Chapter 4 Building Customer Value, Satisfaction, and Loyalty With the rise of

Chapter 4

Building Customer Value, Satisfaction, and Loyalty

With the rise of digital technologies, increasingly informed consumers expect companies to do more than connect with them, more than satisfy them, and even more than delight them. They expect companies to listen and respond to them. Even the best-run companies have to be careful not to take customers for granted. Consumers are better educated and better informed than ever, and they have the tools to verify companies’ claims and seek out superior value alternatives.

Customer-Perceived Value

Customer-perceived value (CPV) is the difference between the prospective customer’s evaluation of all the benefits and costs of an offering and the perceived alternatives (see Figure 4.1). Total customer benefit is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering because of the product, service, people, and image. Total customer cost is the perceived bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market offering, including monetary, time, energy, and psychological costs.

Suppose the buyer for a construction company wants to buy a tractor for residential construction from either Caterpillar or Komatsu. After evaluating the two tractors on the basis of reliability, durability, performance, and resale value, the buyer decides Caterpillar has greater product benefits. He also decides Caterpillar provides better service and has more knowledgeable and responsive staff. Finally, he places higher value on Caterpillar’s corporate image and reputation. He adds up all the benefits from product, services, people, and image, and perceives Caterpillar as delivering greater customer benefits.

The buyer also examines his total cost of transacting with Caterpillar versus Komatsu, including time, energy, and psychological costs expended in product acquisition, usage, maintenance, ownership, and disposal. Then he considers whether Caterpillar’s total customer cost is too high compared to total customer benefits. If it is, he might choose Komatsu. The buyer will choose whichever source delivers the highest perceived value.

In this situation, Caterpillar can improve its offer in three ways. First, it can increase total customer benefit by improving economic, functional, and psychological benefits of its product, services, people, and/or image. Second, it can reduce the buyer’s time, energy, and psychological investment. Third, it can reduce its product’s monetary cost to the buyer.

Some marketers might argue that this process is too rational. Suppose the customer chooses the Komatsu tractor. How can we explain this choice? Here are three possibilities.

The buyer might be under orders to buy at the lowest price. Caterpillar’s task is then to convince the buyer’s manager that buying on price alone will result in lower long-term profits and customer value for the buyer’s company.

The buyer will retire before the company realizes the Komatsu tractor is more expensive to operate. Caterpillar’s task is to convince other people in the customer company that Caterpillar delivers greater customer value.

The buyer enjoys a long-term friendship with the Komatsu salesperson. Here, Caterpillar must show the buyer that the Komatsu tractor will draw complaints from the tractor operators when they discover its high fuel cost and need for frequent repairs.

Customer-perceived value is a useful framework that applies to many situations and yields rich insights. It suggests that the seller must assess the total customer benefit and total customer cost associated with each competitor’s offer in order to know how its own offer rates in the buyer’s mind. It also implies that the seller at a disadvantage has two alternatives: increase total customer benefit or decrease total customer cost.

Consumers have varying degrees of loyalty to specific brands, stores, and companies. Loyalty has been defined as “a deeply held commitment to rebuy or repatronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.”2 The value proposition consists of the whole cluster of benefits the company promises to deliver; it is more than the core positioning of the offering. For example, Volvo’s core positioning has been “safety,” but the buyer is promised more than just a safe car; other benefits include good performance, design, and safety for the environment. The value proposition is thus a promise about the experience customers can expect from the company’s market offering and their relationship with the supplier. Whether the promise is kept depends on the company’s ability to manage its value delivery system. The value delivery system includes all the experiences the customer will have on the way to obtaining and using the offering.3

Total Customer Satisfaction

In general, satisfaction is a person’s feelings of pleasure or disappointment that result from comparing a product or service’s perceived performance (or outcome) to expectations.4 If the performance or experience falls short of expectations, the customer is dissatisfied. If it matches expectations, the customer is satisfied. If it exceeds expectations, the customer is highly satisfied or delighted.5 Customer assessments of product or service performance depend on many factors, including the type of loyalty relationship the customer has with the brand.6

Although the customer-centered firm seeks to create high customer satisfaction, that is not its ultimate goal. Increasing customer satisfaction by lowering price or increasing services may result in lower profits. The company might be able to increase its profitability by means other than increased satisfaction (for example, by improving manufacturing processes). The company also has many stakeholders, including employees, dealers, suppliers, and stockholders. Spending more to increase customer satisfaction might divert funds from increasing the satisfaction of other “partners.” Ultimately, the company must try to deliver a high level of customer satisfaction subject to also delivering acceptable levels to other stakeholders, given its total resources.

Monitoring Satisfaction

Many companies are systematically measuring how well they treat customers, identifying the factors shaping satisfaction, and changing operations and marketing as a result.7 A highly satisfied customer generally stays loyal longer, buys more as the company introduces new and upgraded products, talks favorably to others about the company and its products, pays less attention to competing brands and is less sensitive to price, offers product or service ideas to the company, and costs less to serve than new customers because transactions can become routine.8

The link between customer satisfaction and customer loyalty is not proportional, however. Suppose customer satisfaction iis rated on a scale from 1 to 5. At a very low level of satisfaction (level 1), customers are likely to abandon the company and even bad-mouth it. At levels 2 to 4, customers are fairly satisfied but still find it easy to switch to better offers. At level 5, the customer is very likely to repurchase and even spread good word of mouth about the company. High satisfaction or delight creates an emotional bond with the brand or company, not just a rational preference.

Yet customers define good performance differently. Good delivery could mean early delivery, on-time delivery, or order completeness, and two customers can report being “highly satisfied” for different reasons. One may be easily satisfied most of the time, and the other might be hard to please but was pleased on this occasion. It is also important to know how satisfied customers are with competitors in order to assess “share of wallet” or how much of the customer’s spending the company’s brand enjoys: The more highly the consumer ranks the company’s brand in terms of satisfaction and loyalty, the more the customer is likely to spend on the brand.9

Companies use a variety of methods to measure customer satisfaction. “Marketing Insight: Net Promoter and Customer Satisfaction” describes why some companies believe one well-designed question is all that is necessary to assess customer satisfaction.10

Some companies think they’re getting a sense of customer satisfaction by tallying complaints, but studies show that while customers are dissatisfied with their purchases about 25 percent of the time, only about 5 percent complain. The other 95 percent either feel complaining is not worth the effort or don’t know how or to whom to complain. They just stop buying.11

Of the customers who complain, 54 percent to 70 percent will do business with the organization again if their complaint is resolved. The figure goes up to a staggering 95 percent if the customer feels the complaint was resolved quickly. Customers whose complaints are satisfactorily resolved tell an average of five people about the good treatment they received.12 The average dissatisfied customer, however, gripes to 11 people.

The following practices can help to recover customer goodwill after a negative experience.13

Set up a seven-day, 24-hour toll-free hotline (by phone, fax, or e-mail) to receive and act on complaints—make it easy for the customer to complain.

Contact the complaining customer as quickly as possible. The slower the response, the more dissatisfaction may grow and lead to negative word of mouth.

Accept responsibility for the customer’s disappointment; don’t blame the customer.

Use friendly, empathic customer service people.

Resolve the complaint swiftly and to the customer’s satisfaction. Some complaining customers are looking for a sign that the company cares, not for compensation.

Product and Service Quality

Satisfaction will also depend on product and service quality. What exactly is quality? Various experts have defined it as “fitness for use,” “conformance to requirements,” and “freedom from variation.” We will use the American Society for Quality’s definition: Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs.14 The seller has delivered quality whenever its product or service meets or exceeds the customers’ expectations. It’s important to distinguish between conformance quality and performance quality (or grade). A Lexus provides higher performance quality than a Hyundai: The Lexus rides more smoothly, accelerates faster, and runs problem-free longer. Yet both a Lexus and a Hyundai deliver the same conformance quality if all the units deliver their promised quality.

Studies have shown a high correlation between relative product quality and company profitability.15 Marketing plays an especially important role in helping companies deliver high-quality goods to target customers by (1) correctly identifying customers’ needs and requirements; (2) communicating customer expectations properly to product designers; (3) making sure that customers’ orders are filled correctly and on time; (4) checking that customers have received proper instructions, training, and technical assistance for product usage; (5) staying in touch after the sale to ensure customers are and remain satisfied; and (6) gathering customer ideas for improvements and conveying them to the appropriate departments. When marketers do all this, they make substantial contributions to total quality management and customer satisfaction as well as to customer and company profitability

Maximizing Customer Lifetime Value

Ultimately, marketing is the art of attracting and keeping profitable customers. Yet every company loses money on some of its customers. The well-known 80–20 rule states that 80 percent or more of the company’s profits come from the top 20 percent of its customers. Some cases may be more extreme—the most profitable 20 percent of customers (on a per capita basis) may contribute as much as 150 percent to 300 percent of profitability. The least profitable 10 percent to 20 percent, on the other hand, can actually reduce profits between 50 percent and 200 percent per account, with the middle 60 percent to 70 percent breaking even.16 The implication is that a company could improve its profits by “firing” its worst customers.

It’s not always the company’s largest customers who yield the most profit. The smallest customers pay full price and receive minimal service, but the costs of transacting with them can reduce their profitability. Midsize customers who receive good service and pay nearly full price are often the most profitable.

Customer Profitability

A profitable customer is a person, household, or company that over time yields a revenue stream exceeding by an acceptable amount the company’s cost stream for attracting, selling, and serving that customer. Note the emphasis is on the lifetime stream of revenue and cost, not the profit from a particular transaction.17 Marketers can assess customer profitability individually, by market segment, or by channel. Many companies measure customer satisfaction, but few measure individual customer profitability.18

A useful type of profitability analysis is shown in Figure 4.2.19 Customers are arrayed along the columns and products along the rows. Each cell contains a symbol representing the profitability, positive or negative, of selling that product to that customer. Customer 1 is very profitable; he buys two profit-making products. Customer 2 yields mixed profitability; she buys one profitable product and one unprofitable product. Customer 3 is a losing customer because he buys one profitable product and two unprofitable products. What can the company do about customers 2 and 3? (1) It can raise the price of its less profitable products or eliminate them, or (2) it can try to sell customers 2 and 3 its profit-making products. In fact, the company should encourage them to switch to competitors.

Customer profitability analysis is best conducted with the tools of an accounting technique called activity-based costing (ABC). The company estimates all revenue coming from the customer, less all costs (including the direct and indirect costs of serving each customer). Companies that fail to measure their costs correctly are also not measuring their profit correctly and are likely to misallocate their marketing effort.

Measuring Customer Lifetime Value

The case for maximizing long-term customer profitability is captured in the concept of customer lifetime value.20 Customer lifetime value (CLV) describes the net present value of the stream of future profits expected over the customer’s lifetime purchases. The company must subtract from its expected revenues the expected costs of attracting, selling, and servicing the account of that customer, applying the appropriate discount rate (say, between 10 percent and 20 percent, depending on cost of capital and risk attitudes). Lifetime value calculations for a product or service can add up to tens of thousands of dollars or even run to six figures.21

CLV calculations provide a formal quantitative framework for planning customer investment and help marketers adopt a long-term perspective. Many methods exist to measure CLV.22 Columbia’s Don Lehmann and Harvard’s Sunil Gupta illustrate their approach by calculating the CLV of 100 customers over a 10-year period (see Table 4.1). In this example, the firm acquires 100 customers with an acquisition cost per customer of $40. Therefore, in year 0, it spends $4,000. Some of these customers defect each year. The present value of the profits from this cohort of customers over 10 years is $13,286.52. The net CLV (after deducting acquisition costs) is $9,286.52, or $92.87 per customer.23

Cultivating Customer Relationships

Companies are using information about customers to enact precision marketing designed to build strong and profitable long-term relationships.24 Customer relationship management (CRM) is the process of carefully managing detailed information about individual customers and all customer “touch points” to maximize loyalty.25 CRM is important because a major driver of company profitability is the aggregate value of the company’s customer base. A touch point is any occasion when a customer encounters the brand and product—from actual experience to personal or mass communications to casual observation. For a hotel, the touch points include reservations, check-in and checkout, frequent-stay programs, room service, business services, exercise facilities, and restaurants.

CRM enables companies to provide excellent real-time customer service through the effective use of individual account information. Based on what they know about each valued customer, they can customize market offerings, services, programs, messages, and media. Personalizing marketing is about making sure the brand and its marketing are as personally relevant as possible to as many customers as possible—a challenge, given that no two customers are identical.

To adapt to customers’ increased desire for personalization, marketers have embraced concepts such as permission marketing, the practice of marketing to consumers only after gaining their expressed permission. According to Seth Godin, a pioneer in the technique, marketers develop stronger consumer relationships by sending messages only when consumers express a willingness to become more engaged with the brand.26 “Participatory marketing” may be a more appropriate concept than permission marketing because marketers and consumers need to work together to find out how the firm can best satisfy consumers.

Although much has been made of the newly empowered consumer—in charge, setting the direction of the brand, and playing a much bigger role in how it is marketed—it’s still true that only some consumers want to get involved with some of the brands they use and, even then, only some of the time. Consumers have lives, jobs, families, hobbies, goals, and commitments, and many things matter more to them than the brands they purchase and consume. Understanding how to best market a brand given such diversity in customer interests is crucially important.27

Attracting and Retaining Customers

Companies seeking to expand profits and sales must invest time and resources searching for new customers. To generate leads, they advertise in media that will reach new prospects, send direct mail and e-mails to possible new prospects, send their salespeople to participate in trade shows where they might find new leads, purchase names from list brokers, and so on.

Different acquisition methods yield customers with varying CLVs. One study showed that customers acquired through the offer of a 35 percent discount had about one-half the long-term value of customers acquired without any discount.28 Many of these customers were more interested in the offer than in the product itself. Similarly, many local businesses have launched “daily deal” campaigns from Groupon and LivingSocial to attract new customers. Unfortunately, these campaigns have sometimes turned out to be unprofitable in the long run because coupon users were not easily converted into loyal customers.29

It is not enough to attract new customers; the company must also keep them and increase their business.30 Too many companies suffer from high customer churn or defection. To reduce the defection rate, the company must first define and measure its retention rate, distinguish the causes of customer attrition and identify those that can be managed better, and compare the lost customer’s CLV to the costs of reducing the defection rate. As long as the cost to discourage defection is lower than the lost profit, spend the money to try to retain the customer.

Figure 4.3 shows the main steps in attracting and retaining customers in terms of a funnel. The marketing funnel identifies the percentage of the potential target market at each stage in the decision process, from merely aware to highly loyal. Some marketers extend the funnel to include loyal customers who are brand advocates or even partners with the firm. By calculating conversion rates—the percentage of customers at one stage who move to the next—the funnel allows marketers to identify any bottleneck stage or barrier to building a loyal customer franchise. The funnel also emphasizes how important it is not just to attract new customers but to retain and cultivate existing ones.

Customer profitability analysis and the marketing funnel help marketers decide how to manage groups of customers that vary in loyalty, profitability, risk, and other factors.31 Winning companies know how to reduce the rate of customer defection; increase the longevity of the customer relationship; enhance the growth of each customer through “share of wallet,” cross-selling, and up-selling; make low-profit customers more profitable or terminate them; and treat high-profit customers in a special way.

Building Loyalty

Companies should strive to build loyalty for strong, enduring connections with customers. One set of researchers sees retention-building activities as adding financial benefits, social benefits, or structural ties.32 Next we describe four marketing activities that improve loyalty and retention.

Interact Closely with Customers

Listening to customers is crucial to customer relationship management. Some companies have created an ongoing mechanism that keeps their marketers permanently plugged in to frontline customer feedback. Build-A-Bear Workshop uses a “Cub Advisory Board” as a feedback and decision-input body. The board is made up of 5- to 16-year-olds who review new-product ideas.33 It is also important to be a customer advocate and, as much as possible, take the customers’ side and understand their point of view.34

Develop Loyalty Programs

Frequency programs (FPs) are designed to reward customers who buy frequently and in substantial amounts. They can help build long-term loyalty with high CLV customers, creating cross-selling opportunities in the process. Pioneered by the airlines, hotels, and credit card companies, FPs now exist in many other industries. Typically, the first company to introduce an FP in an industry gains the most benefit, especially if competitors are slow to respond. After competitors react, FPs can become a financial burden to all the offering companies, but some companies are more efficient and creative in managing them. FPs can also produce a psychological boost and a feeling of being special and elite that customers value.35

Club membership programs attract and keep those customers responsible for the largest portion of business. Clubs can be open to everyone who purchases a product or service or limited to an affinity group or those willing to pay a small fee. Although open clubs are good for building a database or snagging customers from competitors, limited membership is a more powerful long-term loyalty builder. Fees and membership conditions prevent those with only a fleeting interest in a company’s products from joining.

Create Institutional Ties

The company may supply business customers with special equipment or services that help them manage orders, payroll, and inventory. Customers are less inclined to switch to another supplier when it means high capital costs, high search costs, or the loss of loyal-customer discounts. A good example is Milliken & Company, which provides proprietary software, marketing research, sales training, and sales leads to loyal customers.

Create Value With Brand Communities

Thanks in part to the Internet, companies are collaborating with consumers to create value through communities built around brands. A brand community is a specialized community of consumers and employees whose identification and activities focus around the brand.36 A strong brand community results in a more loyal, committed customer base and can be a constant source of inspiration and feedback for product improvements or innovations.

Three characteristics identify brand communities:37 (1) a sense of connection to the brand, company, product, or community members; (2) shared rituals, stories, and traditions that help convey meaning; and (3) shared responsibility or duty to the community and individual members. Brand communities come in many different forms.38 Some arise organically from brand users, such as the Atlanta MGB riders club, while others are company-sponsored and facilitated, such as the Harley Owners Group (H.O.G.). Online, marketers can tap into social media such as Facebook, Twitter, and blogs or create their own online community. Members can recommend products, share reviews, create lists of recommendations and favorites, or socialize together online.

Win-Backs

Regardless of how hard companies may try, some customers inevitably become inactive or drop out. The challenge is to reactivate them through win-back strategies.39 It’s often easier to reattract ex-customers (because the company knows their names and histories) than to find new ones. Exit interviews and lost-customer surveys can uncover sources of dissatisfaction and help win back only those with strong profit potential.40

When will consumers choose to engage with a brand? Follow-up analysis of the IBM 2010 CEO Study revealed the following about customer pragmatism: “ most do not engage with companies via social media simply to feel connected To successfully exploit the potential of social media, companies need to design experiences that deliver tangible value in return for customers’ time, attention, endorsement and data.” That “tangible value” includes discounts, coupons, and information to facilitate purchase. The IBM analysts also note that many businesses overlook social media’s most potent capabilities for capturing customer insights, monitoring the brand, conducting research, and soliciting new-product ideas.41

Chapter 5

What Influences Consumer Behavior?

Consumer behavior is the study of how individuals, groups, and organizations select, buy, use, and dispose of goods, services, ideas, or experiences to satisfy their needs and wants.2 Marketers must fully understand both the theory and the reality of consumer behavior. A consumer’s buying behavior is influenced by cultural, social, and personal factors. Of these, cultural factors exert the broadest and deepest influence.

Cultural Factors

Culture, subculture, and social class are particularly important influences on consumer buying behavior. Culture is the fundamental determinant of a person’s wants and behavior. Through family and other key institutions, a child growing up in the United States is exposed to values such as achievement and success, activity, efficiency and practicality, progress, material comfort, individualism, freedom, external comfort, humanitarianism, and youthfulness.3 A child growing up in another country might have a different view of self, relationship to others, and rituals.

Each culture consists of smaller subcultures that provide more specific identification and socialization for their members. Subcultures include nationalities, religions, racial groups, and geographic regions. When subcultures grow large and affluent enough, companies often design specialized marketing programs to serve them.

Social classes are relatively homogeneous and enduring divisions in a society, hierarchically ordered and with members who share similar values, interests, and behavior. One classic depiction of social classes in the United States defined seven ascending levels: (1) lower lowers, (2) upper lowers, (3) working class, (4) middle class, (5) upper middles, (6) lower uppers, and (7) upper uppers.4 Social class members show distinct product and brand preferences in many areas.

Social Factors

In addition to cultural factors, social factors such as reference groups, family, and social roles and statuses affect our buying behavior.

Reference Groups

A person’s reference groups are all the groups that have a direct (face-to-face) or indirect influence on his or her attitudes or behavior. Groups having a direct influence are called membership groups. Some of these are primary groups with whom the person interacts fairly continuously and informally, such as family, friends, neighbors, and coworkers. People also belong to secondary groups, such as religious, professional, and trade-union groups, which tend to be more formal and require less continuous interaction.

Reference groups influence members by exposing an individual to new behaviors and life-styles, influencing attitudes and self-concept, and creating pressures for conformity that may affect product and brand choices. People are also influenced by groups to which they do not belong. Aspirational groups are those a person hopes to join; dissociative groups are those whose values or behavior an individual rejects.

Where reference group influence is strong, marketers must determine how to reach and influence the group’s opinion leader, the person who offers informal advice or information about a specific product or category, such as which of several brands is best or how a particular product may be used.5 Marketers try to reach these individuals by identifying their demographic and psychographic characteristics, identifying the media they read, and directing messages to them.6

Cliques

Communication researchers propose a social-structure view of interpersonal communication.7 They see society as consisting of cliques, small groups whose members interact frequently. Clique members are similar, and their closeness facilitates effective communication but also insulates the clique from new ideas. The challenge is to create more openness so cliques exchange information with others in society. One team of viral marketing experts cautions that although influencers or “alphas” start trends, they are often too introspective and socially alienated to spread them. They advise marketers to cultivate “bees,” hyperdevoted customers who are not satisfied just knowing about the next trend but live to spread the word.8 More firms are in fact finding ways to identify and actively engage passionate brand evangelists and potentially lucrative customers online.9

Family

The family is society’s most important consumer buying organization, and family members constitute the most influential primary reference group.10 There are two families in the buyer’s life. The family of orientation consists of parents and siblings. From parents a person acquires an orientation toward religion, politics, and economics and a sense of personal ambition, self-worth, and love.11 A more direct influence on everyday buying behavior is the family of procreation—namely, the person’s spouse and children. For expensive products and services such as cars, vacations, or housing, the vast majority of husbands and wives engage in joint decision making.12 Men and women may respond differently to marketing messages, however.

Another shift in buying patterns is an increase in the influence wielded by children and teens. Research has shown that more than two-thirds of 13- to 21-year-olds make or influence family purchase decisions on audio/video equipment, software, and vacation destinations.13 By the time children are about 2 years old, they can often recognize characters, logos, and specific brands. They can distinguish between advertising and programming by about ages 6 or 7. A year or so later, they can understand the concept of persuasive intent on the part of advertisers. By 9 or 10, they can perceive the discrepancies between message and product.14 Teens and young adults watch what their friends say and do as much as what they see or hear in an ad or are told by a salesperson in a store.

Roles and Status

We each participate in many groups—family, clubs, organizations—and these are often an important source of information and help to define norms for behavior. We can define a person’s position in each group in terms of role and status. A role consists of the activities a person is expected to perform. Each role in turn connotes a status. A senior vice president of marketing may have more status than a sales manager, and a sales manager may have more status than an office clerk. People choose products that reflect and communicate their role and their actual or desired status in society. Marketers must be aware of the status-symbol potential of products and brands.

Personal Factors

Personal characteristics that influence a buyer’s decision include age and stage in the life cycle, occupation and economic circumstances, personality and self-concept, and lifestyle and values.

Age and Stage in the Life Cycle

Our taste in food, clothes, furniture, and recreation is often related to our age. Consumption is also shaped by the family life cycle and the number, age, and gender of people in the household at any point in time. In addition, psychological life-cycle stages may matter. Adults experience certain passages or transformations as they go through life.15 Their behavior during these intervals, such as when becoming a parent, is not necessarily fixed but changes with the times. Marketers should also consider critical life events or transitions—marriage, childbirth, illness, relocation, divorce, first job, career change, retirement, death of a spouse—as giving rise to new needs.

Occupation and Economic Circumstances

Occupation influences consumption patterns. Marketers try to identify the occupational groups that have above-average interest in their products and services and even tailor products for certain occupational groups: Software companies, for example, design different products for engineers, lawyers, and physicians. Both product and brand choice are greatly affected by economic circumstances like spendable income (level, stability, and pattern over time), savings and assets (including the percentage that is liquid), debts, borrowing power, and attitudes toward spending and saving.

Personality and Self-Concept

By personality, we mean a set of distinguishing human psychological traits that lead to relatively consistent and enduring responses to environmental stimuli including buying behavior. We often describe personality in terms of such traits as self-confidence, dominance, autonomy, deference, sociability, defensiveness, and adaptability.16

Brands also have personalities, and consumers are likely to choose brands whose personalities match their own. We define brand personality as the specific mix of human traits that we can attribute to a particular brand. Stanford’s Jennifer Aaker researched brand personalities and identified the following traits: sincerity, excitement, competence, sophistication, and ruggedness.17 Cross-cultural studies have found that some but not all of these traits apply outside the United States.18

Consumers often choose and use brands with a brand personality consistent with their actual self-concept (how we view ourselves), though the match may instead be based on the consumer’s ideal self-concept (how we would like to view ourselves) or even on others’ self-concept (how we think others see us).19 These effects may also be more pronounced for publicly consumed products than for privately consumed goods.20 On the other hand, consumers who are high “self-monitors”—that is, sensitive to the way others see them—are more likely to choose brands whose personalities fit the consumption situation.21 Finally, multiple aspects of self (serious professional, caring family member, active fun-lover) may often be evoked differently in different situations or around different types of people.

Lifestyle and Values

People from the same subculture, social class, and occupation may adopt quite different lifestyles. A lifestyle is a person’s pattern of living in the world as expressed in activities, interests, and opinions. It portrays the “whole person” interacting with his or her environment. Marketers search for relationships between their products and lifestyle groups. A computer manufacturer might find that most computer buyers are achievement-oriented and then aim the brand more clearly at the achiever lifestyle.

Lifestyles are shaped partly by whether consumers are money constrained or time constrained. Companies aiming to serve the money-constrained will create lower-cost products a nd services. By appealing to thrifty consumers, Walmart has become the largest company in the world. In some categories, notably food processing, companies targeting time-constrained consumers need to be aware that these very same people want to believe they’re not operating within time constraints. Marketers call those who seek both convenience and some involvement in the cooking process the “convenience involvement segment.”22

Consumer decisions are also influenced by core values, the belief systems that underlie attitudes and behaviors. Core values go much deeper than behavior or attitude and at a basic level guide people’s choices and desires over the long term. Marketers who target consumers on the basis of their values believe that with appeals to people’s inner selves, it is possible to influence their outer selves—their purchase behavior.

Key Psychological Processes

The starting point for understanding consumer behavior is the stimulus-response model shown in Figure 5.1. Marketing and environmental stimuli enter the consumer’s consciousness, and a set of psychological processes combine with certain consumer characteristics to result in decision processes and purchase decisions. The marketer’s task is to understand what happens in the consumer’s consciousness between the arrival of the outside marketing stimuli and the ultimate purchase decisions. Four key psychological processes—motivation, perception, learning, and memory—fundamentally influence consumer responses.

Motivation

We all have many needs at any given time. Some needs are biogenic; they arise from physiological states of tension such as hunger, thirst, or discomfort. Other needs are psychogenic; they arise from psychological states of tension such as the need for recognition, esteem, or belonging. A need becomes a motive when it is aroused to a sufficient level of intensity to drive us to act. Motivation has both direction—we select one goal over another—and intensity—we pursue the goal with more or less vigor.

Well-known theories of human motivation carry different implications for consumer analysis and marketing strategy. Sigmund Freud assumed the psychological forces shaping people’s behavior are largely unconscious and that people cannot fully understand their own motivations. Someone who examines specific brands will react not only to the brands’ stated capabilities but also to less conscious cues such as shape, size, weight, and brand name. A technique called laddering lets us trace a person’s motivations from the stated instrumental ones to the more terminal ones. Then the marketer can decide at what level to develop the message and appeal.23

Cultural anthropologist Clotaire Rapaille works on breaking the “code” behind product behavior—the unconscious meaning people give to a particular market offering. Rapaille worked with Boeing to identify features in the 787 Dreamliner’s interior that would have universal appeal. Based in part on his research, the Dreamliner has a spacious foyer; larger, curved luggage bins closer to the ceiling; larger, electronically dimmed windows; and a ceiling discreetly lit by hidden LEDs.24

Abraham Maslow sought to explain why people are driven by particular needs at particular times.25 His answer was that human needs are arranged in a hierarchy from most to least pressing—from physiological needs to safety needs, social needs, esteem needs, and self-actualization needs. People will try to satisfy their most important need first and then move to the next.

Frederick Herzberg developed a two-factor theory that distinguishes dissatisfiers (factors that cause dissatisfaction) from satisfiers (factors that cause satisfaction).26 The absence of dissatisfiers is not enough to motivate a purchase; satisfiers must be present. For example, a computer that does not come with a warranty is a dissatisfier. Yet the presence of a product warranty does not act as a satisfier or motivator of a purchase because it is not a source of intrinsic satisfaction. Ease of use is a satisfier. In line with this theory, sellers should do their best to avoid dissatisfiers that might unsell a product and supply the major motivators (satisfiers) of purchase.

Perception

A motivated person is ready to act—how is influenced by his or her perception of the situation. In marketing, perceptions are more important than reality because they affect consumers’ actual behavior. Perception is the process by which we select, organize, and interpret information inputs to create a meaningful picture of the world.27 Consumers perceive many different kinds of information through sight, sound, smell, taste, and feel.

Sensory marketing has been defined as “marketing that engages the consumers’ senses and affects their perception, judgment and behavior.” Aradhna Krishna argues that sensory marketing’s effects can be manifested in two main ways. One, sensory marketing can be used subconsciously to shape consumer perceptions of more abstract qualities of a product or service (say, different aspects of its brand personality). Two, sensory marketing can also be used to affect the perceptions of specific product or service attributes (such as color, taste, or shape).28

People can emerge with different perceptions of the same object because of three perceptual processes: selective attention, selective distortion, and selective retention. Although we’re exposed to thousands of marketing stimuli every day, we screen most stimuli out—a process called selective attention. Therefore, marketers must work hard to attract consumers’ notice. Research shows that people are more likely to notice stimuli that relate to a current need; this is why car shoppers notice car ads but not appliance ads. Also, people are more likely to notice stimuli they anticipate, such as laptops displayed in a computer store. And people are more likely to notice stimuli whose deviations are large in relationship to the normal size of the stimuli. You are more likely to notice an ad offering $100 off than one offering $5 off a product’s price.

Even noticed stimuli don’t always come across in the way the senders intend. Selective distortion is the tendency to interpret information in a way that fits our preconceptions. Consumers will often distort information to be consistent with prior brand and product beliefs and expectations. Selective distortion can work to the advantage of marketers with strong brands when consumers distort neutral or ambiguous brand information to make it more positive. In other words, coffee may seem to taste better and the wait in a bank line may seem shorter, depending on the brand. Moreover, because of selective retention, we’re likely to remember good points about a product we like and forget good points about competing products. Selective retention again works to the advantage of strong brands. It also explains why marketers need to use repetition—to make sure their message is not overlooked.

Learning

When we act, we learn. Learning induces changes in our behavior arising from experience. Most human behavior is learned, though much learning is incidental. Learning theorists believe learning is produced through the interplay of drives, stimuli, cues, responses, and reinforcement. A drive is a strong internal stimulus impelling action. Cues are minor stimuli that determine when, where, and how a person responds.

Suppose you buy a laptop computer. If your experience is rewarding, your response to the laptop and the brand will be positively reinforced. When you want to buy a printer, you may assume that because the company makes good laptops, it also makes good printers, generalizing your response to similar stimuli. A countertendency to generalization is discrimination, in which we learn to recognize differences in sets of similar stimuli and adjust our responses accordingly. Learning theory teaches marketers that they can build demand for a product by associating it with strong drives, using motivating cues, and providing positive reinforcement.

Emotions

Consumer response is not all cognitive and rational; much may be emotional and invoke different kinds of feelings. A brand or product may make a consumer feel proud, excited, or confident. An ad may create feelings of amusement, disgust, or wonder. Marketers are increasingly recognizing the power of emotional appeals—especially if rooted in some functional or rational aspects of the brand. An emotion-filled brand story has been shown to trigger’s people desire to pass along things they hear about brands, through either word of mouth or online sharing. Firms are therefore giving their communications a stronger human appeal to engage consumers in their brand stories.29

Memory

Cognitive psychologists distinguish between short-term memory (STM)—a temporary and limited repository of information—and long-term memory (LTM)—a more permanent, essentially unlimited repository. Most widely accepted views of long-term memory structure assume we form some kind of associative model. For example, the associative network memory model views LTM as a set of nodes and links. Nodes are stored information connected by links that vary in strength. Any type of information can be stored in the memory network, including verbal, visual, abstract, and contextual. A spreading activation process from node to node determines how much we retrieve and what information we can actually recall in any given situation. When a node becomes activated because we’re encoding external information (when we read or hear a word or phrase) or retrieving internal information from LTM (when we think about some concept), other nodes are also activated if they’re associated strongly enough with that node.

Brand associations consist of all brand-related thoughts, feelings, perceptions, images, experiences, beliefs, attitudes, and so on, that become linked to the brand node. Companies sometimes create mental maps of consumers that depict their knowledge of a particular brand in terms of the key associations likely to be triggered in a marketing setting and their relative strength, favorability, and uniqueness to consumers. Figure 5.2 displays a very simple mental map highlighting some brand beliefs for a hypothetical consumer for State Farm insurance.

Memory encoding describes how and where information gets into memory. The strength of the resulting association depends on how much we process the information at encoding (how much we think about it, for instance) and in what way. The more attention we pay to the meaning of information during encoding, the stronger the resulting associations in memory will be.30 Memory retrieval is the way information gets out of memory. The presence of other product information in memory can produce interference effects and cause us to either overlook or confuse new data. One marketing challenge in a category crowded with competitors is that consumers may mix up brands. Also, once information becomes stored in memory, its strength of association decays very slowly.

Information may be available in memory but not be accessible for recall without the proper retrieval cues or reminders. The effectiveness of retrieval cues is one reason marketing inside a store is so critical—product packaging and displays remind us of information already conveyed outside the store and become prime determinants of consumer decision making. Accessibility of a brand in memory is important for another reason: People talk about a brand when it is top-of-mind.31

The Consumer Buying Decision Process

Smart companies try to fully understand customers’ buying decision process—all the experiences in learning, choosing, using, and even disposing of a product. Figure 5.3 shows the five stages of the process: problem recognition, information search, evaluation of alternatives, purchase decision, and postpurchase behavior. Note that consumers don’t always pass through all five stages—they may skip or reverse some. The model provides a good frame of reference because it captures the full range of considerations that arise when a consumer faces a highly involving new purchase.

Problem Recognition

The buying process starts when the buyer recognizes a problem or need triggered by internal or external stimuli. With an internal stimulus, one of the person’s normal needs—hunger or thirst—rises to a threshold level and becomes a drive. A need can also be aroused by an external stimulus, such as seeing an ad. Marketers want to identify the circumstances that trigger a particular need by gathering information from a number of consumers. They can then develop marketing strategies that spark consumer interest.

Information Search

We can distinguish between two levels of engagement in the information search. The milder search state is called heightened attention, in which a person becomes more receptive to information about a product. At the next level, the person may enter an active information search: looking for reading material, asking friends, going online, and visiting stores to learn about the product.

Marketers must understand what type of information consumers seek—or are at least receptive to—at different times and places.32 Information sources for consumers can be categorized as personal (family, friends) commercial (ads, Web sites, salespeople, packaging, displays), public (mass media, social media), and experiential (handling, using the product). Although consumers receive the greatest amount of information about a product from commercial (marketer-dominated) sources, the most effective information often comes from personal or experiential sources or public sources that are independent authorities.33

By gathering information, the consumer learns about competing brands and their features. The first box in Figure 5.4 shows the total set of brands available. The individual consumer will come to know a subset of these, the awareness set. Only some, the consideration set, will meet initial buying criteria. As the consumer gathers more information, just the choice set will remain strong contenders. The consumer makes a final choice from these.34 Figure 5.4 shows that a company must get its brand into the prospect’s awareness, consideration, and choice sets and identify the other brands in the choice set to plan appropriate competitive appeals. In addition, it should identify the consumer’s information sources and evaluate their relative importance so it can prepare effective communications.

Be aware that search behavior can vary online, in part because of the manner in which product information is presented. For example, product alternatives may be presented in order of their predicted attractiveness for the consumer. Consumers may then choose not to search as extensively as they would otherwise.35

Evaluation of Alternatives

How does the consumer process competitive brand information and make a final value judgment? There are several processes, and the most current models see the consumer forming judgments largely on a conscious and rational basis.

Some basic concepts will help us understand consumer evaluation processes. First, the consumer is trying to satisfy a need. Second, the consumer is looking for certain benefits. Third, the consumer sees each product as a bundle of attributes with varying abilities to deliver the benefits. The attributes of interest vary by product—for example, the attributes buyers seek in a hotel might be location, atmosphere, and price. Consumers will pay the most attention to attributes that deliver the sought-after benefits. We can often segment the market according to attributes and benefits important to different consumer groups.

Through experience and learning, people acquire beliefs and attitudes, which in turn influence buying behavior. A belief is a descriptive thought that a person holds about something. Just as important are attitudes, a person’s enduring favorable or unfavorable evaluations, emotional feelings, and action tendencies toward some object or idea. People have attitudes toward almost everything: religion, clothes, music, or food. Because attitudes economize on energy and thought, they can be very difficult to change, which is why firms should try to fit their products into existing attitudes rather than try to change attitudes.

The consumer arrives at attitudes toward various brands through an attribute-evaluation procedure, developing a set of beliefs about where each brand stands on each attribute.36 The expectancy-value model of attitude formation posits that consumers evaluate products and services by Purchase Decision

In the evaluation stage, the consumer forms preferences among the brands in the choice set and may also form an intention to buy the most preferred brand. Even if consumers form brand evaluations, two general factors can intervene between the purchase intention and the purchase decision. The first factor is the attitudes of others. The influence of another person’s attitude depends on (1) the intensity of the other person’s negative attitude toward our preferred alternative and (2) our motivation to comply with the other person’s wishes.38 The more intense the other person’s negativism and the closer he or she is to us, the more we will adjust our purchase intention. The converse is also true.

The second factor is unanticipated situational factors that may erupt to change the purchase intention. Linda might lose her job, some other purchase might become more urgent, or a store salesperson may turn her off. Preferences and even purchase intentions are not completely reliable predictors of purchase behavior.

A consumer’s decision to modify, postpone, or avoid a purchase decision is heavily influenced by one or more types of perceived risk.39 For example, functional risk entails the product not performing to expectations; social risk entails embarrassment in front of others. The degree of perceived risk varies with the amount of money at stake, the amount of attribute uncertainty, and the level of consumer self-confidence. Marketers must understand the factors that provoke a feeling of risk in consumers and provide information and support to reduce it.

Postpurchase Behavior

After the purchase, the consumer might experience dissonance from noticing certain disquieting features or hearing favorable things about other brands and will be alert to information that supports his or her decision. Marketers must therefore monitor postpurchase satisfaction, postpurchase actions, and postpurchase product uses and disposal. A satisfied consumer is more likely to purchase the product again and will also tend to say good things about the brand to others. Dissatisfied consumers may abandon or return the product, take public action (by complaining to the company or complaining to others online), or take private actions (not buying the product or warning friends).40

Postpurchase communications to buyers have been shown to result in fewer product returns and order cancellations. Marketers should also monitor how buyers use and dispose of the product. A key driver of sales frequency is product consumption rate—the more quickly buyers consume a product, the sooner they may repurchase it. One strategy to speed replacement is to tie the act of replacing the product to a certain holiday, event, or time of year. Another strategy is to provide consumers with better information about (1) the time they first used the product or need to replace it or (2) its current level of performance. If consumers throw the product away, the marketer needs to know how they dispose of it, especially if—like electronic equipment—it can damage the environment.

Behavioral Decision Theory and Behavioral Economics

Consumers don’t always process information or make decisions in a deliberate, rational manner. One of the most active academic research areas in marketing over the past three decades has been behavioral decision theory (BDT). Behavioral decision theorists have identified many situations in which consumers make seemingly irrational choices. What such studies reinforce is that consumer behavior is very constructive and the context of decisions really matters. The work of researchers has also challenged predictions from economic theory and assumptions about rationality, leading to the emergence of the field of behavbehavioral economics.41 Here, we review some issues in two key areas: decision heuristics and framing.

Decision Heuristics

Consumers often take “mental shortcuts” called heuristics or rules of thumb in the decision process. In everyday decision making, when they forecast the likelihood of future outcomes or events, consumers may use one of these heuristics.

The availability heuristic—Consumers base their predictions on the quickness and ease with which a particular example of an outcome comes to mind. If an example comes to mind too easily, consumers might overestimate the likelihood of its happening. For example, a recent product failure may lead consumers to inflate the likelihood of a future product failure and make them more inclined to purchase a product warranty.

The representativeness heuristic—Consumers base their predictions on how representative or similar the outcome is to other examples. One reason package appearances may be so similar for different brands in the same product category is that marketers want their products to be seen as representative of the category as a whole.

The anchoring and adjustment heuristic—Consumers arrive at an initial judgment and then adjust it—sometimes only reluctantly—based on additional information. For services marketers, a strong first impression is critical to establishing a favorable anchor so subsequent experiences will be interpreted in a more favorable light.

Framing

Decision framing is the manner in which choices are presented to and seen by a decision maker. A $200 cell phone may not seem that expensive in the context of a set of $400 phones but may seem very expensive if other phones cost $50. Researchers have found that consumers use a form of framing called mental accounting when they handle their money, as a way of coding, categorizing, and evaluating financial outcomes of choices.42 The principles of mental accounting are derived in part from prospect theory, which maintains that consumers frame their decision alternatives in terms of gains and losses according to a value function. Consumers are generally loss-averse. They tend to overweight very low probabilities and underweight very high probabilities.

What is Organizational Buying?

Many marketers sell not to consumers but to organizational buyers. Frederick E. Webster Jr. and Yoram Wind define organizational buying as the decision-making process by which formal organizations establish the need for purchased products and services and identify, evaluate, and choose among alternative brands and suppliers.43 The business market differs from the consumer market in a number of ways.

The Business Market versus the Consumer Market

The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. Some of the major industries making up the business market are aerospace; agriculture, forestry, and fisheries; chemical; computer; construction; defense; energy; mining; manufacturing; construction; transportation; communication; public utilities; banking, finance, and insurance; distribution; and services. Table 5.1 shows 10 unique characteristics of business markets.

TABLE 5.1

As an example of the business market, consider the process of producing and selling a simple pair of shoes.44 Hide dealers must sell hides to tanners, who sell leather to shoe manufacturers, who in turn sell shoes to wholesalers. Wholesalers sell shoes to retailers, who finally sell them to consumers. Each party in the supply chain also buys other goods and services to support its operations.

Institutional and Government Markets

The overall business market includes institutional and government organizations in addition to profit-seeking companies. The institutional market consists of schools, hospitals, and other institutions that provide goods and services to people in their care. Many of these organizations have low budgets and captive clienteles. For example, hospitals must decide what quality of food to buy for patients. The objective is not profit because the food is part of the total service package; nor is cost minimization the sole objective because poor food will draw complaints and hurt the hospital’s reputation. The hospital must search for vendors whose quality meets or exceeds a certain minimum standard and whose prices are low.

In most countries, government organizations are major buyers of goods and services. The U.S. government now spends more than $500 billion a year—or roughly 14 percent of the federal budget—on private-sector contractors, making it the largest customer in the world.45 Government buyers typically require suppliers to submit bids and often award the contract to the low bidder, sometimes making allowance for superior quality or a reputation for on-time performance. Governments will also buy on a negotiated-contract basis, primarily in complex projects with major R&D costs and risks and those where there is little competition.

Business Buying Situations

The business buyer faces many decisions in making a purchase. How many depends on the complexity of the problem being solved, newness of the buying requirement, number of people involved, and time required. Three types of buying situations are the straight rebuy, modified rebuy, and new task.46

Straight rebuy. In a straight rebuy, the purchasing department reorders items like office supplies and bulk chemicals on a routine basis and chooses from suppliers on an approved list. The suppliers make an effort to maintain quality and often propose automatic reordering systems to save time. “Out-suppliers” attempt to offer something new or exploit dissatisfaction with a current supplier. Their goal is to get a small order and then enlarge their purchase share over time.

Modified rebuy. The buyer in a modified rebuy wants to change product specifications, prices, delivery requirements, or other terms. This usually requires additional participants on both sides. The in-suppliers become nervous and want to protect the account. The out-suppliers see an opportunity to propose a better offer to gain some business.

New task. A new-task purchaser buys a product or service for the first time (an office building, a new security system). The greater the cost or risk, the larger the number of participants, and the greater their information gathering—the longer the time to a decision.47

The business buyer makes the fewest decisions in the straight rebuy situation and the most in the new-task situation. Over time, new-buy situations become straight rebuys and routine purchase behavior. The buying process passes through several stages: awareness, interest, evaluation, trial, and adoption. Mass media can be most important during the awareness stage; salespeople often have the greatest impact at the interest stage; and technical sources can be most important during evaluation. Online selling efforts may be useful at all stages.

Many business buyers prefer to buy a total problem solution from one seller. Called systems buying, this practice originated with government purchases. In response, many sellers have adopted systems selling or a variant, systems contracting, in which one supplier provides the buyer with all MRO (maintenance, repair, and operating) supplies. This lowers procurement costs and allows the seller steady demand and reduced paperwork.

Participants in the Business Buying Process

Who buys the trillions of dollars’ worth of goods and services needed by business organizations? Purchasing agents are influential in straight-rebuy and modified-rebuy situations, whereas other employees are more influential in new-buy situations. Engineers are usually influential in selecting product components, and purchasing agents dominate in selecting suppliers.48

The Buying Center

Webster and Wind call the decision-making unit of a buying organization the buying center. It consists of “all those individuals and groups who participate in the purchasing decision-making process, who share some common goals and the risks arising from the decisions.”49 The buying center includes all organizational members who play any of these roles in the purchase decision process.

Initiators—Users or others in the organization who request that something be purchased.

Users—Those who will use the product or service. In many cases, the users initiate the buying proposal and help define the product requirements.

Influencers—People who influence the buying decision, often by helping define specifications and providing information for evaluating alternatives.

Deciders—People who decide on product requirements or on suppliers.

Approvers—People who authorize the proposed actions of deciders or buyers.

Buyers—People who have formal authority to select the supplier and arrange the purchase terms. Buyers may help shape product specifications, but they play their major role in selecting vendors and negotiating. In more complex purchases, buyers might include high-level managers.

Gatekeepers—People such as purchasing agents and receptionists who have the power to prevent sellers or information from reaching members of the buying center.

Several people can occupy a given role such as user or influencer, and one person may play multiple roles.50 A purchasing manager, for example, is often buyer, influencer, and gatekeeper simultaneously, deciding which sales reps can call on others in the organization, what budget and other constraints to place on the purchase, and which firm will actually get the business. Buying Center Influences

Buying centers usually include participants with differing interests, authority, status, susceptibility to persuasion, and sometimes very different decision criteria. Engineers may want to maximize product performance; production people may want ease of use and reliability of supply; financial staff focus on the economics of the purchase; purchasing may be concerned with operating and replacement costs.

Business buyers also have personal motivations, perceptions, and preferences influenced by their age, income, education, job position, personality, attitudes toward risk, and culture. Webster cautions that ultimately individuals, not organizations, make purchasing decisions.51 Individuals are motivated by their own needs and perceptions in attempting to maximize the organizational rewards they earn. But organizational needs legitimate the buying process and its outcomes.

Targeting Firms and Buying Centers

Successful business-to-business marketing requires that business marketers know which types of companies to focus on in their selling efforts, as well as whom to concentrate on within the buying centers in those organizations. Finding the market segments with the greatest growth prospects, most profitable customers, and most promising opportunities for the firm is crucial. A slow-growing economy has put a stranglehold on large corporations’ purchasing, making small and midsize business markets more attractive for suppliers, as discussed in “Marketing Insight: Big Sales to Small Businesses.”

marketing insight

Big Sales to Small Businesses

The Small Business Administration (SBA) defines small businesses as those with fewer than 500 employees for most mining and manufacturing industries and $7 million in annual receipts for most nonmanufacturing industries. Small and midsize businesses present huge marketing opportunities and huge challenges. The market is large but fragmented by industry, size, and number of years in operation. Here are some guidelines for marketing to small businesses:

Don’t lump small and midsize businesses together. There’s a big gap between $1 million in revenue and $50 million or between a start-up with 10 employees and a mature business with 100 employees. IBM distinguishes its offerings to small and medium-sized businesses on its common Web site for the two.

 Do keep it simple. Offer one supplier point of contact for all service problems or one bill for all services and products. AT&T serves millions of businesses with fewer than 100 employees with bundles that include Internet, local phone, long distance phone, data management, business networking, Web hosting, and teleconferencing.

 Do use the Internet. Hewlett-Packard found that time-strapped small-business decision makers prefer to buy, or at least research, purchases online. Its site therefore features extensive advertising, direct mail, e-mail campaigns, catalogs, and events.

 Don’t forget about direct contact. Even if a small business owner’s first point of contact is via the Internet, you still need to be available by phone or in person.

 Do provide support after the sale. Small businesses want partners, not pitchmen, and expect service and commitment.

 Do your homework. The realities of small or midsize business management are different from those of a large corporation, so understand what target customers need and how they prefer to buy.

Stages in the Business Buying Process

The business buying-decision process includes eight stages called buyphases, as identified by Patrick J. Robinson and his associates, in the buygrid framework (see Table 5.2).53 In modified-rebuy or straight-rebuy situations, some stages are compressed or bypassed. For example, the buyer normally has a favorite supplier or a ranked list of suppliers and can skip the search and proposal solicitation stages. Here are some important considerations in each of the eight stages.

Problem Recognition

The buying process begins when someone in the company recognizes a problem or need that can be met by acquiring a good or service. The recognition can be triggered by internal or external stimuli. The internal stimulus might be a decision to develop a new product that requires new equipment and materials or a machine that requires new parts. Externally, the buyer may get new ideas at a trade show, see an ad, receive an e-mail, read a blog, or receive a call from a sales representative who offers a better product or a lower price. Business marketers can stimulate problem recognition by direct marketing in many different ways.

General Need Description and Product Specification

Next, the buyer determines the needed item’s general characteristics and required quantity. For standard items, this is simple. For complex items, the buyer will work with others to define characteristics such as reliability, durability, or price. Business marketers can help by describing how their products meet or even exceed the buyer’s needs.

The buying organization now develops the item’s technical specifications. Often, the company will assign a product-value-analysis engineering team to the project. Product value analysis (PVA) is an approach to cost reduction that studies whether components can be redesigned, standardized, or made by cheaper methods of production without adversely affecting product performance. The PVA team will identify overdesigned components, for instance, that last longer than the product itself. Suppliers can use PVA as a tool for positioning themselves to win an account.

Supplier Search

The buyer next tries to identify the most appropriate suppliers through trade directories, contacts with other companies, trade advertisements, trade shows, and the Internet. Companies that purchase online are utilizing electronic marketplaces in several forms (see Table 5.3). Web sites are organized around two types of e-hubs: vertical hubs centered on industries (plastics, steel, chemicals, paper) and functional hubs (logistics, media buying, advertising, energy management).

Moving into e-procurement means more than acquiring software; it requires changing purchasing strategy and structure. However, the benefits are many. Aggregating purchasing across multiple departments yields larger, centrally negotiated volume discounts, a smaller purchasing staff, and less buying of substandard goods from outside the approved list of suppliers.

The supplier’s task is to ensure it is considered when customers are—or could be—in the market and searching for a supplier. Marketing must work with sales to define what makes a “sales ready” prospect and send the right messages via sales calls, trade shows, online activities, PR, events, direct mail, and referrals. After evaluating each company, the buyer will end up with a short list of qualified suppliers.

Proposal Solicitation

The buyer next invites qualified suppliers to submit written proposals. After evaluating them, the buyer will invite a few suppliers to make formal presentations. Business marketers must be skilled in researching, writing, and presenting proposals as marketing documents that describe value and benefits in customer terms. Oral presentations must inspire confidence and position the company’s capabilities and resources so they stand out from the competition.

Supplier Selection

Before selecting a supplier, members of the buying center will specify and rank desired supplier attributes. To develop compelling value propositions, business marketers need to better understand how these business buyers arrive at their valuations.54 Further, despite moves toward strategic sourcing and partnering, business buyers still spend a lot of time negotiating price. Suppliers can counter requests for lower price in a number of ways. They may be able to show that their product’s life-cycle cost is lower than for competitors’ products or cite the value of the services the buyer now receives, especially if it is superior to that offered by competitors.55 Service support and personal interactions, as well as a supplier’s know-how and ability to improve customers’ time to market, can be useful differentiators in achieving key-supplier status.56

Order-Routine Specification

After selecting suppliers, the buyer negotiates the final order, listing the technical specifications, the quantity needed, the delivery time, warranties, and so on. For maintenance, repair, and operating items, buyers are moving toward blanket contracts under which the supplier promises to resupply the buyer as needed, at agreed-upon prices, over a specified period. Because the seller holds the stock, blanket contracts are sometimes called stockless purchase plans. These long-term relationships make it difficult for out-suppliers to break in unless the buyer becomes dissatisfied.

Companies that fear a shortage of key materials are willing to buy and hold large inventories. They will sign long-term contracts with suppliers to ensure a steady flow of materials. Some companies go further and shift the ordering responsibility to their suppliers, using systems called vendor-managed inventory. These suppliers are privy to the customer’s inventory levels and take responsibility for continuous replenishment programs.

Performance Review

The business buyer periodically reviews the performance of the chosen supplier(s) using one of three methods. The buyer may contact end users and ask for their evaluations, rate the supplier on several criteria using a weighted-score method, or aggregate the cost of poor performance to come up with adjusted costs of purchase, including price. This performance review may lead the buyer to continue, modify, or end a supplier relationship.

Managing Business-to-Business Customer Relationships

Business suppliers and customers are exploring different ways to manage their relationships.57 One key aspect of strong customer relationships between businesses is the concept of vertical coordination.

The Benefits of Vertical Coordination

Much research has advocated greater vertical coordination between buying partners and sellers so they can transcend merely transacting and instead create more value for both parties.58

Building trust is a prerequisite to enjoying healthy long-term relationships. A number of forces influence the development of a relationship between business partners, including availability of alternatives, importance of supply, complexity of supply, and supply market dynamism. Based on these we can classify buyer–supplier relationships into eight categories:59

Basic buying and selling—Simple, routine exchanges with moderate levels of cooperation and information exchange.

Bare bones—These relationships require more adaptation by the seller and less cooperation and information exchange.

Contractual transaction—Defined by contract, these generally have low levels of trust, cooperation, and interaction.

Customer supply—In this traditional supply situation, competition rather than cooperation is the dominant form of governance.

Cooperative systems—Participants are united in operational ways, but neither demonstrates structural commitment through legal means or adaptation.

Collaborative—Much trust and commitment through collaboration can lead to true partnership.

Mutually adaptive—Buyers and sellers make many relationship-specific adaptations, but without necessarily achieving strong trust or cooperation.

Customer is king—In this close, cooperative relationship, the seller adapts to meet the customer’s needs without expecting much adaptation or change in exchange.

Risks and Opportunism in Business Relationships

Establishing a customer–supplier relationship creates tension between safeguarding (ensuring predictable solutions) and adapting (allowing for flexibility for unanticipated events). Vertical coordination can facilitate stronger customer–seller ties but may also increase the risk to the customer’s and supplier’s specific investments.60 Specific investments are expenditures tailored to a particular company and value chain partner (investments in company-specific training, equipment, and operating procedures or systems).61 They help firms grow profits and achieve their positioning.62

When buyers cannot easily monitor supplier performance, the supplier might not deliver the expected value. Opportunism is “some form of cheating or undersupply relative to an implicit or explicit contract.”63 It may entail self-serving violation of contractual agreements or an unwillingness to adapt to changing circumstances in satisfying contractual obligations. Opportunism is a concern because firms must devote resources to control and monitoring that would otherwise be allocated to more productive purposes. Contracts may become inadequate to govern supplier transactions when supplier opportunism becomes difficult to detect, when firms make specific investments in assets they cannot use elsewhere, and when contingencies are harder to anticipate. When a supplier has a good reputation, it is more likely to avoid opportunism to protect this valuable intangible asset.