Customer Buying Behavior Chapter 4 Customer Buying Behavior McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Questions How do customers decide which retailer to go to and what merchandise to buy? What social and personal factors affect customer purchase decisions? How can retailers get customers to visit their stores more frequently, and buy more merchandise during each visit? Why and how do retailers group customers into market segments? DISCUSS: Think about your own experience looking for “interview clothes.” How do some of these issues affect your buying decisions? Examples: Price, word of mouth, convenience, brand image and “self image,” customer service

Stages in the Buying Process Ex 4-1 page 81. DISCUSS: Which categories require so many conscious steps? Do you see this process applying to all shopping decisions?

Types of Needs Utilitarian Needs –satisfied when purchases accomplish a specific task. Shopping needs to be easy, and effortless like Sam’s or a grocery store. Hedonic needs – satisfied when purchases accomplish a need for entertainment, emotional, and recreational experience as in department stores or specialty stores. Link to Maslow hierarchy: http://en.wikipedia.org/wiki/Image:Maslow%27s_hierarchy_of_needs.svg#file What kind of retailers satisfy what kinds of needs? (Breathing/food/water…shelter and clothing…friendship, family…self-esteem, achievement…self-actualization, creativity.) DISCUSS how in today’s economy the consumer is “trading down” from hedonic to utilitarian needs…which stores benefit?

Hedonic Needs that Retailers can Satisfy Stimulation Ex: Background music, visual displays, scents Victoria’s Secret Social experience Ex: Mixed-use developments, lifestyle centers Learn new trends and fashions Ex: The Body Shop – learn how to live an environmentally friendly lifestyle Satisfy need for power and status Ex: Canyon Ranch – upscale health resorts Self-rewards Ex: personalized makeovers Sephora Adventure Treasure hunting for bargains Example: TJ Maxx Is it easier to stimulate “hedonics” in a store or on a website? Why? Which is more likely to encourage impulse shopping? (TJ Maxx)

Conflicting Needs Ex: Eva’s hedonic needs (wearing a DKNY suit to enhance self-image) conflict with her budget, and her utilitarian need to get a job. Customers make trade-offs between their conflicting needs Cross shopping Costs of time and convenience What stores are satisfying both hedonic and utilitarian needs? Plus new issues like time-starved consumers, price of gas, etc. – even more dramatic during the recession

Stimulating Hedonic Need Recognition Suggestions by Sales Associates Advertising and Direct Mail Visual Merchandise in store Special Events in the Store Signage Displays Free food sample How else do retailers convince you that you need something, especially if you don’t? How important are “silent salespeople” in self-service stores? Stockbyte/Punchstock Images

Information Search Amount of Information Search Depends on the value from searching versus the cost of searching – are you buying a new car or a dozen eggs? Factors Affecting Amount of Information Search Product Characteristics Complexity Cost Customer Characteristics Past experience Perceived risk Time pressure Market Characteristics Number of alternative brands Simple vs. complex purchase decisions (dozen eggs vs. new car) affect the “science” of the process. DISCUSS other examples (HDTV vs. 6 pk sport socks)

Sources of Information Internal Past experiences Memory Digital Vision / Getty Images External Consumer Reports Advertising Word of mouth and social networking DISCUSS importance of prior web search before making purchase decision. Do you buy ANYTHING nowadays without doing prior research on the web? DISCUSS recent car-shopping behavior and patterns (INFLUENCE OF SOCIAL NETWORKING?) © Dynamic Graphics/Picture Quest

How Can Retailers Limit the Information Search? Information from sales associates Provide an assortment of services Provide good assortments Everyday low pricing Credit Not just limiting but filtering the info search…is this becoming harder for retailers to control in the age of online reviews, social networking sites, etc.? Royalty-Free/CORBIS

Internet, Information Search, and Price Competition Profound impact on consumers’ ability to gather external information Number of stores visited is no longer limited by physical distance Information about the quality and performance at a low search cost Retailers using an Internet channel can differentiate their offerings by providing better services and information Expand on points from last slide

Retailers encourage customers to spend time The more time customers spend shopping, the more they will buy. Customers who spend 40 mins in a store are more than twice as likely to buy than someone who spends 10 mins. Also, they typically buy 2x as many items. Stores use food and personal service Talbots: attention of a sales associate, light snack Costco: Food samples everywhere! Gymboree: television playing kids’ videos Websites provide enjoyable experiences with technologies, longer online visit = more sales DISCUSS Kohl’s convenience strategy, which became a double-edged sword (“Explore the store”)

Getting into the Consideration Set Consideration set: the set of alternatives the customer evaluates when making a selection Retailers develop programs influencing top-of-mind awareness Get top-of-page exposure on search engines like Google Brand advertising (Best Buy) More stores in the same area (e.g., Starbucks) Again, the alternatives and the breadth of choice depends on what you’re buying. DISCUSS: Best Buy as a “top of mind” retailer, how competitors have fallen out of the consideration set. Why?

Methods for increasing the chance of store visit after getting into the consideration set Increase Performance Beliefs of Your Store Decrease Performance Beliefs About Competitor Increase Importance Weight of Attributes on which You Have an Advantage (“BEST IN CLASS”) Add a New Benefit on which You Excel (e.g. Best Buy…tops in assortment and service) KNOW WHERE YOU ARE “BEST IN CLASS” Price…Service…Convenience…Trend Merchandise (Examples: Walmart…Nordstrom…Walgreens…Target) “EST” theory requires that you decide what you are best at, and focus on it

Evaluation of Alternatives Multiattribute attitude model: Customers see a retailer, product, or service as a collection of attributes or characteristics Predict a customer’s evaluation of a retailer, product, or service based on Its performance on relevant attributes the importance of those attributes to the customer But you need to be good (or great) at more than just one key attribute. Even if you are “best in class” at something (e.g. price) you need to execute well.

Purchasing Merchandise or Services Customers do not always purchase a brand with the highest overall evaluation…why not? The high-rated item may not be available in the store. How can a retailer increase the chances that customers will convert their merchandise evaluations into purchases? Most important: The right goods (FOCUS ON RELEVANCE AND RESPONSIVENESS) Why would you choose a “second best” brand? The McGraw-Hill Companies, Inc./Jill Braaten, photographer

Converting Merchandise or Services Evaluations into Purchases Measure: the number of abandoned carts in stores and at websites Methods to reduce “non-conversion”: Don’t stock out of popular merchandise Reduce waiting times at checkout Use staffing models Apple stores – cell check-out Easy navigation and check-out at websites (amazon.com) Offer liberal return policies, money back guarantees, and refunds if same merchandise is available at lower prices from another retailer The McGraw-Hill Companies, Inc./Andrew Resek, photographer STRATEGIC, CONSISTENT, RESPONSIVE, RELEVANT…this one is about being RESPONSIVE (execution) – review some of the slide points

Types of Purchase Decisions Extended Problem Solving -High financial or Social Risk -House, car Limited Problem Solving -Some Prior Buying Experience -Clothes, phones Habitual Decision Making -Gas, food Next key part of chapter 4…will be some questions on the first midterm about these types of decisions (EXTENDED, LIMITED, HABITUAL)

Extended Problem Solving Consumers devote time and effort analyzing alternatives Financial risks – purchasing expensive products or services Physical risks – purchases that will affect consumer’s health and safety Social risks – consumers believe product will affect how others view them EXAMPLES? (House, car, computer, big screen TV)

Provide a Lot of Information What Retailers Need to do for Customers Engaged in Extended Problem Solving Provide a Lot of Information -Use Salespeople rather than advertising to communicate with customers Reduce the Risks -Offer Guarantees -Return Privileges What else? “Geek Squad” as a way for BBY to reduce the risk perception – Hyundai/return car if you lose your job © Royalty-Free/CORBIS

Limited Problem Solving Purchase decisions process involving moderate amount of effort and time Customers engage in this when they have had prior experience with products or services Customers rely more upon personal knowledge Majority of customer decisions involve limited problem solving Class examples? (Clothing? Computer software? What else?) (c) Brand X Pictures/PunchStock

What do Retailers Need to do for Customers Engaged in Limited Problem Solving? It depends… If the Customer Is Coming to You, Provide a Positive Experience and Create Loyalty (RESPONSIVE) Make Sure Customer is Satisfied Provide Good Service, Assortments, value Offer Rewards to Convert to Loyal Customer If the Customer Goes to Your Competitor’s Store, Change Behavior Offer More Convenient Locations, Better Service and Assortments (RELEVANT) RESPONSIVE and RELEVANT esp. by staying in stock on wanted mdse.

Encouraging Impulse Buying Impulse buying: one common type of limited problem solving Influence by using prominent point-of- purchase (POP) or point-of-sale (POS) Have Salespeople Suggest Add-ons Have Complementary Merchandise Displayed Near Product of Interest Use Signage in Aisle or Special Displays Put Merchandise Where Customers Are Waiting (CHECKOUT LANES) Examples here would include fashion jewelry and accessories, cosmetics – categories near the front of the store Also think about “endcap” items at the grocery (gum, magazines)…bordering on “habitual” PhotoLink/Getty Images

Habitual Problem Solving Purchase decision process involving little or no conscious effort For purchases that aren’t as important to the consumer as big investments For merchandise consumers have purchased in the past For consumers loyal to brands or a store Examples like a dozen eggs, 10 gallons of gas, etc.

Customer Loyalty Brand Loyalty Store Loyalty Committed to a Specific Brand Reluctant to Switch to a Different Brand May Switch Retailers to Buy Brand Store Loyalty Committed to a Specific Retailer Reluctant to Switch Retailers Loyalty isn’t what it used to be, more cross-shopping now CAN PRICE DRIVE LOYALTY? In an economic pinch, easier to switch loyalty even on habitual purchases on the basis of price….Roundy’s brands vs. national brands (Chairman Bob)

What Retailers Need to do for Customers to Engage in Habitual Decision Making IT DEPENDS If the customer habitually comes to you, reinforce behavior especially through GOOD EXECUTION! Make sure merchandise in stock Provide good service Offer rewards to loyal customer If the customer goes to your competitor’s store, break the habit (especially if you are new in the marketplace) Offer special promotions How else to change behavior? Not just about price! DISCUSS: how to change habitual decision making (for example, if you’re the new food store in town)? EXAMPLES?

Social Factors Influencing the Buying Decision Process Let’s talk further about some of these influences

Family Influences Buying Decisions Purchases are for entire family to use Whole family participates in decision making process Retailers work to satisfy needs of all family members For example, buying a game system – Xbox vs. Wii – why? How about something simpler like what kind of frozen pizza to buy? But why are department stores losing Gen Y shoppers?

Reference Groups A reference group is one or more people whom a person uses as a basis of comparison for beliefs, feelings and behaviors. (APPLE) Reference (or peer) groups affect buying decisions by: Offering information Providing rewards for specific purchasing behaviors Enhancing a consumer’s self-image Think back to Maslow’s hierarchy – esteem and sense of belonging How does “social networking” fill this role for you? (c) image100/PunchStock

Criteria for Evaluating Market Segments Actionable Retailer should know what to do to satisfy needs for the customers are in the segment Identifiable Retailer is able to determine which customers are in the segment It’s one thing to identify market segments using these criteria, but the important thing: Is the segment big enough (or targeted enough) to drive sales?

Criteria for Evaluating Market Segments Substantial Market segment must be larger enough or its buying power significant to generate sufficient profits Reachable Retailer can target promotions and other elements of the retail mix to customers in the segment Video on mkt segmentation after the break

Methods for Segmenting Retail Markets…or Fragmenting them! Geo-demographic Geographic Segmenting Markets Demographic Different types of segmentation; Psychographic segmentation another important factor (Kohl’s customer segmentation leading to “nine box grid”) Lifestyle Benefits Buying situations

What is Fashion? “A type of product or way of behaving that is temporarily adopted by a large number of consumers because it is viewed as socially acceptable.” – DO YOU AGREE WITH THIS DEFINITION? The McGraw-Hill Companies, Inc./Lars A. Niki, photographer PLEASE read appendix to ch 4 (pages 105-7) if interested, but want to take a few minutes on fashion as a driver of consumer behavior Will spend more time on trend management and merchandising later in the course Digital Vision / Getty Images (c) Digital Vision/PunchStock

Why Consumers Buy Fashions Communicate with (and impress) Others Manage Appearance Express Self-Image Enhance Ego “Self-esteem” part of Maslow Hierarchy Self-esteem part of hierarchy McGraw-Hill Companies, Inc./Gary He, photographer

Stages in the Fashion Life Cycle IMPORTANT concept whether you’re talking about fashion, CPG, services, etc. – PRODUCT LIFE CYCLE

Keywords complexity The ease with which consumers can understand and use a new fashion. cross-shopping A pattern of buying both premium and low-priced merchandise or patronizing expensive, status-oriented retailers and price-oriented retailers. everyday low pricing (EDLP) A pricing strategy that stresses continuity of retail prices at a level somewhere between the regular nonsale price and the deep-discount sale price of the retailer’s competitors. impulse buying A buying decision made by customers on the spot after seeing the merchandise. information search The stage in the buying process in which a customer seeks additional information to satisfy a need. lifestyle Refers to how people live, how they spend their time and money, what activities they pursue, and their attitudes and opinions about the world they live in. multiattribute attitude model A model of customer decision making based on the notion that customers see a retailer or a product as a collection of attributes or characteristics. The model can also be used for evaluating a retailer, product, or vendor. The model uses a weighted average score based on the importance of various issues and performance on those issues. postpurchase evaluation The evaluation of merchandise or services after the customer has purchased and consumed them. satisfaction A post-consumption evaluation of the degree to which a store or product meets or exceeds customer expectations. store advocates Customers who like a store so much that they actively share their positive experiences with friends and family.