Consumer buying behavior: Deliberate decisions or habits?

The consumer buying process, at least in Marketing academia, is a straight forward five step process: 1.) problem/need recognition, 2.) information research, 3.) evaluation of alternatives, 4.) purchase decision and, finally, 5.) post-purchase behavior but is the process really so rational?  Why would we, marketers, care?  Most of marketing is focused on targeting one or more these steps to encourage consumers through the process.  If the process doesn’t follow this process, then your marketing expenditure isn’t going to be effective.

Well if the buying process is not this well worn path, what else could it be?  Habit.  Humans are dominated by habit.  Habits are wonderfully effective tools your brain uses to efficiently move through the day and your habits can be beneficial or harmful, depending on the habit.

Try a little experiment.  Keep all of your personal receipts for one month.  Grab your check book, credit card statement, your Paypal account and anything else that you to purchase something over the last 30 days.  Put them all on a spreadsheet and then add a few columns, for example channel, store, brand, product, etc.  Which columns are most meaningful to you will depend on the segment you manage.  Mark those purchases that relate to the segments you manage.

For each purchase, fill in each  column whether that purchase was a habit, a thought through decision or a trapped decision (a monthly expenditure on a 2 year cellphone contract would be trapped).  For example, stopping into Starbucks on the way into work is likely a habit in any column you may put up.  Total up your purchases.  What percent of your purchases each month are made out of habit?  Was the habit the store you went to, the brand you picked, the exact product, etc.?

This throws a twist into marketing for many of us.  If your segment is heavily dependent on habit, whether in channel, store, brand, etc., then you customers’ buying process is no longer the classically defined process listed above and your marketing will have to change.

Pricing to profit

The simplest way to price is cost plus pricing.  That is, determine how much it costs you to provide your product and add some factor.  A company that supplies to a department store may do a factor of four to the final consumer.  For example, it costs company X to $25 to make a product.  They may sell it to a department store for twice that, $50, and the department store my price it to the final consumer at $100.  Of course little things get in the way of that like promotional strategy.  Department stores are heavily promotional so they may price the product at $200 so that they can sell it to you at 50% off.  Cost plus pricing requires that you have done your market research on which features and functions the consumer requires.  Otherwise you may double the cost of the product and therefore the final retail by adding features the consumer is unwilling to pay for.

Cost plus is simple and it guarantees your products will make a similar margin percentage but it isn’t the most profitable way of pricing your product.  A better method is pricing to what the customer is willing to pay.  For example, working with Swarovski, I priced a foot tall pure crystal bird sculpture (which would have pricing according to Swarovski’s pricing methodology at $650) at $885.  I knew that the consumer would be willing to pay more for such a majestic piece.  What also helped my pricing decision was that I knew the product was supply constrained.  That is, we were likely to not be able to satisfy all of the consumer demand.  Therefore, Swarovski’s profitability was maximized by raising the price where demand would equal supply.

The goal of pricing is to price to the PROFIT maximizing level.  I stress profit because too many people attempt to maximize sales.  Let’s use a simple example.  Through analysis, you feel that you could sell 1000 units of a product at $10, 500 units at $15 or 250 units at $20.  Sales in these examples would be $10,000 at $10, $7500 at $15 and $5000 at $20.  If the product cost you $9 to make at $10 you would only have made $1000 in profit.  At $15, you would have made $3000 and, at $20, you would have made  $2750.  Therefore, pricing to maximize sales would have you at $10 while pricing to maximize profits would have you at $15.

Competitive Analysis

A useful tool in understanding your business is in understanding your competitors.  More importantly, you must understand how your customers perceive you vs. how they perceive you competitors.  This can be done by evaluating which characteristics consumers value in your type of product and service for both you and your competitors.

I’m going to take a quick tangent and remind you about customer segmentation.  Different segments of customers will value different things.  For example, my commuter car is comfortable and safe but all I care is that it gets me where I’m going as inexpensively as possible since I put on a significant number of miles each week.  While reliability is important, I am more concerned about price and mileage.  I have at least 140,000 miles on it and will probably double that before I think about replacing it.  A friend of mine was driving back from a later event with her three small children in her car.  The car broke down completely unexpectedly.  This was back before everyone had a smartphone.  She was stuck in the middle of nowhere with her kids for a long time before someone pulled over and offered to call AAA for her.  Even then, she was nervous about the stranger in the middle of no where.  She values reliability over everything else.  There was no way that she was going to be in that situation again….. ever.  She has purchased a new car every three years, regardless of how well she may love her current one.  She also won’t consider an entry price point car because she perceives them as less reliable.  Two different segments.  Me, ok I’m cheap.  My friend, Ms. Reliable.

Back to competitive analysis.  Start by compiling a list of different functions, features and attributes about your product and your competitors’ products.  Keep in mind that you want to understand the consumer perception of the products.  For example, if product quality is a key differentiator and you could put your product up against a dozen competitors in a third party lab and prove without a hesitation that your product’s quality is superior but the consumers have a perception that the competitors are of higher quality than you, you lose that comparison.  Common attributes include performance, price, quality, convenience, reliability, etc.  Don’t forget that even if you are providing a product, the delivery process is part of the consumers’ perception.  Therefore, you may need to include things like knowledge sales associates, return policy, hours of operation, etc.

A survey works well for creating what some call an importance-performance analysis.  For each attribute for each product you want to test, you need to have the respondent provide two points of data.  First, how does this specific product deliver against the attribute.  For example, on a 7 point scale rate how product A satisfies each of the following attributes: price, delivery, reliability, quality, etc.  Additionally, you need to know how important each of those attributes are to the customer.  Back to the car’s, I would rank price as more important than reliability while my friend would be the reverse.  In this case, I suggest force ranking the attributes.  That is, if you have six attributes you are measuring, have the respondent rank them in importance.  Importance of feature can be an excellent method for segmenting your customers.

Once you graph the result, you can see which areas you are superior and inferior to your competitors AND you can tell how important each of those areas are.  Good rule of thumb, the more important the attribute, the more you want to be better than your competitor.  The less important the attribute, the less it matters.

Customer (Market) Segmentation

Customer segmentation, also called Market segmentation, is classifying your customers into different segments based on similarities or differences in their need.  To segment, you need to collect as much data as possible about how your customers are using your product, which features they value and where are they in relevant point in life statistics.

Relevant point in life statistics means understanding where customers of your product generally are in their life.  For example, if you are selling products to new mothers, the relevant point in life you are most interested in is that they just had a baby.  Additionally, you may consider segments as pregnant women, couples seeking adoption and new grandparents.

A simple example is a service that provides roofing to home owners.  In a town with 100,000 residents, there may only be 20,000 owner occupied residences.  That is one rather large segment.  Depending on the business, this segment can also be divided by neighborhood, considering that most homes within a neighborhood are not only of similar age but the owners are generally in similar income brackets.  Another large segment could be owners of rental homes.

The three questions of marketing new business

1.) Does a market exist?

Basically, are there customers willing to pay for your product or service.  Most products and services are an extension of something that already exists, so you know that a market exists.  This question becomes even more important as if you are offering a disruptive product or service.

2.) How big is a market?

Basically, are there enough people who are willing to pay for your product to sustain your business.  You must also consider at this point how many competitors are there and how entrenched are they.  For example, if there is a million dollar business but there are already a dozen competitors, there will not be a lot of unmet demand.  Then your business will have to out perform enough of the established businesses to squeeze into the market.

3.) Is the market concentrated?

Basically, how spread out is the market.  It you are providing a service where you have to be present but your customers are spread across a 250 mile strip, it may not be a workable scenario.  With the power of the internet, it is significantly easier to service a  market that isn’t concentrated.  You may have to structure your business differently depending on how and where your customers are located.

3 C’s of Business

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Evaluate what the customer desires, what your competitor does well and what you do well.    Where your strengths and the customer’s needs overlap, there is potential for profit.  Unfortunately, your competitor will also try to align with the customer’s needs.  Where your competitor’s and your strengths competition through either lower prices or higher services tends to erode profits.

5 Stages of Customer Buying Decision

1.) Realization of need – First the consumer my realize that they “need” an item or service. The realization may happen slowly over time, e.g. the realization that the customer needs a new home, or very quickly, e.g. the realization of a need for Chapstick at the cash register at CVS. The marketer must understand how their targeted consumer segments come to this realization and plan accordingly.

2.) Research – Customers then research which products or services may satisfy their need. They get their information from everything from advertisements, company websites, family and friends, sales people and product packaging. Increasingly powerful source of information is social media and peer review sites. Research may be a large part of the purchasing decision, e.g. a customer purchasing a home will do a lot of their own research and often bring in a real estate agent to find the right match. Or the research process may be as quick as seeing the Chapstick at the cash wrap and realizing they have dry lips.

3.) Evaluation – After the customer has identified a number of options that may satisfy their need, the customer will select the best option for them based on a number of criteria, i.e. price, quality, convenience, brand, reliability, etc.

4.) Purchase – The customer then purchases the product but must still decide which channel (online, retail, catalog, etc) and which specific provider.

5.) Satisfaction – Once the customer has purchased the product or service the customer may realize the purchase was satisfactory or not. This realization will help determine if the customer becomes a positive or negative influence for potential future customers as well as determine if this customer will be a repeat consumer.

How do you know what your customers what?

Understanding what the customers want is incredibly important to running a successful business.  It allows you to invest in areas the customer values (and would be willing to pay for) while cutting investment in items/features that the customer doesn’t value (and would NOT be interested in paying for).  So how do you know what the customer wants?

While there are many ways and I encourage you to use several of them, one of the basic methods is to look at the data you already have.  If you are able to track purchases at the customer level, you have an incredible amount of power in understanding customer behavior at your fingertips.  One great way to understand different segments of your business is to create a Customer Preference to Purchase chart.  Group your customers based on their average purchase frequency and average purchase value.  Then for each group, list where the top 50% of sales are coming from (or profit if you have widely varying margins).  Group your products/services at different levels to see what differences come up.  I created one for a made-up burger joint below.  Basically, both the average customer (box in the middle) and the high value customers (box on top right) are burger and fries customers.  The high frequency but low average purchase customers (bottom right) basically just stop in for coffee in the morning.  Note that at this level I didn’t separate out my single patty from the double or triple patty.  Drilling down to that level may help important depending on what you are trying to accomplish.

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Another useful way to populate the boxes is to look at how this segment differs from the norm.  It can be as simple as comparing the percent of business a given product category does for your customer segment vs. what it does in total.  For example, dessert may be 20% of the high frequency/high purchase value but only 5% of your total business.  This means that high frequency/high purchase value customers are four times as likely to buy a dessert.

Not just the “why” of strategy, the “five whys”

Originally created in the Toyota Corporation by Sakichi Toyoda as part of the Toyota Production System, the five whys is a simple yet effective tool for driving to the root cause of an issue.  In utilizing the five whys, state the issue and then ask “Why?”  Once you have a satisfactory answer, again ask “Why?” to the answer.  Repeat asking “why” until you have discovered the root cause.  Generally speaking asking “why” five times is sufficient to determine the root cause.  For example, 1.) Why was the wrong product shipped to the customer?  Because the sku in the catalog was incorrect.  2.) Why was the sku incorrect?  Because the error wasn’t caught in final proofing.  3.) Why wasn’t the error caught in proofing?  Because too few people are part of the proofing process.  4.) Why are too few people part of the proofing process?  Because the draft was delivered late to the team.  5.) Why was the draft delivered late?  Product marketing was late in providing final information to the catalog team.  This error was really caused by product marketing being late with information.  Of course, “why” could be asked several more times in this example before a satisfactory solution could be found.

The five whys is frequently used in very process oriented systems, such as manufacturing, but it also fits very nicely in marketing and strategy development.  Consider trying to discover why a consumer prefers a competitive product (see below for the first level of questioning).  Use field sales, customer service, management, analysts and insights team to pick the top two or three reasons why the customer prefers the competition.  Then for each answer, do some research.  For example, competitively shop your competition and determine how your organization’s pricing measures up.  Then for each researched answer, ask the most relevant “why” question.  Repeat until you have several paths of root causes for your team to provide solutions.

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The five whys can also be used to build a solid story for marketing or social media campaigns?  Start with why the customer would care about the story.  Several levels and frequently the root of the customer’s motivation will present itself.  Build your campaign to communicate directly to your customer’s root motivation.

Another use would be to determine target customers and best methods for reaching them.  For example, why are Boomers less likely to use our product than Gen X?  Or why are women more likely than men to use our product.