Markets are the focal point for all marketing decisions. A market is people or organizations with wants to satisfy, money to spend, and the willingness to spend it. Organizations closely monitor markets in order to adjust to changing tastes and preferences. For example, in 1995 the U.S. Internet market was described as 67% male, 80% age 18-44, 51% with household incomes $35,000 to $75,000, 19% employed in sales and 15% employed in engineering. (See Defining the Internet Opportunity, O'Reilly & Associates, 10/1/95.) In 1999, the U.S. Internet market more closely resembles the adult demographics of the United States. (Also, see Statistical Agencies – International.) Since the compositions of markets are constantly changing, marketers must understand buyer behavior -- why people buy or don’t buy products. To accommodate differences in consumers across nations, marketers need to gain a strong understanding of consumer behavior before adjusting marketing decisions for different countries. Successful organizations know their markets, know how to reach their markets, and know when wants change and adjust their marketing efforts accordingly.
Market Segmentation
In order to identify its potential buyers, organizations choose to segment or not to segment a market. An organization that does not segment chooses a mass-market -- the same product is offered to all customers. Henry Ford’s Model T is the classic example of mass marketing. Marketers segment (divide) a market because different groups within the market have different needs. To be successful, the chosen segment must be identifiable and measurable, profitable, economically accessible, and exhibit a relatively homogeneous response function to the marketing efforts designed for it. Marketers focus their efforts on target markets, or groups of customers with similar needs, rather than on the entire market. (Many of the models in advertisements are chosen to represent the target market.) The marketing concept holds that marketing will be more effective if it is tailored to the unique needs of each target market. For example, even Coca-Cola is adapted to each country’s local tastes and conditions, by being less sweet or less carbonated in certain countries.
Two broad segments of markets are consumer and organizational. Consumer markets can be distinguished from organizational markets by answering the following questions. WHO bought it? WHY did they buy it? Consumer markets are individuals and households that buy products for personal consumption. Organizational markets buy products for further processing or for use in their organization. They refer to marketers as suppliers or vendors. Most people are surprised to learn that organizational markets account for a significant percentage of all purchases made and are much larger in terms of dollars than consumer markets. Some marketers focus only on organizational markets. However, marketers can increase their sales by serving both organizational markets and consumer markets. The Seattle Times reported in the February 7, 1999 edition that Microsoft plans to reorganize its business into four markets – the Internet, corporations, home offices or telecommuters, and developers or software programmers. Another example of serving the organizational and consumer is the Hummer.
Consumer markets
Consumer markets are individuals and households that buy products for personal consumption. Five categories are commonly used to segment the consumer market -- geographic, demographic, psychographic, benefits, and usage. Geographic segmentation divides the market based upon the geographic distribution of population (regional, urban, suburban, and rural). Demographics are the vital statistics that describe a population (gender, age, income, family size, education, social class, and ethnicity). Psychographic segmentation involves examining attributes related to how a person thinks, feels, and behaves (personality, lifestyles, and values). A market can be segmented based on the benefits desired from the product. A classic example is brands of toothpaste designed to satisfy different benefits sought by consumers (no cavities, whiter teeth, fresh breath, and sex appeal). Another product-related basis for segmentation is the product usage rates of consumers (nonusers, light users, medium users, and heavy users). Marketers are very interested in the “heavy half” of the users of a product. Heavy users typically account for 80 percent of total purchases. (A classic example is young, male beer drinkers.) In general, marketers use several of these variables to describe their markets. For example, researchers at the wireless phone industry’s largest convention held the week of February 8, 1999 in New Orleans described prime wireless customers as predominately men, upper-income, business users, and heavy users. (Source: Survey of 803 wireless users by Peter D. Hart Research Associates, Inc.) The complex interplay of social and psychological factors, as well as the act of buying a product influences consumer purchases.
Social Factors
Social factors influence buying decisions. Culture is the complex of symbols and artifacts created by a society and handed down from generation to generation as determinants and regulators of human behavior. For example, a child in the U.S. is exposed to the cultural values of achievement and success, activity and involvement, efficiency and practicality, progress, material comfort, individualism, freedom, humanitarianism, youthfulness, and fitness and health. Cultural values vary from country to country. Marketers need to pay special attention to cultural differences when selling to other countries.
A culture contains several subcultures, or groups that exhibit characteristic behavior pattern sufficient to distinguish them from other groups within the same culture. (Examples of subcultures include Hispanic, African-American, and Asian American within the U.S. population). In addition to factors such as race, subcultures may be based upon nationality, religion and urban-rural identification. When a subculture has specific purchasing patterns, marketers need to understand how best to serve their needs.
Buying a behavior is influenced by social classes. A social class is a relatively permanent
and ordered division in a society whose members share similar values, interests, and
behaviors. Variables that define social class include education, occupation, and
type of residential neighborhood. It is interesting to note that income is not one of the
determining factors. Different social classes respond differently to a seller’s
marketing program. In the U.S., social scientists have identified seven American social
classes.
a) Upper-uppers (less than 1 percent) are the social elite who have inherited wealth and have well-known family backgrounds. They tend to be conservative and often serve as reference groups for others. They live in large homes in exclusive neighborhoods and buy expensive products.
b) Lower-uppers (about 2 percent) are “the new rich,” having earned their wealth. Much of the time, they have more money than the upper uppers and want to be accepted by the upper uppers.
c) Upper-middles (12 percent) are primarily “career” oriented business and professional people. They are well educated, have a strong desire for success, and encourage their children to do well. They are joiners and civic minded. They buy products that signify status and belong to private clubs.
d) Middle class (32 percent) is made up of average-pay-white-collar and blue-collar workers who live on “the better side of town” and try to “do the proper things.” Their homes are well cared-for and they buy products that are popular.
e) Working class (38 percent) consists of those who lead a “working class lifestyle.” They are tied closely to family for support and have a local orientation. The working class maintains sharper sex role divisions and stereotyping. They are concerned about security, live in smaller homes, drive larger cars, and watch bigger television sets than the middle class.
f) Upper-lowers (9 percent) or “working poor” work and are not on welfare. However, their living standard is just above the poverty line. They poorly educated and perform unskilled labor for low pay, but strive for a higher class.
g) Lower-lowers (7 percent) or “welfare poor” are on welfare, visibly poverty stricken and usually out of work or have the “dirtiest jobs.”
Groups with which a consumer has social interaction or aspires to be a member of influence consumer behavior. A reference group is people who influence one’s attitudes, values, and behavior. Each group has its own standards of behavior and members share these values and are expected to conform to the group’s behavioral patterns. Consumers are more likely to be influenced by word-of-mouth information from reference group members than by advertising or salespeople. Reference group influence tends to be strongest when the product is conspicuously consumed (others can clearly see the brand). For example, reference group is stronger for purchase of clothing than it would be for purchase of canned peaches. Other people see your clothes, but not what brand of peaches that you are eating. An aspirational group is one to which an individual hopes to belong. All reference groups have opinion leaders – people whom, because of their special skills, knowledge, personality, or other characteristics, exert influence on others. Opinion leaders drive the decision of many others and are important for marketers to identify. An example is the use of celebrities and athletes in advertising.
The most important reference group is the family, a group of people related by blood, marriage, or adoption living together in a household. A household relates to a dwelling rather than a relationship. It could consist of a single person, a family, or any group of unrelated persons who occupy a housing unit. Marketers are interested in the buying behavior of the household as a unit. Who influences the buying decision? Who makes the buying decision? Who makes the actual purchase? Who uses the product? It is interesting to note that children are assuming greater household responsibility for purchases.
Psychological Factors
The four major psychological factors influencing buying choices are motivation, perception, learning, and personality. All behavior starts with a recognized need. A need is anything that is required, desired, or useful. A want is a conscious recognition of a need. A need has to be sufficiently aroused to a level of intensity before it becomes a motive and drives an individual to action.
Abraham Maslow developed a hierarchy of needs to
describe how people seek to satisfy their needs. According to Maslow, people have
five levels of needs, with the most basic need emerging first and the most sophisticated
need last. People move up the hierarchy one level at a time. Gratified needs lose their
strength and the next level of needs is activated. As basic or lower-level needs are
satisfied, higher-level needs become operative. A satisfied need is not a motivator. The
most powerful need is the one that has not been satisfied. Abraham Maslow first presented
the five-tier hierarchy in 1942 to a psychoanalytic society and published it in 1954 in Motivation
and Personality (New York: Harper and Row).
Level I - Physiological needs are the most basic human needs. They include food, water, and comfort. Food satisfies hunger.
Level II - Safety needs are the desires for security and stability, to feel safe from harm. Food that has been properly sealed and dated for freshness can satisfy safety needs.
Level III - Social needs are the desires for affiliation. They include friendship and belonging. Eating with others can satisfy social needs.
Level IV - Esteem needs are the desires for self-respect http://www.queendom.com/selfest.html and respect or recognition from others. Eating “low fat” and “heart healthy” foods can satisfy esteem needs.
Level V - Self-actualization needs are the desires for self-fulfillment and the realization of the individual's full potential. Preparing and cooking a gourmet meal can satisfy self-actualization needs.
Perception is the process of selecting, organizing, and interpreting information to
form a meaningful picture of the world. Selectivity limits perceptions. What we perceive
depends on our experiences. Selective attention means that people perceive
only a subset of the information to which they are exposed. Selective distortion
means that consumers tend to interpret information to support their existing beliefs and
attitudes. Selective retention means that consumers only retain part of the
information they have selectively perceived. As a result of selective attention,
marketers seek ways to gain the consumer’s attention. Also, ads should match
the consumer’s beliefs. In general, an ad must be repeated three times before
the consumer will notice it.
Since selective exposure, distortion, and retention filter marketer’s messages, consumers spend relatively little time and effort in processing advertisements. As a result, marketers must work very hard to attract the consumer’s attention. Advertisers became interested in subliminal perception in 1957. (See Advertising Age, Vol 37, page 127, September 16, 1957.) Subliminal messages are presentations of stimuli at a rate below the threshold of conscious awareness that may be perceived unconsciously. These messages include flashing phrases and logos, rapid scene changes, pulsating music and sounds, and embedded symbols in print advertisements. Despite years of research showing that subliminal messages have little or no effect on consumer behavior; people still worry about subliminal advertising.
Learning refers to changes in behavior resulting from observation and experience. (It excludes behavior that is attributable to instinct.) According to the stimulus-response learning theory, learning occurs through the interplay of stimuli, responses, and reinforcement. Learning occurs as a person responds to some stimulus and is rewarded with need satisfaction for a correct response or penalized for an incorrect one. When the same correct response is repeated in reaction to the same stimulus, learning is established. You need to eat lunch and want a hamburger. The hamburger is the stimulus object, which is the target of the drive. Your response may be influenced by various cues in the environment such as a television ad or a direct mail coupon. Once you respond by buying a hamburger, future behavior will be influenced by whether the original behavior was appropriately reinforced. That is, were you satisfied with the purchase? Did the company send you another coupon?
Personality is an individual’s pattern of traits that influence behavioral
responses. Traits such as self-confidence, dominance, sociability, defensiveness,
and adaptability are used to describe personality. Sigmund Freud originated psychoanalysis, which seeks to explain
how the human mind works. He said that there are three parts to human personality
– the id, the ego, and the superego. Freud’s
theory views people as responding to urges that are repressed but never fully under
control. (Visit the Library of Congress exhibition, Sigmund Freud: Conflict &
Culture.) For marketers Freud’s theory suggests that a consumer’s real
motive for buying a product may be hidden. Therefore, it is difficult for marketers
to uncover reasons for subconscious buying behavior.
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What’s your
personality type? Take the A related area of personality is self-concept, the way you see yourself as well as the picture you think others have of you. The actual self-concept is the way you really see yourself. The ideal self-concept is the way you want to be seen or would like to see yourself. In general, people prefer products that are compatible with their self-concepts. Which self-concept do you think is usually shown in ads – the actual or the ideal?
Over time, people develop attitudes that influence their buying behavior. An attitude is a learned predisposition to respond to an object or class of objects in a consistently favorable or unfavorable way. Attitudes are learned through direct or indirect experiences with a product and interactions with groups of people. People hold attitudes toward an object (something general or specific, abstract or concrete). Attitudes are either favorable or unfavorable toward an object and have strength. They are relatively resistant to change and have a strong influence on the purchase decision. Attitudes do not always predict purchase behavior. For example, a person may hold favorable attitudes toward a product but not buy it because he or she does not have enough money to make the purchase. (Wouldn’t you like to live in a mansion?) When faced with unfavorable attitudes, marketers frequently change the product to match the attitudes.
A lifestyle is a person’s pattern of living as expressed in his or her activities, interests, and opinions (AIOs). Lifestyle is a rich descriptor of peoples’ buying patterns. Values represent a reflection of a person’s needs adjusted for the realities of the world in which we live. One popular classification of American lifestyles is the Values and Lifestyles (VALS2) classification by SRI Consulting. It divides consumers into groups based on similarities in their self-orientation (patterns of attitudes and activities that help people reinforce their social identities) and individual resources (income, health, educational, and self-confidence). The unique feature of VALS2 typology is that it links demographics and purchase patterns with psychological attitudes. SRI has adapted VALS 2 for lifestyle classifications in other countries.
Consumer Buying Decision Process
Consumers go through a five-stage buying decision process: (1) need recognition, (2) information search, (3) evaluation of alternatives, (4) purchase decision, and (5) postpurchase behavior. The consumer selects an involvement level or how much effort to exert in satisfying a need. The more effort exerted the higher the involvement. For some purchases, consumers may go through these stages very quickly or may actually even skip stages or reverse some of the steps. Most buying decisions for products sold in supermarkets, drugstores, and discount stores are low involvement. These products have close substitutes and are relatively low-priced. The consumer will be more involved when he or she lacks information about the purchase, views the product as important, thinks the product has considerable social importance, and sees the product as having a potential for providing significant benefits.
Need recognition occurs when buyers perceive a significant difference between their actual state and their desired state. Marketers are very interested in the factors that trigger a conscious recognition of a need.
After the need is triggered, consumers search for information that will satisfy the need. This may be as simple as a memory scan or as complex as extensive search. In other words, the information search may be internal (the consumer scans his or her memory for alternatives that would satisfy the need) or external (the consumer actively engages in a search for information that would assist in the decision). In an active search, consumers are very likely to read ads (commercial sources) and articles (public sources), talk to friends and relatives (personal sources), and visit a store (experiential sources). Marketers are interested in the kinds of sources searched by consumers.
Information search leads the consumer to evaluate the alternatives in order to reach a purchase decision. Evaluation of alternatives involves establishing criteria with which to evaluate each alternative before making a purchase decision. Often a consumer’s evaluation may be incorrect due to inexperience are biased information. Marketers must monitor choice criteria in order to identify changes and to correct any misconceptions.
The purchase decision is a series of related decisions consumers must make before making a purchase. These decisions include such things as specific features of the product or product attributes, where and when to make the actual purchase, how to take possession, and the method of payment. Patronage motives are determined by such factors as location, convenience, speed of service, merchandise accessibility, prices, merchandise assortment, services offered, and sales personnel. Successful marketers evaluate their customers’ patronage motives and carefully design the shopping experience accordingly.
The purchase process does not end with the purchase. Postpurchase behavior can influence future purchases and what the buyers tell others about the product. You may recommend the brand to everyone who asks you about your purchase. Or, you may tell everyone about your unhappy experience with the product. In many purchases, consumers may experience anxieties, known as cognitive dissonance. This occurs anytime there is inconsistency in a person’s cognitions such as knowledge, attitudes, beliefs, and values. Each product considered by the consumer has both advantages and disadvantages. Thus, the purchased product has both advantages and disadvantages. The rejected products have some advantages. Given the importance of postpurchase behavior in influencing future purchases, marketers want to help reduce dissonance. They can reassure buyers through their advertising and personal selling, while giving quality service after the sale.
Organizational Markets
Organizational markets buy products for further processing or for use in their organization. Segments are based upon geographic location, type of customer, and transaction conditions. Most industries are geographically concentrated due to the need to be near raw materials, labor, or customers. Therefore, a large amount of purchasing power is concentrated in relatively few firms. These firms account for the greatest share of value added to products by manufacturing. Value added is the dollar value of a firm’s output minus the value of inputs it purchased from other firms. Many countries are organized geographically into free trade zones (an area included in a country's political borders, but outside its customs frontiers). Examples include the European Union, the European Free Trade Association, and the North American Free Trade Association. Thus, marketers must identify their organizational market carefully by type of industry and geographic location.
Customer based segments include producers, resellers, government, and institutions. Producers purchase products used in the production of other products for the purpose of making a profit. Original equipment manufacturers (OEMs) buy materials from suppliers to use in the course of creating the products they sell. Also, they buy other goods and services to be used in business activities that indirectly support their production operations. Resellers (wholesalers, brokers/agents, and retailers) buy products in order to resell them at a profit. Often, resellers transport and repackage items before offering them to their customers. Wholesalers buy from producers and then sell to retailers. Retailers buy from manufacturers or wholesalers and then resell to consumers. Government (international, federal, state, and local) agencies buy products in order to produce public services or transfer them to those that need them. Every nation buys on behalf of its central government. Institutions consist of hospitals, charities, civic groups, religious institutions, schools, prisons, museums, libraries, and other for-profit and not-for-profit organizations. Most of the products purchased relate to services institutions provide for their customers.
Three types of buying situations are used to segment markets (straight rebuy, modified rebuy, and new task buying). The straight rebuy is characterized by the routine purchase of familiar products from regular suppliers. It is common for suppliers to set up automatic ordering systems to ensure that buyers continue to order from them and to make the process more convenient. In a modified rebuy, the buyer requires additional information or a change to the original product. New task buying is a situation in which a buyer purchases a product for the first time. By using value analysis sellers can show buyers a better way to make a product; then the outside seller can turn straight rebuy situations into new-task situations that give them a chance to obtain new business. Value analysis is an approach to cost reduction in which components are studied carefully to determine if they can be redesigned, standardized, or made by less costly methods of production.
It is difficult for marketers to determine which individuals in the organization are responsible for making the purchase. In general, products for organizations are purchased by more than one person, known as a buying center. A buying center is an informal, cross-departmental decision unit in which the primary objective is the acquisition, dissemination, and processing of relevant purchasing-related information. Membership in and the size of the buying center vary considerably across and even within organizations. It may be difficult to determine the buying center since it is not always identified on the company’s organizational chart.
There are several roles in the buying center. The user is the member who will actually use the product. The buyer is the member with the formal authority to purchase the product. The gatekeeper is the member who controls the flow of information related to the purchase. The decider is the member who makes the actual purchase decision. The influencer is the member (or outsiders) who affect the purchase decision by supplying advice or information.
Organizational Buying Behavior
Organizational buying behavior and consumer buying behavior are similar. Organizations, after all, are made up of people. However, differences exist between organizational and consumer markets. Organizational markets have fewer customers. Those customers make larger purchases (both in volume and dollars). Many organizational products are more complex than consumer products and must be tailored to exacting technical standards. Service components, such as delivery and technical advice, are important to the total value package marketed to organizational customers.
The North American Industry Classification System (NAICS) has replaced the Standard Industrial Classification (SIC) system, developed by the federal government of the United States, and provides common industry definitions for Canada, Mexico, and the United States. It identifies firms by a multi-digit code. The 1997 NAICS has been matched to 1987 SIC. The NAICS is a useful tool for identifying prospective customers. It is widely employed by marketers to classify organizations in terms of the economic activities in which they are engaged. (Also, the NAICS is used for competitive intelligence.) A similar system, International Standard Industrial Classification (ISIC), applies to the worldwide organizational market.
Demand in organizational markets is derived (dependent on the demand of consumer products). In order to estimate demand, marketers must know how their product is used. Marketers gain a clearer picture of how derived demand will affect products by using external computer databases to check sales of related consumer products. Organizational demand is inelastic (not significantly affected by short-term changes in price). In the long term, demand for a product is more elastic.
Organizational buyers are rational and well informed about what they are buying. After all, buying expensive, technical products takes more time and effort than shopping for consumer products. Buyers need information and, as a result, producers place greater emphasis on personal selling (closer relationships) to organizational markets. Total Quality Management (TQM) influences purchase decisions since product quality is very important. Many associations have established objective standards to guide buyers in evaluating products. Also, reliable delivery and just-in-time inventory management can be critical. In just-in-time production, materials arrive at the customer’s factory exactly when needed for production, rather than being stored by the customer until used. Organizational buyers place value on a supplier's reliability, responsiveness to customer demands, willingness to help customers, and prompt service support. Buyers compare alternative sources of supply, products, and prices. Of course, the cost of a mistake can be very expensive.
Organizational Buying Decision Process
Just like consumers, organizational buyers go through a process of decision-making. Unlike ultimate consumers, organizational buyers are expected to follow a set of formal procedures to place orders. Organizations go through a multistage buying decision process: (1) problem recognition, (2) identification of alternatives, (3) evaluation of alternatives, (4) purchase decision, and (5) post-purchase behavior.
Problem recognition begins when someone realizes that a product can solve a problem. This can result internally (low inventory report) or externally (salesperson has a new product that can lower costs).
Identification of alternatives includes a description of the general characteristics and quantity of a needed item. In product specification, the buying organization specifies the exact requirements for a needed item. Alternative brands, models, and sources of supply that meet these specifications are identified.
Evaluation of alternatives includes examining each supplier's value package (product performance, price, delivery, and quality). A value analysis examines the balance between a product’s cost and its design, quality, and performance.
Purchase decision includes to buy or not to buy, choice of product, and selection of a supplier. Suppliers are the source for materials brought through the value chain to create the value package purchased by consumers. In a supplier search, the buyer tries to find the best vendors that can provide the needed products. Some buyers narrow the list of potential suppliers by requiring a supplier certification, which considers only suppliers that meet stringent standards for quality and other requirements. This can lead to a partnership with suppliers that can increase the purchaser’s competitiveness. In proposal solicitation, the buyer invites qualified suppliers to submit proposals. (Government agencies ask vendors to compete for an order by showing how they will meet the product specifications, the delivery dates, and other requirements by completing a request for proposal (RFP). The vendor submits a bid indicating the price the company will charge, the products it will provide, and other details.) In supplier selection, the buyer reviews proposals, selects a supplier or suppliers, and negotiates supplier agreements. The buyer writes the final order with the chosen supplier(s) and lists the technical specifications, quantity needed, expected time of delivery, return policies, and warranties in the order-routine specification.
Post-purchase behavior evaluates whether the product and its supplier met or exceeded the organization's expectations. In a performance review, a formal vendor analysis, the buyer rates its satisfaction with supplier’s performance, deciding whether to continue, modify, or drop them.
Organizational Relationships
Marketers take a broad view of the exchange process and form relationships at all levels of the exchange. Suppliers, producers, and distributors are part of the value chain. Marketers are better serving customers by benchmarking world-class standards in areas such as delivery time, order fulfillment, quality, and purchasing costs. Partnerships are formed on a customer-by-customer basis. Marketers collaborating with customers to tackle issues that are important to both parties can strengthen relationships. In addition, they can get together with another marketer to supply what organizational customers need rather than going it alone. They can form strategic alliances and joint ventures for the benefit of the customer. Another way to build strong value-chain relationships is to cross functional borders within organizations or geographical boundaries.
Reciprocity and reverse marketing arrangements may be used. Suppliers may voluntarily buy from customers to show commitment to the relationship. Reciprocity is the practice of buying from suppliers that are also customers. It is legal in the U.S. as long as it is not enforced through coercion or does not harm competition. In reverse marketing, customers use marketing to build stronger relationships with suppliers. Customers want loyal suppliers that will satisfy very specific needs and also anticipate and react to changed needs.
An Electronic Data Interchange (EDI) is the computer-to-computer exchange of common business documents over telephone lines using a standardized electronic format. The use of EDI replaces the very costly labor and time intensive process of typing and retyping paper forms and mailing them to partners. There are no forms to type and nothing to mail since every exchange between the two partners can be accomplished through EDI except the actual delivery of the products. Some marketers use the Internet, while others dial into their customers' computers. An internal database can be used to track the purchase and product usage behavior of the organizations that buy an organization’s products. EDI cuts paperwork and speeds information exchange.
Value added networks (VAN) are an integral part of the EDI system and
without them a large-scale EDI program is virtually impossible. VAN acts as a postal
system for EDI. It is a third-party service provider that furnishes clients with
electronic mailboxes, storage and forwarding services, tracking capabilities, and
translation services that are not offered by normal public networks.
Marketing Class
Table of Contents
Chapter 5