Consumer and Organisational Behavior Research Paper

Consumer and Organisational Buyer Behaviour

Much of the basics of brand loyalty seem to stem from research conducted initially by the Chicago Tribune in the late 1940s and early 1950s, based on consumer diary panel data that recorded consumer household purchases. Initially reported in Advertising Age in a series of articles in 1952-1953, that data was subsequently published in the Harvard Business Review in 1956. All this coincided with the work on market segmentation prevalent at the time, starting first with Twedt’s work on the “heavy-half” theory and progressing through Haley’s “benefit segmentation.” Thus, most of the early work in customer or brand loyalty was focused primarily on how customers purchased or “behaved” in the marketplace.

By the mid 1960s, much of the research on brand loyalty focused on the economics of information, i.e., the cost and ability of consumers to search for information about alternatives and to understand brand choices. Farley’s (1964) work on “Brand-Loyalty and the Economics of Information” is an excellent example of that stream of work. In the early 1970s, Jacoby and Kyner (1973) raised the issue of brand loyalty versus repeat purchasing behavior. They suggested that psychological factors could help explain why loyalty occurred.

 

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In 1978, Jacoby and Chestnut published what has become the base of our understanding regarding how consumers relate, decide, and purchase brands exhibiting customer loyalty in their book, Brand Loyalty: Measurement and Management. Much of the theory base for brand loyalty stems from attempts to model basic consumer behavior, that is, how consumers evaluate alternatives and make purchase decisions. Howard (1963) and Howard and Sheth (1969) developed extensive models to explain the process. Their work has often been used as a way to explain why and how customers make purchase decisions and become brand loyal, switchers, or something else.

In the 1980s, with the availability of supermarket scanner data, the research focus shifted to consumer choice and behavior modeling, again, using primarily observable consumer purchase behavior. Goading and Little (1983) approached the subject as alternative choice models available to consumers. During that same period, direct marketers and catalogers began to develop very sophisticated approaches using regression, CHAID, CART, and other statistical techniques. There, the focus was almost entirely on observable consumer behaviors in the form of longitudinal purchase occasions. This was followed by Jones and Sasser’s (1995) and Reichheld’s (1996) seminal articles on the economic value of customer loyalty in the 1990s. Reichheld’s text “The Loyalty Effect” (1996) has set the direction and tone for much of the loyalty thinking over the past several years.

As illustrated above, much of the brand or customer loyalty concepts have been developed from the marketer’s view (the economic value of customer loyalty to the firm and how that loyalty might be managed). This has used analyses of historical consumer purchase behavioral data.

Unfortunately, less work appears to have been done on the consumer side, asking why consumers become and remain loyal to brands. Additionally, most of the research and analysis has been conducted in a fairly traditional marketplace where customers generally had limited choices or where their alternatives were restricted by time or geography. Given the changes occurring in marketplaces around the world, particularly in the rapidly developing electronically driven markets of the United States, United Kingdom, Scandinavia, Australia, Japan, and the like, it is time to revisit what is known about the consumer view of brand or customer loyalty.

The Interactive marketplace is defined by the relationships between buyer and seller. While relationships have always existed in any type of buyer-seller situation, Interactive marketplace relationships change from mass or arms-length to interpersonal. There is interaction between the buyer, the seller, and all the systems and functions that link them.

In the Product-Driven and Distribution-Driven marketplaces, the flow of these relationships has always been outbound only. In other words, the marketer/channel drove the elements used to create the relationship. The marketer offered a relationship to the customer on the marketer’s terms. That is, the marketer controlled most of the elements in the relationships and the customer could either accept or reject the relationship based on those elements. Because the marketer or channel always had more information technology, the consumer was generally at a disadvantage. He or she could buy the brand, buy from a competitor, or do without. Thus, with restricted marketplace access and limited information, the advantage was generally on the side of the marketer or channel.

In the Product- and Distribution-Driven marketplaces, there were limited feedback loops available to the marketer. The marketer generally knew little about the needs or desires of the customer and even less about the relationship between the customer and the brand. Thus, the marketer tended to focus on product developments, price reductions, improved distribution systems, or perceived improvement in value, all communicated to customers and prospects through mass media systems.

In a Customer-Driven marketplace, ongoing interaction occurs between buyer and seller. In this type of relationship, give and take exists, with continual balancing of inputs to the relationship and the outcomes from those relationships as well. Thus, we believe that customer or brand relationships in the future, particularly in the Interactive marketplace, will consist of shared values or reciprocity between the buyer and the seller.

If the customer does not value the offering of the marketer at the price asked, he or she has three choices: (a) attempt to negotiate the price or value with the seller, (b) find an alternative supplier, or (c) do without the value of the product or service. The same holds true of the marketer. If the consumer does not value the bundle at the price asked, the marketer can (a) negotiate with the consumer, (b) seek another buyer, or (c) change the value bundle of the product or service to attract other customers. Assuming the value bundle created by the marketer meets the needs and value of the consumer, the consumer would likely continue to provide a profitable revenue stream to the brand. Thus, brand or customer loyalty should result. As long as the equations for the two parties in terms of inputs and outputs are in balance, then customer or brand loyalty on both sides should develop and continue.

The above description of brand loyalty sounds similar to the basis on which customer or brand loyalty has been considered in the past (i.e., acceptable value on each side, based on cost results, in customer or brand loyalty). Reciprocity has, however, one basic difference in our concept of brand loyalty and those traditionally used. Historically, marketers have attempted to maximize returns from customers. That brought about the traditional “caveat emptor” or “let the buyer beware” approach to the marketplace. Since the marketer believed its product or service, or the channel believed its location or facility was all that mattered, little interest remained in developing or maintaining on-going customer relationships. The shift of marketplace power, however, fueled the heightened interest in relationship marketing and customer relationship management (CRM).

In an interpersonal relationship the focus is on inputs and outputs by the two or more parties involved in the relationship. That is, one party puts something into the relationship in order to get something back. It is this on-going social interaction with inputs and outputs, investments and rewards that we believe define customer and consumer and brand relationships in the Interactive marketplace of today and tomorrow. Thus, we believe a social psychology-based approach to brand-customer relationships provides a sound foundation for our theory. Further, we believe the idea of shared value might be the appropriate way to model the theory.

The brand loyalty theory served as the analytic platform to determine the current value of each customer to the company and the current value of the service package to each customer. Four segments were identified from the interviews of four presumable ‘average buyers’:

Segment 1 (Low Value/Noncompatible): These customers were a poor fit for the company’s offering because their entry-level skill set did not match the relatively high-end initial services offered by the company. In order to deliver on the value proposition, the company was investing additional trainers and training time in each of these customers. As a result, profitability was relatively low for this group.

Segment 2 (Low Value/Compatible): These customers were much closer to having the entry-level skills necessary to take full advantage of the company’s offerings and, thus, were more compatible. This segment still required additional resources on the part of the company to deliver the service. Pricing to this segment, however, did not reflect this additional “value.” Thus, the segment’s profitability to the company was relatively low.

Segment 3 (High Value/Compatible): The most “equitable” segment--customers were highly satisfied with the service they were receiving, returned year after year, and were a significant source of new business based on their advocacy. The company derived their greatest profit margin from these customers.

Segment 4 (High Value/Noncompatible): This segment represented the highest entry-skill level. As a result, the company’s offerings were often under-performing to this group. At the same time, this group was willing to pay a premium for what it perceived as “high level training to highly skilled participants.” Thus, while initially profitable, they often became dissatisfied and left.

Based on the analysis and additional diagnostics relative to the needs, mindset, and environment of the segments, the company may deploy a two-pronged customer-brand value strategy:

Brand-building: Modify the curriculum being offered to Segment 4 to become more compatible with their needs. While this involved some additional resource investment, the technology investment already made would help defray targeting, qualification, and service-delivery costs. In addition, it was felt that this group would pay an additional premium for a more compatible offering.

Business-building: By continuing to invest in Segment 2, the company could effectively migrate this segment to the High Value/Compatible quadrant by bundling some of the higher margin offerings with the lower margin, introductory offerings. Plans may also be made for leveraging the new technology platform to better communicate with these valuable Segment 3 customers and thus increase retention.

In today’s “marketspace,” the consumer is gaining more power. Consumer inputs are still price paid and effort to obtain, but competition and new distribution systems are driving price down and making access to both products and the information needed to compare alternatives ever easier to obtain. In this “interactive” marketplace, many of our traditional approaches and concepts are simply no longer relevant. In addition, consumers are becoming increasingly willing to provide personal information as an “input” to the relationship.

In order to balance the equity of the relationship, it appears manufacturers and retailers are adding additional inputs like reward programs and “memberships” to compensate consumers for their information and their loyalty. The concern is that consumers are becoming more demanding in their loyalty requirements as they gain more power. Thus, the seller faces ever-increasing demand to add “value” to the relationship to keep customers satisfied.

The theory of brand loyalty explains the new focus on customer relationship marketing or CRM quite well. If the two sides are to be balanced in the creation of a strong relationship, there should be some “profit” for the consumer as well as the manufacturer. Humby (1998) illustrates the distinction between consumer “profit” and transaction equity quite well in his work done with the U.K. retail giant Tesco. He describes a distinction between customers who are targeted for reward programs that essentially represent profit-sharing with the consumer (“Thank you, Tesco shopper, for continuing to do what we want you to do”) and incentive programs (i.e., equitable exchanges for the execution of a desired behavior). “We’ll reward you, Tesco shopper, if you will change your behavior in our relationship.” (Humby, 1998)

Assuming Tesco has segmented and targeted customers in a manner similar to that described here, our theory would suggest that Tesco’s reward program maintains an equitable balance with its very best customers. No ad ditional “inputs” are expected on the part of the customer. If, in fact, these “loyal” customers do invest additional inputs (e.g., recommending the store to others), Tesco recognizes that input and offers a “fair value” exchange for advocacy (e.g., a finder’s fee or other reward). (Humby, 1998)

The incentive program, on the other hand, is intended to directly modify behavior. Tesco offers the customer or prospect a motivation to change what they are currently doing. What should be kept in mind is that such incentives will continue to be necessary until the customer experiences other “value” as a result of changing stores or shopping behaviors and, thus, no longer requires the incentive to buy from Tesco. (Humby, 1998) The value exchange moves to the equilibrium state where both parties benefit from the new behaviors.

Applying the new theory of customer loyalty in the interactive marketplace is more than just an intellectual or academic exercise. We feel the theory can be actively applied to the creation and management of many marketing activities for all types of organizations. Through effective measurement, analysis, and monitoring of the customer-brand relationship definition of reciprocal brand loyalty, brand management can be more conscious of the content of their marketing communications, their promotion and loyalty programs, and their customer-level investments.

The focus of today’s marketers on relationship marketing and customer relationship management (CRM) requires an updated version of the way brand loyalty is conceptualized and measured. The brand equity theory described here recognizes the dynamic nature of a mutual input/outcomes exchange between buyer and seller. As a strategic platform, it identifies and sizes opportunities for business-building and brand-building efforts. As a value metric, it provides a tool for measuring and monitoring the development of brand loyalty among a firm’s customers and prospects, as well as determining the return-on-customer-investments (ROCI). Finally, as a segmentation scheme, it provides a structure for the continuous recognition of customers based on the strength and nature of their relationship with the brand.

As with any theory, this approach to a concept of developing and defining customer and brand loyalty needs critique, expansion, and most of all, marketplace applications. The researchers are currently involved in developing and refining these initial thoughts on distributive justice, social equity, and customer-brand relationships as they can be used to define, measure, and understand customer brand loyalty in the marketplace.

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