Marketing Management 4. Czinkota and Kotabe: Understanding the Buyer

Understanding Customers

Perceptions in Marketing 1. Major Issues 1. Marketing Myopia (Levitt): when marketers think that their own perceptions represent customer perceptions as well. 2. Communicating product benefits: helping customers to develop their own opinions. That’s why advertising is seen by many as the narrowly defined “marketing” 3. Perceptions are highly selective and, due to that selectivity, firms may lose a great many potential customers 4. Customers may attach high perceived values to products that do not provide such real values

Stimulus - a television commercial Loss of potential customers who didn’t see or hear the ad Loss of potential customers who didn’t pay attention Loss of potential customers who misunderstood the ad Loss of potential customers who didn’t remember the ad SELECTIVE EXPOSURE Consumer is exposed to the ad or not. SELECTIVE ATTENTION Paying attention to the ad SELECTIVE COMPREHENSION Understanding the ad SELECTIVE RETENTION Remembering the ad? Perceptions in Marketing 2. Selectivity

Perceptions in Marketing 3. Improving Perceived Value Customer-focus: providing product features that are communicated and perceived by customers as “benefits” Ex: your new fridge will easily hold a watermelon… Benefits = Product + Service + Brand benefits Customer Value = Customer Benefits / Purchase Costs Perceived Value = Perceived Benefits / Perceived Costs

Estimating Customer Perceptions: Relative Value (RV)

The Meaning of Relative Value (RV) Positive RV: strong competitive position for the product / brand Around Zero RV: above-average benefits are offset by above-average price or vice versa Negative RV: weak competitive position for the product / brand Comparing RVs with competitors: Value Maps Consumer may also seek and obtain this kind of information easily (ex: Consumer Reports)

A VALUE-MAP for TOASTERS

Problem or need recognition Information search Evaluation of alternatives Purchase decision Postpurchase behavior Buying Process

Consumer recognizes a need Ex: Consumer recognizes that he needs to upgrade his computer. He wants faster processing, more memory, and several other features (benefits). Problem or need recognition Buying Process

Consumer seeks out information to fulfill the need. Ex: Consumer searches through PC World and other magazines for information on computers. Information Search

Buying Process Consumer evaluates the options that may fulfill his needs. Ex: Consumer selects several different brands and models of computers to consider and to evaluate them. Evaluation of Alternatives

Buying Process Consumer decides which product or brand to purchase. Ex: Consumer decides to buy a Dell Laptop on the Internet. Purchase Decision

Step 3 and 4: How Do Consumers Make the Actual Decision? (A) Compensatory process: evaluating combinations of product benefits (compensating - / with +) (B) Non-Compensatory processes: 1. Conjunctive rule: all benefits must exceed a minimum level of expectations 2. Disjunctive rule: at least one, key benefit must exceed a minimum level of expectations 3. Lexicographic rule: ranking the benefits and buying the best brand at the most important benefits, if there is a tie, go to the 2 nd benefit…etc. 4. Elimination rule: eliminating brands that do not make a cutoff level at the most important benefit, then go to the 2nd most important benefits…etc.

Buying Process Consumer will use the product and evaluate his or her decision. Cognitive dissonance: post-purchase tension resulting from a poor decision. We tend to justify our decisions and seek supportive information only Ex: Consumer decides Dell brand was a good choice. Post-Purchase Behavior

Customer Retention Tree: What % of Our Customers Will Buy Our Product Again? Group 1 Group 2 Group 3

Customer Retention Rate (CRR): An Example Total current customer base: 100,000 Satisfied: 70%100 x.70 = 70,000 retained Dissatisfied: 30%100 x.30 = 30,000 (unknown) Dissatisfied (30%) + Complained (10%) + Retained (80%): That is =.30 x.10 x.80 =.024 = 2.4% of the total.024 x 100,000 = 2,400 customers also retained Dissatisfied (30%) + Did Not Complain (90%) + Retained (10%) That is =.30 x.90 x.10 =.027 = 2.7% of the total.027 x 100,000 = 2,700 customers also retained Total customers retained: 70, , ,700 = 75,100 customers CUSTOMER RETENTION RATE: CR = 75,100 / 100,000 =.751 The CRR is 75.1%

Customer Life Expectancy (N) Customers are lifetime partners in relationship marketing Customer Life: The duration of business relationship with an average customer. N = 1 / (1 – CRR) The length of “N” is strongly influenced by the product category (e.g., bananas vs. computer games vs. medicine) Higher customer satisfaction  higher CRR  higher customer life expectancy (N) In the previous example: CRR =.751 N = 1 / (1 - CR) = 1 / ( ) = 1/.252 = 4 years When the given firm is able to improve its CRR up to 80% CRR =.80 N = 1 / (1 - CR) = 1 / (1-.80) = 1 /.2 = 5 years So, a 5% improvement in the CRR results in a 20% increase in the average customer life expectancy

Customer Lifetime Value (CLV) CLV shows the current value of average cash flows from an average customer during the average length of a business relationship Interaction of Finance – Accounting - Marketing Determines how much a firm could invest in individual customer relationships Note: Spinners are customers who take advantage of favorable business deals without any brand loyalty at all. Firms want to minimize marketing expenditures on “spinners (e.g., phone companies)

Estimating CLV 1. Present Value of average sales revenues per customer ($) 2. Lifetime (N) 3. Average profit margin of the company (%) 4. CLV = $ x N x % 5. Rough estimate, but useful in prevention of overspending on customers 6. Note: the average revenues are to be counted at their current value, that means using the Present Value formulas from Finance