are led, their day to day and month to month activities, their important religious rituals and holy places, sites and artefacts, their development and use of technologies, as well as their myths and history embodied in their writings and story telling. The study of how they traded was a sometimes minor, sometimes major component of the study of primitives, but what we can say is that the tribes that developed a lot of trading have, through cause and effect, prospered. How todays subcultures and tribes buy and consume is a major topic in contemporary anthropology and sociology. For example, the evolution of consumption in China and other rapidly evolving economies and understanding it best is a major global competitive issuethe focus of a lot of companies small and large. What anthropologists and sociologists have learned is that because modern societies are made up of peoples from many different nations and subcultures, it is not sensible to talk about the Canadian or Chinese culture. Instead, it makes more sense to talk about the Inuit culture and how its behaviour and beliefs are changing or the new Chinese immigrant subculture in Toronto or the old French Canadian culture in Quebec, one of fifteen different subcultures within the French Canadian culture, according to the VALS analysis, a proprietary method of identifying modern subcultures that are often given catchy labels (e.g., the Tres Chic).6

Canadian culture 7
Canada, in spite of its close cultural affinity to the United States and its shared border, has a distinct model of cultural and social integration. While the United States broadly aspires to a Melting Pot model where immigrants from the world over come to the United States and adopt American values and become distinctly American -- immigrants to Canada are told that Canada embraces multiculturalism and rejects cultural homogeneity. Canadian author Yann Martel is credited with defining Canada as a Grand Hotel. The inference here is that loyalty to Canada is no more than the loyalty of a Holiday Inn guest to their hotel when they happen to be staying there. Consider that the typical hotel patron does not create identity around their hotel and leaves the hotel and returns with little social angst. While Canada, at times, has no shortage of nationalistic fervour, especially when it comes to Olympic mens hockey, the country is considered by many to be collection of many states (its provinces) and many nations (its ethnic minorities). Books have been written and editorial columns have been penned that address what it is and what it should be to be Canadian. For the purposes of the Canadian marketer, it is important to know that Canada is a large country comprised of distinct ethnic and geographical markets, it is a country that has a relatively high percentage of recent immigrants and it is a country that while collectively falling under the nation-state umbrella of Canada, has distinct markets with distinct needs.

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http://en.wikipedia.org/wiki/VALS This section was written by Paul Finlayson, Ted Rogers School of Business, Ryerson University.

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Knowledge is power While there might be a strict border between Canada and the United States, for the purposes of the marketer there could potentially be more similarity between the marketplace of Denver, CO and Calgary AB (both tend to be conservative politically, broadly WASP based, historically come from a pioneering culture, have strong roots and economic influence from the oil and gas industry) than there is between Calgary, AB and Quebec City, QC even though they are in the same country. According to the 2001 census by Statistics Canada, Canada has 34 ethnic groups with at least one hundred thousand members each, of which 10 have over 1,000,000 people and numerous others represented in smaller amounts. 16.2% of the population belonged to visible minorities: most numerous among these are South Asian (4.0% of the population), Chinese (3.9%), Black (2.5%) and Filipino (1.1%). Outstripping visible minorities in proportion, however, were (non-British or French) invisible minorities, the largest of which were Irish (13.9%), German (10.2%), and Italian (4.6%), 3.9% Ukrainian, 3.9% Dutch, and 3.2% claiming Polish origin ("North American Indian," a classification which may include in-migrants from indigenous peoples of the United States and Mexico but which for the most part are not considered immigrants, comprise 4.0% of the national population). Other invisible minority ethnic origins include Russian (1.6%), Norwegian (1.4%), Portuguese (1.3%) and Swedish (1.1%) In 2007, Canada received 236,760 immigrants. The top ten sending countries, by state of origin, were People's Republic of China (28,896), India (28,520), Philippines (19,718), Pakistan (9,808), United States (8,750), United Kingdom (7,324), Iran (7,195), South Korea (5,909), Colombia (5,382) and Sri Lanka (4,068). These top ten source countries were followed closely by France (4,026) and Morocco (4,025), with Romania, Russia and Algeria each contributing over 3,500 immigrants. Asian Canadians are the fastest growing visible ethnic minority in Canada. The 2006 Census enumerated nearly 2.5 million individuals who self-indentified as South Asian or Chinese. This number represents a 27% growth over 2001. Asian Canadians and permanent residents have an above average per capita income and are concentrated in the major Canadian urban clusters of Toronto, Vancouver, Montreal, Calgary and Edmonton. They value education very highly and generally value high status luxury goods with brand names as a way of gaining or demonstrating status. They tend to be early adapters of new technology and respond well to ethnic marketing. They are among the most wired of Canadians, with 88% PC penetration in the typical Asian Canadian household. The Canadian marketplace can be broadly divided on geographic lines and within these geographic lines there are regional markets created by ethnic, religious, financial and historical criteria. Perhaps the most obvious unique regional market in Canada is found in Quebec. Sentiments of cultural and social distinctiveness are so strong that they are the only province to have a political party (both at provincial and federal levels) dedicated to political separation. In 1995, Quebec sovereignists lost in a very close vote: 50.6 percent to 49.4 percent, or only 53,498 votes out of the more than 4,700,000 votes cast. About five million Canadians (out of a total population of approximately 33 million) are Francophone with the majority of them living within the borders of Quebec. Half of Quebecers speak only French. Broadly speaking, the Francophone market is more individualistic, more open to government intervention in the economy, more focused on a work-life balance (more a European than American model). In practical matters, market researchers have discovered that Quebecers are more likely to make meals from scratch, less likely to eat reheated refrigerated food, and drink more coffee (but less tea) than the rest of Canada. Quebecers also tend to be more fashion conscious than most of the major urban areas of Canada, with sweats pants and old t-shirts less often found on the streets of Montreal than the streets of the more Americanized Edmonton. 11.

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Other regional factors important to Canadian Marketers Marketers are obviously influenced by levels of prosperity in respective areas. Prosperity brings higher discretionary income and is only partially ameliorated by Employment Insurance payouts and provincial transfer payments. The following unemployment numbers are from January 2009: Newfoundland and Labrador: 15.1% Prince Edward Island: 12.3% Nova Scotia: 8.8% New Brunswick: 8.8% Quebec: 7.9% Ontario: 8.7% Manitoba: 4.8% Saskatchewan: 4.7% Alberta 5.4% British Columbia: 6.7%

While the Maritime provinces (Newfoundland, PEI, Nova Scotia and New Brunswick) have seen some recent resurgence due to offshore oil, they have remained a relatively high unemployment zone. Quebec and Ontario, especially Ontario, have historically been the manufacturing and financial centre of Canada. An appreciating dollar and fall out from the current worldwide recession has hit the centre of Canada particularly hard. Manitoba enjoys a relatively stable and diverse economic base (coupled with a low cost of housing). Saskatchewan is enjoying a new prosperity based on increasing commodity prices. Alberta, until recently, was the economic star of Canada. While still relatively well off, Alberta oil sands development has been hurt by falling oil prices, which make the high cost Alberta oil sands (heavy crude) less profitable. British Columbia, historically a lumber and mining driven economy, has also been hurt by the recent world wide economic slowdown.

Drivers of cultural change

Todays cultures (defined as stages of civilization of a nation) are also very dynamic, largely changed by their developing economies and evolving trade with other countries. The growth of a middle class in China and India, the new bourgeoisie, has created enormous potential markets for consumer goods (soon if not now), but has also created huge social change in the following way. One of the most important implications of the theory of competition in What is Marketing is that new technologies and skills change economic processes. That, in turn, changes the economic structure which in turn leads to changes in the political structure. The changing economic structure and political structure clearly also impacts a nations cultures and subcultures behaviours and beliefs. All of this comes from openness to foreign ideas as openness to foreign ideas is the single most important source of new technology and skills in developing countries. 8 Again we recall that powerful conservative elites often stand in the way of progress so as to conserve their self-interest. Their antagonists are the new middle classes seeking new business and trade openness and investing in progress. They invest, rather than spend now. They invest in their childrens education, in business development, in innovation and diffusion of innovation, in new ways of
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The Economist, A Special Report on the New Middle Classes, February 14, 2009: p.16.

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Knowledge is power doing things and in wealth creation. They are prepared to delay gratification. Yes they spend, but more importantly, they are investing and creating and their business creation and personal spending feeds on itself. In these ways, the new emerging middle classes around the world are changing their cultures and, with their access to the international media, are becoming increasingly internationalist (like many Canadians). But this is not to deny the influence of strong family ties on emerging middle class behaviour. There is often tension between the old cultural values, the good old days promoted by grandparents, and their grand-childrens values with their perceived antisocial (within the family) use of new technology. But these differences are often forgotten or papered over at times that are very special to the extended family, such as at Thanksgiving or Christmas. Think about the symbolism of the Christmas tree ornaments and how they are treasured by families often as remembrances of very happy family times. Nostalgia for the old culture can be powerfully harnessed by marketers around national holidays in every nation. Family and the way you are reared can have a huge influence on consumer behaviour. In China, the one child rule established to control population growth 40 years ago has had an extraordinary unintended cultural consequence. The Chinese culture has for thousands of years placed great emphasis on loving children. But with one child being pampered by two parents and often four grandparents the result is an indulged younger generation often indulged with western TV programs, movies, music and icons. This is in contrast with the self-sacrificing, puritanical, collectivist values of the Chinese polity and political leadership. But these excellently educated, English-speaking young Chinese also possess strong individualism and an international outlook that will serve their nation well in the future. They also share a great deal of national pride in the ascendancy of their nation. In a sense, they are Chinas secret weapon as they and their children will both create and serve the emerging new Chinese consumption culture that will diffuse its innovation and brands around the world. The major agent of change in the North American family over the last 50 years has been the employment and social emancipation of women. This has led to many significant changes, one being that the majority of university students are now women. The greater financial independence of women and the general societal changing values about families and related institutions such as marriage, divorce and sexual orientation have led to a major reduction in the percentage of traditional North American households. Soaring divorce rates and the multiple demands on working mothers have led to many women being time poor. This has created many new market opportunities for products and services that did not exist before, for example, child care, fast food and female healthcare and wellness. There are other powerful cultural knock-on effects of the changing family structure that have yet to fully play out. Some parents no longer have the quality time and resources to imbue their children with the life skills and personal discipline developed in previous generations by household chores, earned allowances, early responsibility and deferred gratification. Because of a loss in the U.S. economys global competitiveness, the median family income of the American household has risen by only about 20% over the last 40 years, despite more female heads of household working. 9 Mens average wages have actually declined over this time, adjusting for inflation. The future outlook is even more uncertain, with a significant percentage of the next generation of young U.S. workers possessing problematic education, skills and work habits. They are far from the human capital needed for the United States to compete in the global
9

http://www.u.arizona.edu/~lkenwor/indv102livingstandards.pdf

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Knowledge is power labour market. On the other hand, there are pockets of superb parenting that has led to elite high school graduates swamping the premier California Universities with off the chart entrance scores. The point is that there is great diversity across families and generational prospects in the United States. The same can also be said of Canada although, according to international test score results, its education system is generally more uniform and of a higher standard. This great diversity or heterogeneity in culture and consumption is again often not recognized in talking about the baby boomers aged 45-60, or the middle class that makes up about 40% of North Americans. It is not very useful for marketers to talk about baby boomers aged 45-60 or the middle class, as these are not monolithic groups with homogenous consumption patterns. We need to put the customer under a more high-powered microscope and observe that there are baby boomers who have saved and are well educated and they are worlds away in their consumption and shopping behaviour from the poorly educated boomers with no savings and who have run out of health and prospects. The successful middle class blue-collar roofer running his own business with his holiday home and fishing boats and Maple Leaf season tickets is a world away from the middle class fine arts teacher or university lecturer saving to put children through college and borrowing foreign movies from the public library. General demographic or social class labels may be popular with journalists, economists and politicians, but they are not nearly refined enough for marketers to zero in on their product or service target market segments, as will become clear in the next module on segmentation and positioning.

The effect of income and time pressure on consumer behaviour

In leisurely paced societies, a lot of free time is allowed for play, a midday siesta and recreational pursuits such as fishing, hunting and sports. Time is not of great importance, few are punctual, and what can be postponed may as well be. In North America, the situation is very different for most adults and households. Punctuality is important, scheduling is a must, and whatever leisure time available is often spent recovering from the rat race. Time is a highly valued commodity for two groups in particular: high-income couples who are pursuing dual careers, and low-income couples and single parents who are struggling to pay the rent and raise children. Many marketers have yet to fully appreciate this fact. Income and time pressure have the following important interaction effects on consumption. For the fortunate, as their household income and the hourly wage/salaries of its members rise, families buy homes, then larger homes, a second home, a swimming pool, more cars, recreational vehicles, boats, vacations, skis, and so on. However, most of these goods take up more personal time to buy, enjoy and maintain. As income rises, more activities can be or have to be squeezed into leisure time. The result is that the perceived value of free time increases and produces what has been called the harried leisure class. Leisure time management has some significant effects on decision making, particularly on each of the following: Risk Taking. If consumers are more harried in their work and family life, then they are less likely to be novelty seekers and innovators when they make purchases. They already have enough stimulation and excitement in their lives. What the wealthy often want are not the latest products, but the highest-quality, lowest-maintenance, most reliable products. They do not want to waste time returning goods or waiting for a new innovation to be repaired. Further, many of the working wealthy do not have time to invest in a hobby or to become an expert, enthusiastic do-it-yourselfer. The real innovators are likely to be the consumers who have more leisure time to devote to their interests. What this suggests is that new innovations should be first marketed to interest groups, perhaps through clubs, newsletters or the Internet, rather than through expensive department stores or catalogues to the wealthy.

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Searching and Shopping. Consumers have developed a series of informal buying rules to save time but still ensure satisfactory purchases. For example, consumers tend to buy quality brand-name products, follow the advice of friends, buy from quality catalogues and remain loyal to high-service stores. The latter not only reduces shopping time and effort, but also increases personal services at restaurants, dry cleaning services, florists, and so on. Two of the biggest pet peeves of North American shoppers are waiting in line while other windows or registers are closed and waiting at home for a noshow delivery or service call. In a recession and an era of fierce competition between retailers, reducing costs by reducing personal service may be the wrong way to go. The more competitive strategy might be to develop a reputation for excellent customer service and expertise. Product Expertise. One of the ironies of the wealth time trap is that some higher income consumers may not get the most out of their purchases because they do not have the time to learn to use the products properly. They do not learn how to adjust an expensive camera or use all the features on their sound system, cell phone, iPod or DVD player. As a consequence, some of the advantages they gain from buying quality products are lost by their not learning to use the products for maximum effect. In an interesting role reversal, teenagers often teach their parents how to use some luxury products, particularly electronic equipment. What this suggests is that manufacturers need to place a very high priority on design simplicity that makes their products easy to use and easy to learn to use. This includes designing more user-friendly instruction manuals for the equipment. Over the last 20 years, numerous companies thought that increasing quality meant adding complex features and providing 30-page instruction guides. They lost share to suppliers who increased the design quality and performance of the core features that determine quality perceptions, got rid of the silly, gimmicky features and provided all of the instructions on a single concise laminated sheet. Demand for Quality. Although members of the harried leisure class pay top dollar for time-saving, high-quality devices and services, they do so because they can afford to or want very reliable performance, not because they wish to conspicuously display their wealth. When time is very scarce, consumers try to squeeze the very most out of their free time. They therefore demand goods that increase the enjoyment and quality of their leisure. A large HDTV with a super sound system increases the quality of the television viewing time. A high-quality tennis racquet enriches exercise time. A sports or luxury car enhances the time spent in recreational driving. Higher incomes enable consumers to buy higher quality items, but it is the perceived value of scarce leisure time that often motivates the demand for high-quality products. This is one of the reasons why higher quality products and services have increased in value and will continue to appreciate as leisure time becomes scarcer for families, whether they are wealthy or struggling to make ends meet.

Word of mouth and social networking

A seventy percent majority of Canadians use word of mouth recommendations in choosing a bank and 95% when choosing a doctor. 10 Note that these are high risk intangible services compared with products you can inspect. Word of mouth is important for such credence goods where you have to take someones word that they are good. Those independent evaluation stars and recommendations on websites have become very important in influencing purchase decisions, particularly about credence goods.

10

Lyn Fletcher, The Buzz on Buzz, Marketing Magazine, August 23, 2004.

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Knowledge is power Word of mouth is also powerful in spreading the word about great prices or special deals on wellknown brands and spreading the word about really great new products and brands. Despite the tremendous excitement about the marketing potential of online social networks, the reality is that while online social networking burns brightly, most social influence is still person to person through church friends, bowling club buddies, college mates, bridge nights, Rotary Clubs, etc. What seems to have excited guerrilla marketers is the ability to create online sales agents as independent opinion leaders who are paid to promote brands and products in their blogs and websites. The fancy new name is brand ambassador, but the problem is still the same. Sometimes, their paid spokesperson job is outed and they cease to be credible, trusted or respected. It is an entirely different matter if the enthusiastic endorsements are genuinely independent, but note that the power and source of such a marketing campaign is not so much the social networking technology, but the superior product or service quality that creates such delight. Social networking sites are not the answer to marketers dreams a truly outstanding product or service that is amazing value for money is the answer to a marketers dream. Extensive word of mouth publicity is a natural by-product of such a superior product. Word of mouth through online social networking is also definitely an age related phenomenon as the following Table reveals:

U.S. Online Users Who Participate In Social Networks

Source: Josh Bernoff, The Growth of Social Technology Adoption, Forrester Research, October 20, 2008.

Age

Content creators: publish web page, post blogs & videos 34% 37 30 19 12 7 5

Critics: comment, post ratings and reviews 24% 37 34 25 18 15 11

Spectators: read blogs, access videos & podcasts 49% 59 54 41 31 26 19

12-17 18-21 22-26 27-40 41-50 51-61 62+

Table 4.1 Online Social Networking It is huge among teenagers and young adults, but much less important among older consumers who own all of the wealth. The interesting question is whether it is a cohort trend or age related. Will todays teenagers grow out of it or continue to blog into their middle age when there are many other demands on their time? Another important question is - what have social networkers given up to spend more time online? Is it television, homework, or even talking live or by phone with friends and family? Maybe they have become better at multi-tasking and have not given up anything. Another reality is that the social influence of others outside your immediate family is far, far greater today than 100 years ago. Then, families often worked together all day on family farms or in family businesses and socialized together at night. Modern communication and transportation technology changed all that. Today in a normal day we talk to dozens of different people, see hundreds if not thousands. On TV we are exposed to the opinions and behaviour of many celebrities and people we aspire to be like or dream of befriending, not to speak of Twitter, text-messages, cell phones and blog discussion groups. All this explains why conservative religious groups seek shelter from this social influence through communal living and banning various modern communication devices. This deluge of social influence threatens their subcultures survival.

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A big question that is further discussed in the Advertising module is just how influential the online social media is and will become in influencing product category consumption and brand preferences? It is obviously a new form of media to communicate with and listen to customers that is here to stay, and how big it will become in shaping consumer preferences and demand we do not know, but we do know that it will vary by product market. The way that social influence is applied to the diffusion curve is to first think about buyers in terms of innovators, early adopters, early majority, late majority and laggards (see Figure 4.1). Everett Rogers, the developer of the diffusion curves below explained how early adopters learn from innovators, the early majority from early adopters, etc. 11 He estimated the average size of each group based on a meta analysis of the diffusion of over four hundred innovations. Today some consider his terminology and framework scrambled by the continuous innovation occurring in many markets where sometimes later adopters are acquiring the newest innovation before the innovators and early adopters who now own the old technology.

Figure 4.1: The Rogers Adoption of Innovation Curves The vertical axis is the percentage of the potential market that has adopted the innovation.

11

http://en.wikipedia.org/wiki/Diffusion_of_innovations. See also Rogers, Everett M. Diffusion of Innovations. New York: Free Press, 1983.

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5. Customer Shopping Behaviour

Habitual shopping
Reptiles are slaves to routine. They browse or stalk their territory pretty much the same way each day or night, following their instincts and stimulus-response-reward reinforcement learning, based on where they find food. To a certain extent so do we. Reptiles and mammals (including us) have a limbic core of our brain that is the reptiles what-to-do-next decision center. As a result, a good deal of our shopping behaviour is similarly habitual. We shop the same convenience stores, supermarkets, dry-cleaners and gas stations in our territory and we give these activities about as much thought as a reptile mooching around its swamp. Think about the routine way you shop your supermarket. This is not all bad. Our shopping habits have survival value for several reasons: 1. 2. 3. 4. What has worked in the past (rewarded us) is likely to work again (reward us again) in the future. Habits allow us to save time making decisions and to be thinking of other things as we do them. Habitual shopping routines can often be executed more efficiently than new behaviours. Habitual shopping provides a sense of discipline, order and control in our lives.

Biological evolution also helps us understand why many habits are formed in our youth and through our 20s. For most of human existence, life expectancy was less than 30 years. Thus, continuing to learn and develop new thinking and search skills through old age had little survival, reproductive and hence evolutionary value. The evolutionary selection pressure was on our ability to learn in childhood and youth, apply it to a few years of parenting and then die. Our memories and learning are still designed to learn this way today, which is why curiosity and learning is greatest when we are young. This means that the best time to influence shopping and consumption values, beliefs and habits is before the age of about fifteen. It helps explain why debates over unhealthy fast food, borrowing to buy, rather than saving to buy, and the decline in recreational reading focus on influencing children and youths. It also suggests that our proneness to brand loyalty and the importance of the influence of others on our consumption is often but not always set when we are young. What this implies is that studying the changing shopping and saving behaviour of teens from one generation to the next is a strong leading indicator of how adult shopping behaviour is likely to change over the next 20 years. This suggests an interesting business opportunity, a joint venture between a business school or market research firm and high schools to undertake such a long-term study. The creation of consumer loyalty to a store or a brand is akin to domesticating the consumer. The shoppers behaviour becomes routinized and, in that sense, tamed by the seller. This is achieved through a stream of marketing activities and purchases that result in an enduring relationship between the seller and the buyer. Indeed, some buyers can be so domesticated that they allow themselves to be branded. For example, they will wear the firms brand advertising on a T-shirt, cap or bag, even pay to wear it. This is because they like to identify with the brand, they want to tell other people that they identify with the brand, and the brand identifies with them. Apple computer owners wear cool jeans and Apple t-shirts. They are walking unpaid billboards (a little like the old sandwich boards worn by hawkers in the streets of the 19th century). 18.

Knowledge is power

But not all of our shopping is so mindless that we can be herded like cattle. When something goes really wrong with a habitual shopping outcome, we are likely to change our behaviour. Little mistakes are OK. The key is not making really big mistakes with customers in their convenience shopping and in the use of fast-food restaurants and customer services such as dry-cleaning. What may be lost is a habitual relationship and stream of purchases that might have extended over many years into the future.

Recreational shopping
Evolution has also endowed us with curiosity and boredom, the yang to the yin of mindless shopping. This often drives us to recreational shop the malls and curiosity stores. As children, teenagers and adults, we become experts through reading about, using and buying products associated with our attitudes, opinions, interests, hobbies and passions. All these together are called our psychographics. 12 Such hobbies and interests include many types of arts and crafts, collecting, antiques, interior decorating, gardening, cooking, furniture restoration, knitting, weaving, fishing, bird watching, computer games, card games, the list is endless. An important recreational aspect of such hobbies is shopping for supplies or to see what is new and improved. Such shopping is done at specialty stores and personal, first-name friendships often develop with store owners and their salespeople. A two-way learning process also occurs where customers and salespeople exchange information about what is going on in the marketplace, new trends, and what works and what does not. The internet is also searched and favourite hobby sites are frequently visited and added to our favourite sites or even as icons on our computer to make visiting easier. What are your favourite sites? This product enthusiast market segment is often very profitable because hobbyists are heavy users, important influence agents, and can be targeted because they often gather together in clubs or on specialty Internet sites. Among them are market mavens, highly influential diffusers of market information. They are sometimes called market multipliers because of their word-of-mouth (mouse) effect on others. They are often innovators and early adopters in Rogers typology. Marketers particularly like to run focus group discussions with such market mavens because the focus group runs itself and the problem is shutting people up rather than getting them to talk. Market mavens can be sent products on free trial or given free services. They can also be openly sponsored to give workshops and lectures in public libraries or in specialty stores on their hobby. Sponsoring their blogs is also an option but this may detract from their independence. Recreational clothes and cosmetic shopping is huge among teenagers and it appears to be a crosscultural phenomenon. Perhaps it harkens back to the behaviour of teenage animals in herds where they tend to form a separate group and are sent out to entertain themselves by the adults. These roving teenage packs spend a lot of time playing, exploring and getting into trouble, jousting, fighting, flirting and sorting out pecking orders. This pretty much describes the activities of the teenage boys and girls in the malls around the world. Interestingly, conformance can be huge among these groups. Wearing the wrong brand or look can lead to utter, inconsolable humiliation.

12

William D. Wells and Douglas J. Tigert, Activities, Interests, and Opinions, Journal of Advertising Research, 11, August, 1971: 27-35.

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Complex search and shopping behaviour

There are certain items that are shopped for that often involve extended search and alternative evaluation, such as the purchase of a home, a car, a college education or a serious healthcare treatment. They are not undertaken mindlessly and while the shopping may be enjoyed, it is not recreational, as too much is at stake. Such shopping often involves the consultation of expert sources, either on the Internet or in person, and includes realtors, investment advisers, accountants, travel agents, interior designers, wardrobe consultants and car and appliance salespeople. The success of such professional advice agents depends on their expert knowledge of the product category, the current market conditions and their ability to: 1. 2. 3. 4. Understand what benefits the customer really wants and can afford. Help define the features wanted and not wanted. Show and explain the alternatives and provide their expert evaluations. Find or make the consumer a deal that makes it unnecessary for the consumer to look any further.

Figure 4.2 that follows is a model of complex search and shopping behaviour. 13 Some event arouses the buyer to start actively shopping, such as another car breakdown, a change in family circumstances such as the birth of another child, or the purchases or recommendations of a friend or family member. And of course, an advertisement or magazine article or blogger recommendation can also precipitate the purchase process. Shoppers first use their past direct and vicarious (learning by watching others) experience and product knowledge, as well as beliefs and brand attitudes to help decide what to buy (e.g., to specify the purchase in terms of size, must have features and/or price range). Often a Google search follows for advice, expert opinion, performance data and price comparisons. Over 80 percent of car purchases involve such initial Internet searches and another later search of comparative prices for the final model with the loaded features chosen, (to use in negotiating a local dealers price down). In 2009 65% of Canadians aged 16 or older window shopped on the Internet. 14 What emerges from this initial search and discussion with friends, etc. is a rough idea of what you want to buy, which is called purchase specification.

13

14

William L. Wilkie and Peter R. Dickson, Shopping for Appliances: Consumers Strategies and Patterns of Information Search. In Harold H. Kassarjian and Thomas S. Robertson, Perspectives in Consumer Behavior, Englewood Cliffs, NJ: Prentice Hall, 1991: 1-26. Canadian 2009 Internet Use Survey at http://www.statcan.gc.ca/daily-quotidien/100510/dq1005110a-eng.htm

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Precipitating purchase circumstances

Shopper experience, knowledge, and attitudes Friends, relatives, Internet, catalogs, ads, magazines

Purchase specification Store sale advertising Store visit Salesperson Purchase (re) specification Identification of best alternative

Identification of other stores

Yes
It is exactly what was wanted?

No

Is the benefit of further shopping worth the cost?

Yes Purchase

No

Figure 4.2: Complex Shopping Behaviour The store visit comes next, perhaps triggered by a sales advertisement or a public holiday when you have time to shop, often with family of a friend. The good salesperson helps the buyer to refine the purchase requirements more precisely, explains the latest popular technology or features, explains how to judge quality, relates their personal experiences with the products, discusses the pros and cons of the different brands and models, and finally suggests what may be best for the shopper. Folklore sometimes portrays the salesperson as an adversary of dubious integrity (e.g., the car salesman). It is true that most of us have been deceived at some time by a dishonest sales pitch, but what we tend to forget is that the great majority of our experiences with store salespeople are very helpful and positive. We are also often unaware of the mistakes they have piloted us past in getting us to the best choice. There is a strong incentive for a salesperson to gain a shoppers confidence and make the sale. They do not get paid otherwise. The more a salesperson expects repeat business, the greater the incentive to give honest, helpful advice. This economic survival incentive explains why the salesperson often plays a major role in the purchase decision and why shoppers lean heavily on the salespersons advice. But it is important that the shopper knows just enough to be able to spot the salesperson who is a sham, a shark, or both. A shopper without such skills will often shop with a more expert friend. Alternatively, they will go to a high quality, high service store for advice. Here salespeople are expert and trustworthy. Then they might shop the discount stores or on the Internet for the lowest price. In this way, shoppers can exploit retail salespeople maybe just as much as salespeople exploit shoppers!

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Knowledge is power Figure 4.2 above depicts a procedurally rational cost-versus-benefit decision process that determines the extent of complex search and shopping. Notice that some shoppers stop searching and purchase because they believe they have found exactly what they want. Others stop searching and purchase because they believe the benefit of further shopping is not worth the cost. They settle for the best alternative they have found and purchase it.

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6. Consumer Beliefs
In the What is Marketing module the importance of tracking changing consumer preferences and behaviour was discussed. A leading indicator of changing preferences and behaviour is changing beliefs about the performance of products and services supplied to the market. In the following section we explain how to measure product perception beliefs. How these beliefs are used to explain utility and quality and position your product is demonstrated in the next module. But demand for your product or service depends not just on what consumers want to buy, but on whether they want to buy at all. Economists have discovered that an important economic outlook indicator is consumer belief about whether they are going to be better off, worse off or the same in the future. This is called consumer confidence and it is correlated with intentions to purchase cars, large flat screen TVs, major home appliances, homes and/or take expensive holidays. Below is a figure that indicates that consumer confidence has dramatically declined in the United States.

Figure 4.3: U.S. Consumer Confidence: http://www.pollingreport.com/consumer.htm. 21 Feb. 2009 Consumer Confidence in Canada did not slump as much and has recovered a lot more from a low of 55 in February 2009 to reach 90 in June 2010. 15 The big question is how long will the economic recovery take in the U.S.? It is an important issue because 75% of the U.S. economy depends on consumer spending. Over 50% of North American consumers also believe that within five years they will go strongly green in their life-style and purchasing, reflecting a serious shift toward a concern over environmental quality. Business buyer beliefs are also very important, particularly about the economic outlook, which explains why a survey of purchasing managers future purchase intentions is also a very important leading economic indicator going into a recession. In expected recessions, businesses often dramatically cut back on their purchasing and draw down their inventory, thus contributing to the recession. But purchasing managers future intentions are a lagging indicator coming out of a recession, because they often delay building up their inventory until they are very confident the recession is ending or over.
15

http://www.tradingeconomics.com/Economics/Consumer-Confidence.aspx?Symbol=CAD

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Consumer research often studies consumer beliefs to establish not just the why behind consumer behaviour, but also the why behind a lack of consumption behaviour. For example, a leading lawn care service company was facing slowing growth and a lot of price competition from local, upstart imitators. About 16 percent of households were using a lawn care service. The company assumed that a major problem was a lot of adverse publicity about the serious health hazards caused to pets and people by spraying chemicals on lawns. Their solution was to switch to a granular treatment that was safer but had less of an immediate satisfying impact. They were also considering a price promotion program to compete against the local competition. The results of a national survey research study were very informative. Only five percent of households at the time were concerned about environment-safety issues, today the percentage is much higher. Twenty-five percent of nonusers believed the service was too expensive and thirty-five percent believed they could do a better job themselves. The real opportunity was the 30% of non-users (about a quarter of all home owners) who had never thought about using such a service and the 10% of non-users (eight percent of households) who would use such a service if approached. The results of this belief study suggested an alternative marketing campaign of expanding advertising and introducing a telemarketing campaign early in the spring. Unfortunately, the company and its advertising agency chose to ignore the results of this expensive study and went with price promotions to existing customers (that got it into a price war with local rivals) and granular treatments that appeared to the customer to be less effective than the spray treatment provided by local companies. The company continued to lose customers rather than gain customers and was ultimately taken over by a smaller rival whose marketing better fit the beliefs and behaviour of the market. The lesson from this example is that consumer beliefs and nonbeliefs are important, and it is important to discover them and have them determine the design of your product offering and marketing mix spending.

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7. Customer Satisfaction
A specific consumer belief that is crucial in determining consumers future purchases is how satisfied they are with their past and current purchases. In 1980 the founder of J.D. Powers Dave Powers was hooted down by Pontiac executives when he explained the quality-satisfactionmarket-share growth success of the Japanese competition. Powers went on to say that if General Motors (GM) (particularly its Pontiac Division) did not respond to the voice of the customer, its market share would decline dramatically from 48% to the low 30s. 16 Nine years later in 1989, GMs share had slipped to under 33%. Yet when Mr. Powers gave another talk to GM executives, he faced the same defensive negativity of a decade before. This negative attitude cost tens of thousands of jobs and forever hurt the reputation of GM brands. By 1995 and 1996, GM had worked closely and successfully with J.D. Powers to dramatically turn around some aspects of customer satisfaction and win several quality awards. The lesson is that the biggest of companies can bootstrap their customer satisfaction up quite quickly even if it is too little, too late to be able to ever regain much of the lost market-share. This is because other brands have also greatly improved their quality and customer satisfaction and GMs share of the North American market has continued its fall from 28% in 2000 to 24% in 2007. 17 The years of mismanagement at GM have been an American tragedy. What has been good for GM has been good for America, what has been bad for GM has been bad for America. Not paying attention to customer satisfaction has been bad for business and America. The key determinant of marketing success is not fussing about the best measurement of customer satisfaction or talking a lot about customer satisfaction. It is doing something about it (see the Hyundai Case below). When satisfaction rankings improve, shareholder value increases. J.D. Powers asked a simple question (and J.D. Powers knows a lot about asking the right question) How satisfied are you with your overall ownership experience (including product quality and dealer service quality)? They placed each automobile brand into three groups, low, medium and high customer satisfaction. Between 1998 and 2003, high satisfaction brand sales increased by 40% and low satisfaction brands sales dropped. More impressively the brands that between 1994 and 1999 improved their satisfaction ranking by more than three ranks (for example, from 10th best in their category to 4th best in overall customer satisfaction) increased their shareholder value from 1999 to 2004 by an average of 52%. By contrast, those whose rankings declined by more than three ranks suffered, on average, a painful 28% decline in shareholder value. Satisfaction drives shareholder value/equity creation. Customer satisfaction creation is a major creator of capital. Enterprise Rent-A-Car has publicly admitted that it was one of many U.S. companies that has paid lip-service to customer satisfaction, but that all changed when innovative senior managers decided to block promotions in a group or region if the groups customer satisfaction scores fell below the company average. Now managers sat up and took notice of customer satisfaction and did something about it. Manager operating reports give the same billing to customer satisfaction as they do to profit and growth. When customer satisfaction determines promotions, managers go to bed at night thinking about customer satisfaction.

16

The following paragraphs draw heavily on Chris Denove and James D. Power IV, Satisfaction: How Every Great Company Listens to the Voice of the Customer, Penguin, New York, 2006. We highly recommend this book by leading experts in tracking customer satisfaction and using that information to redesign products and services. 17 Alex Taylor, Gentlemen, Start your Engines, Fortune, January 21, 2008: p. 74.

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Knowledge is power One of the unique and powerful recommendations of J.D. Powers is to follow Southwest Airlines example of hiring customer empathetic people. Hire people who in J.D. Powers words were born to be helpful. You also keep them by paying them well. You pay peanuts, you get bad employee attitude. Bad customer service will lead to declining satisfaction, lower customer retention and lower sales, which results in an even more negative company culture, mass firings that further hurts employee attitudes, and thus, a vicious cycle is created between supply and demand. It is a feedback that can as equally be turned positive where happy, well paid, well rewarded, well informed employees, such as those at Southwest Airlines or Costco, increase customer satisfaction and customer acquisition and retention. This, in turn, increases profits and shareholder value and employee rewards. This creates further employee enthusiasm and effort (see the Figure below). Understanding and tracking feedback effects between various marketing metrics such as the supply side metric, employee morale, service and product quality, and demand side metrics such as customer satisfaction, acquisition and retention are an important part of a marketing managers job.

Service Quality

Employee Morale

Customer Satisfaction and Demand

Employee Benefits/wages

Exogenous Pulse

Figure 4.4: The Employee Morale Customer Satisfaction Virtuous/Vicious Circle This is a vicious or virtuous circle depending on whether demand is increasing or decreasing. Management can trigger this feedback effect by giving the system a pulse, such as giving employees a one time bonus for service improvement, or negatively by reducing employee benefits.

Measuring satisfaction
The standard way of measuring satisfaction uses a seven-point agreement with three measures, such as that below. I am completely satisfied with it (the product or service purchased). Strongly Somewhat Neither Agree Somewhat Agree Disagree Disagree Disagree or Disagree Agree 1 2 3 4 5 6

Strongly Agree 7 26.

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I will purchase (the product or service purchased) again. Strongly Somewhat Neither Agree Somewhat Disagree Disagree Disagree or Disagree Agree 1 2 3 4 5 I will recommend (the product or service purchased) to friends. Strongly Somewhat Neither Agree Somewhat Disagree Disagree Disagree or Disagree Agree 1 2 3 4 5

Agree 6

Strongly Agree 7

Agree 6

Strongly Agree 7

The third measure above is the gold standard because scores on this measure are always a little lower than the first two measures. But firms should seek other simple metrics such as the number of complaint e-mails and product returns on the negative side and unsolicited e-mails and letters from delighted customers on the positive side. The point is to not spend a lot of time and effort refining the measure, but to start using and tracking several simple, common-sense measures. To repeat, here is a list of customer satisfaction/dissatisfaction behaviours that the well managed firm tracks and broadcasts across its organization: 1. Truly unsolicited letters and e-mails of thanks 2. Letters and e-mails complaining and reasons for returns ranked 3. Returns and reasons for returns ranked These behaviours are initiated by customers. They are knocking at your door, in some cases banging on your door. Count them, pay attention to them, and provide superior customer service to them before you reach out and undertake additional customer satisfaction surveys, which are expensive. These customers are coming to you about their satisfaction rather than you approaching them to find out about their satisfaction. Unsolicited letters, complaints and returns tell you a lot about customer satisfaction and dissatisfaction very quickly. Over 20 years ago, the author was involved in launching a new bedding product, a luxury woollen mattress pad that promised a better nights sleep or your money back. Today, such pads are readily available through catalogues and department stores, are made by several manufacturers and have dropped significantly in price. The original product was a woven pure wool throw rug, the white shaggy look in front of a log fire on polished yellow oak floor that was very popular in the late 1970s. We never received any unsolicited letters from buyers of our luxury rug. Yet when we threw it on the bed and made it into the Woolrest underlay, we received hundreds of unsolicited letters from the elderly saying that they were tossing and turning much less, sleeping much better, and through restorative sleep (sleep, natures sweet nurse William Shakespeare), feeling much better. Their scratchy, arthritic writing told story after story of a new lease on life. It is the only product I have worked on in my career whose launch produced such a deluge of unsolicited, heartfelt thank you letters. When it happens, you turn it into a news story and publicity does the rest for you as reporters follow up on the advocates stories. A common sense measurement process is to always ask an open-ended question as to how you could better satisfy your customers. Hotels have discovered that the number one driver of customer satisfaction is fast and efficient check in. They discovered this by asking customers how their service could be improved. Upgrades, knowledge of local restaurants and sites and a pleasant dcor are all well and good, but it is fast and efficient check-in that is the real driver of customer satisfaction. It is the customer service process that has to be fixed first so that it is fast and efficient. The mistake that many companies make in efforts to improve their customer satisfaction is to try to improve too many things at once. The trick is to focus on the product or service features that most determine customer satisfaction. 27.

Knowledge is power

For example, J.D. Powers has some very interesting advice on website design keep it simple and intuitive. Ease of navigation around a website is the number one determinant of overall satisfaction and perceived quality of a website. Think Google, the extreme example of simplicity and lack of clutter not surprising as Google are the navigation experts. This is a general lesson about quality do not use too many metrics focus on the key quality measure or maybe two, but not 10! In politics it is the economy, stupid. In websites, it is ease of navigation. In quality, it is keep it simple by focusing on the most determinant quality metric and connecting serious manager rewards to improving performance on the most determinant quality metric.

Hyundais miracle performance

Over the 44 industries studied by The University of Michigan American Customer Satisfaction Index, the company that made, by far, the largest progress in increasing customer satisfaction between 1994 and 2006 was the South Korean automobile company Hyundai: its satisfaction rating jumped from 68 in 1994 to 84 in 2006.a 24% increase! Hondas rating in 2006 was 86. Toyotas rating in 2006 was 87. Hyundai has made huge progress in its product innovation, product quality, service quality and in satisfying its customers. It is a great and rare success story. How did Hyundai lift its customer satisfaction? It hired J.D. Powers to analyze customer dissatisfaction. The first reports were presented to low level managers who were not interested in the bad news, blaming it on U.S. sales staff and women drivers. These managers believed that the car price was so low that quality did not matter. It did. When J.D. Powers presented another negative report to Hyundai in 1996 it was to Chairman Chung who was unaware of Powers previous studies and the reasons behind a sales decline. The result was a sea change in company culture as the company responded to the top down direction to pay attention to the voice of the customer and to fix the quality problems. Quality greatly improved, sales quadrupled and now loyal customers buy Hyundai cars because they want one and not because it is the only new car they can afford. Contrast this story with J.D. Powers early experience with General Motors.

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8. The Consumption Behaviour of Businesses

Company shopping behaviour can be viewed from two perspectives: the engineering-user view and the purchasing-buyer view. This is because both perspectives are likely to be encountered in the different individuals the team has to deal with and satisfy in the buying organization. The end users in a buying firm are more sensitive about product performance, defect rates, service support, parts availability and user training. The professional purchasing agents in a buying firm are concerned about price, purchase terms, discounts, legal contracts and delivery costs. Often wide variations occur in the way firms make the purchase decision and in their standard purchasing procedures. However in general, they are likely to follow a standard operating procedure or mandated process such as those presented in Figure 4.5 below. The short- and longterm financial positions of customers also influence the way they buy, as will the unique personalities and socio-political climates that exist within a buying firm. Indeed, it may be difficult to generalize and aggregate industrial buyers based on their purchasing characteristics because each uses a different bidding and buying process. This is why an adaptive salesforce is needed to spearhead the marketing effort. To handle such complexity, a systematic analysis of a business account should proceed through a step-by-step description of when they review and renew their supply contracts, the people involved, the organizations use of the product or service, the major players perceptions of the benefits sought, and perceptions of the competitive offerings. The firms standard buying behaviour can even be mapped out in a flowchart. If the seller is lucky, such a standard buying or bidding process may even be provided by the buying firm. Competition has forced many companies to search for new, economical sources of supply, as discussed in What is Marketing. Purchasing agents and entrepreneurs from North America fill the hotels in Shanghai, Mumbai, Singapore and Hanoi, carrying samples of parts and finished products to be copied by Asian manufacturers. The typical process of seeking and then evaluating bids can initially appear very complicated (see Figure 4.5). However, after a purchasing agent has learned the ropes, the process becomes routine, depending on the yes or no answers to a series of questions presented in the different sections of the flowchart. The process is an application of a series of activities and rules that make the decision-making much more systematic and predictable. Such purchasing process activities and rules include the following: 1. Actively seek new sources when the number of suppliers on the bid list is less than three. 2. Keep using current suppliers when their performance is satisfactory and the number of suppliers on the list is greater than three. 3. Toughen acceptable performance standards when the number of suppliers on the list is greater than three. 4. Drop the existing vendor with the worst performance when new vendors are included on the bid list. 18 Such product performance specifications and rules are likely to have evolved from past group decision-making sessions that involved technical experts and senior management. For some purchases undertaken by very large companies or governments, it is even possible to develop computer-based expert systems that guide a purchasing officer through a purchase decision.
18

Niren Vyas and Arch G. Woodside, An Inductive Model of Supplier Choice Processes, Journal of Marketing 48, Winter, 1984: 30-45.

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Knowledge is power Typically these decisions are made according to rules set up by expert buyers and the original design and production engineers. Future expert systems are likely to integrate information from production that rates competing suppliers in terms of defect rates within individual order batches, on-time delivery and other performance criteria. This will make buying a much more objective process and will identify problems that can be eliminated by improving specific processes within the trading relationship.

Figure 4.5: A Firms Standardized Purchasing Process

Reproduced from Niren Vyas and Arch G. Woodside, An Inductive Model of Supplier Choice Processes, Journal of Marketing 48, Winter, 1984: 30-45. The shortest path is 1-2-12-13-15-22. What is the longest path?

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Knowledge is power A striking characteristic of most bidding processes is their emphasis on encouraging competition among suppliers by seeking bids from three or more vendors. The explanation is simple: a bidding competition among suppliers is in the interests of the buyer. It is not a coincidence that a bias exists toward always accepting the lowest bid, rather than the bid that offers the most value for price. This bias is often encouraged by company audit procedures that require purchasing agents to file a written justification if they do not accept the lowest bid. However, powerful arguments may exist for choosing superior quality and service rather than the lowest price. Furthermore, the whole process of bid buying has started to be questioned by many organizations, as discussed in the next section.

Supply chain partnering and management

In an attempt to become more competitive in their markets, many manufacturers are now reaching back up the supply channel to help their suppliers develop more innovative materials and components, establish more efficient production processes and produce a product that exceeds the buyers desired quality and performance specifications. Such behaviour is called supply chain management. As described in the Branding and Product Development module, it makes a great deal of sense to involve suppliers in the development of new products. Rather than taking over their key suppliers, firms set up joint ventures that give them exclusive rights to any product or process innovations developed in cooperation with the supplier. The logic behind the idea of the supplier and buyer working together is that two independent, innovative and entrepreneurial firms are better than a single, vertically integrated firm. The continued independence between the supplier and buyer enhances innovation and keeps the entrepreneurial leadership in both the selling and buying firms happy. Joint venturing can also produce major cost savings for both parties. Ongoing selling and purchasing costs are reduced to a minimum, and cooperation on product design can significantly reduce costs. Perhaps the most publicized advantage is that the inventory holding costs of both the supplier and buyer can be dramatically reduced by developing a just-in-time (JIT) delivery system. JIT is a supply system where the seller delivers its product as it is needed to the production line of the buyer. JIT offers the following features: 1. Items and subcomponents (i.e., assembled modules of items such as hard drives, transformers or keyboards for a personal computer) are designed and produced according to buyer specifications. 2. All delivered items are inspected by the supplier before delivery, reducing the defect rate to zero for the buyer. 3. Delivery is frequent and absolutely reliable. Suppliers often relocate close to an account to provide such service. The initial negotiation of terms and operating procedures among senior executives is extensive. 4. Prices are often based on supplier costs revealed to the buyer, and both parties work together to reduce these costs. The likelihood of repeated contract renewal is very high. The power of advances in information technology to create close working relationships between vendor and customer is demonstrated in Ryder's Fast Track Maintenance Service for its thousands of trucks. An on-board computer in each truck records the history of its performance, which can be obtained by connecting a handheld computer to a coin-sized disk in the truck's cab. The information quickly detects performance problems, thus speeding up repairs and reducing truck downtime. But the information has even greater strategic value. It enables Ryder to focus on parts' defects with its suppliers and to demand higher quality and longer warranties. It also enables 31.

Knowledge is power Ryder and its suppliers to identify what situation usages (e.g., city versus highway use) wear out which parts faster and to redesign Ryder trucks and parts for such usage situations. Rolls Royce similarly tracks the performance of 3,500 jet engines operating around the world. It can predict when an engine is likely to fail and recommend prompt engine changes and maintenance. It also enables Rolls Royce to focus on unreliability problems through design improvements that over the last 30 years have extended the life of an engine tenfold. Another example of such a vendor that has become expert in serving its customers who wish to develop a close, long-term trading relationship is automaker supplier Prince Corp. It designs and manufactures car interior trims and works with its automaker customers using computer-aided design and manufacturing and three-dimensional prototypes. It prides itself on beating deadlines and also stays close to the ultimate customer, the car buyer. To keep its costs down, it runs its factories up to twenty-four hours a day, six days a week. The aim of business-to-business marketers like Prince and Rolls Royce is to become members of the actual cross-functional platform teams that develop new cars and aircraft. Twenty-four such guest engineers are working at Hondas product development centre in Ohio. In such a situation, the trusted supplier-partner works backward (with the team) from the target selling price of the car to determine the target price for each part. The supplier is then expected to deliver a zero-defect part on time and at or below the target price for the part. In the 1980s, such supplier partnering gave Japanese auto companies a $300 to $600 per-car-cost advantage over U.S. automakers, in addition to superior designs and features and fewer defects. Such partnering where the supplier becomes a subcontractor allows the automaker to focus on its core competitive processes. For example, in setting up its new manufacturing plant in South Carolina, BMW concentrated on designing and manufacturing its cars power train, suspension and cockpit. These are the processes that create the differentiated BMW driving experience. The rest of the car is made by suppliers that are world-class experts in the design and manufacturing of the rest of the BMW car parts. Most have built plants right beside the BMW factory.

Social networking in business-to-business markets

Within a business-to-business market there often exist powerful social networks. Although word of mouth is important in the selling of any product or service, the following sociological characteristics of the business-to-business marketplace make it critical: 1. Generally, the most influential members of the buying firms received comparable training in engineering or trade schools. They think in similar ways, which enables them to communicate more readily with one another. Their similar training also instils like values and ways of thinking. Industry trade associations encourage the exchange of ideas and learning within an industry (even among competitors) through conferences, trade shows, seminars and annual meetings. Executives who move on to a position with a competitor, supplier or major customer often maintain personal friendships with their previous coworkers. Engineering consultants act as word-of-mouth megaphones; they often pass on what they have learned to others. A consultants advice to one company is also often noted and copied by other companies. Sellers often use testimonials and encourage prospects to contact satisfied customers. Finding and talking to dissatisfied customers is harder. 32.

2.

3. 4.

5.

Knowledge is power 6. Keeping up with what the competitors are buying is a necessity because the survival of the firm may depend on the early adoption of new technology.

The reasons listed explain why a letter of introduction or an open endorsement from an opinion leader in an industry can be a powerful marketing tool. Conversely, in a close-knit industry that has strong personal networks, a supplier and its salesforce cannot afford to make any major blunders. Word will get around. Well established social networks may be important enough and stable enough in a market for a supplier to invest the time and effort necessary to map them. A social network then can be divided into niches based on influential individuals and organizations that become the targets of a coordinated selling effort. In fact, experienced salespeople already know these social networks and use them constantly. When they exist, they should become a formal basis for purchase behaviour segmentation because they are powerful in the diffusion of new ideas and products in an industrial market. The above is only a brief introduction to how consumers and businesses form their preferences, how their shopping and choices are influenced by their culture, social environment and beliefs. Throughout this course we return time and again to discussing buyer behaviour and its sensitivity to elements of the marketing mix: the product, price, promotion and distribution.

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