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Student Publications
Author: Jonathan Dodoo
Title:
Practical Approach Towards Consumer'S Behavior
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INTRODUCTION
An important part of the marketing process is to understand why a
customer or
buyer makes a purchase. Without such an understanding, businesses
find it hard to
respond to the customers needs and wants.
Marketing theory traditionally splits analysis of buyer or customer
behaviour into
two broad groups for analysis Consumer Buyers and Industrial Buyers,
Consumer
buyers are those who purchase items for their personal consumption
Industrial
buyers are those who purchase items on behalf of their business or
organisation
Businesses now spend considerable sums trying to learn about what
makes
customers tick. The questions they try to understand are:
� Who buys?
� How do they buy?
� When do they buy?
� Where do they buy?
� Why do they buy?
For a marketing manager, the challenge is to understand how
customers might
respond to the different elements of the marketing mix that are
presented to them.
If management can understand these customer responses better than
the
competition, then it is a potentially significant source of
competitive advantage.
Consumer behaviour is the study of how people buy, what they buy,
when they
buy and why they buy. It blends elements from psychology, sociology,
sociopsychology, anthropology and economics. It attempts to
understand the
buyer decision making process, both individually and in groups. It
studies
characteristics of individual consumers such as demographics,
psychographics,
and behavioural variables in an attempt to understand people's
wants. It also tries
to assess influences on the consumer from groups such as family,
friends,
reference groups, and society in general.
Buyer decision processes are the decision making processes
undertaken by
consumers in regard to a potential market transaction before,
during, and after the
purchase of a product or service. More generally, decision making is
the cognitive
process of selecting a course of action from among multiple
alternatives.
Common examples include shopping, deciding what to eat. Decision
making is
said to be a psychological construct. This means that although we
can never "see"
a decision, we can infer from observable behaviour that a decision
has been made.
Therefore we conclude that a psychological event that we call
decision making
has occurred. It is a construction that imputes commitment to
action. That is,
based on observable actions, we assume that people have made a
commitment to
effect the action.
3
INTRODUCTION
In an early study of the buyer decision process literature, Frank
Nicosia (Nicosia,
F. 1966; pp 9-21) identified three types of buyer decision making
models. They
are the univariate model (He called it the "simple scheme".) in
which only one
behavioural determinant was allowed in a stimulus-response type of
relationship;
the multi-variate model (He called it a "reduced form scheme".) in
which
numerous independent variables were assumed to determine buyer
behaviour; and
finally the system of equations model (He called it a "structural
scheme" or
"process scheme".) in which numerous functional relations (either
univariate or
multi-variate) interact in a complex system of equations. He
concluded that only
this third type of model is capable of expressing the complexity of
buyer decision
processes. Nicosia builds a comprehensive model involving five
modules. The
encoding module includes determinants like attributes of the brand,
environmental
factors", "consumer's attributes, attributes of the organization",
and "attributes of
the message". Other modules in the system include consumer decoding,
search
and evaluation, decision, and consumption.
4
DISCRIPTION
Consumer behaviour is the study of how people buy, what they buy,
when they
buy and why they buy. It blends elements from psychology, sociology,
sociopsychology, anthropology and economics. It attempts to
understand the
buyer decision making process, both individually and in groups. It
studies
characteristics of individual consumers such as demographics,
psychographics,
and behavioural variables in an attempt to understand people's
wants. It also tries
to assess influences on the consumer from groups such as family,
friends,
reference groups, and society in general.
Psychology is both an academic and applied discipline involving the
scientific
study of mental processes and behavior. Psychologists study such
phenomena as
perception, cognition, emotion, personality, behavior, and
interpersonal
relationships. Psychology also refers to the application of such
knowledge to
various spheres of human activity, including issues related to daily
life e.g.
family, education, and work and the treatment of mental health
problems.
Psychology is one of the behavioral sciences a broad field that
spans the social
and natural sciences. Psychology attempts to understand the role
human behavior
plays in social dynamics while incorporating physiological and
neurological
processes into its conceptions of mental functioning. Psychology
includes many
sub-fields of study and application concerned with such areas as
human
development, sports, health, industry, law, and spirituality.
Sociology is an academic and applied discipline that studies society
and human
social interaction. Sociological research ranges from the analysis
of short contacts
between anonymous individuals on the street to the study of global
social
processes. Numerous fields within the discipline focus on how and
why people
are organized in society, either as individuals or as members of
associations,
groups, and institutions. As an academic discipline, sociology is
typically
considered a social science.
Sociology is a cluster of disciplines which seek to explain the
dimensions of
society and the dynamics that societies operate upon. Some of these
disciplines
which reflect current fields of Sociology are demography, which
studies changes
in a population size or type; criminology, which studies criminal
behavior and
deviance; social stratification, which studies inequality and class
structure;
political sociology which studies government and laws; sociology of
race and
sociology of gender which examine the social construction of race
and gender as
well as race and gender inequality. New sociological fields and
sub-fields such as
network analysis and environmental sociology continue to evolve many
of them
are very cross-disciplinary in nature.
5
DISCRIPTION
Economics is the social science that studies the production,
distribution, and
consumption of goods and services. A definition that captures much
of modern
economics is that of Lionel Robbins in a 1932 essay: the science
which studies
human behaviour as a relationship between ends and scarce means
which have
alternative uses. Scarcity means that available resources are
insufficient to satisfy
all wants and needs. Absent scarcity and alternative uses of
available resources,
there is no economic problem.
An organisation cannot be reach its goals without understanding
buyer behaviour
which is the action people take in buying and using goods and
service. Marketers
who understand buyer behaviour, such as how a price increase will
affect a
products sales, can create a more effective marketing mix.
To understand buyer behaviour, marketers must understand how
consumers make
buying decisions. The decision making process has several steps
which the entire
process is affected by a number of personal and social factors, A
buyer decision
start with a stimulus, which is anything that affects one or more of
our senses like
sight, smell, taste, touch and hearing. A stimulus might be the feel
of a sweater,
the sleek shape of a new model car, the design on a package or a
brand name
mentioned by a friend.
The stimulus leads to problem recognition; this sweater feels so
soft and looks
good on me, should I buy it, in word the consumer decides that
theres a purchase
need The consumer then get information about the purchase or what
other styles
of sweater are available at what price can this sweater be bought at
a lower price
elsewhere, the consumer weighs the options and decides whether to
make the
purchase. If the consumer buys the product certain outcomes are
expected, these
outcomes may or may not become reality the sweater may last for
years or the
shoulder seams may pull out the first time its worn, the consumer
assesses the
experience with the product and uses this information to update
expectation about
future purchases.
Individual and social factors can influence the consumer decision
making process;
the individual factors are within the consumer and are unique to
each person, they
include perception, beliefs and attitudes, values, learning, self
concept, and
personality.
Companies often conduct research to better understand individual
factors that
cause consumers to buy or not to buy, for instance, Hyatt Hotel
found that people
who stayed at Hyatt while on business chose other hotels when they
traveled on
vacation with children.
6
DISCRIPTION
Consumer Decision Making Process
1
Sense Stimulus
2
Recognise problem
3
Search for information
4
Individual and
Evaluate alternatives
memory
Social factors
5
Purchase product
6
Evaluate outcome
7
Engage in
Post purchase behaviour
Hyatt was perceived as a businesspersons hotel, so Hyatt came up
with a
program called Camp Hyatt which caters to children with a year round
program
that varies by season. It combines attractive rates that appeal to
parents with lots
of activities for kids.
Social factors that affect the decision making process include all
interactions
between a consumer and the external environment, family, opinion
leaders, social
class, and culture. Families may be the most important of these
social factors, yet
families have limited resources so many buying decisions are
compromises. Since
a number of decisions include input from several family members
marketing
managers sometimes promote products using a family theme such as
Camp Hyatt.
7
GENERAL ANALYSIS
The need for an understanding of the organizational buying process
has grown in
recent years due to the many competitive challenges presented in
business-to-
business markets. Since 1980 there have been a number of key changes
in this
area, including the growth of outsourcing, the increasing power
enjoyed by
purchasing departments and the importance given to developing
partnerships with
suppliers.
Business buyer behaviour and business markets are different from
consumer
markets. Business markets include institutions such as hospitals and
schools
manufacturers, wholesalers, and retailers and various branches of
government.
The purchase volume is that business where customers buy in much
larger
quantities than consumers, think how many truckloads of sugar mars
must
purchase to make one day output of M&Ms. imagine the number of
batteries sears
buys each day for resale to consumers and also think about the
number of pens the
federal government must use each day.
The numbers of customers business marketers usually have far fewer
customers
than consumer marketers, as a result, it is much easier to identify
prospective
buyers and monitor current needs. How few customers for airplanes or
industrial
cranes there are compared to the more than 70 million consumer
households in
the United States?
The location of buyers is that business where customers tend to be
much more
geographically concentrated than consumers; the computer industry is
concentrated in Silicon Valley and a few other areas. Aircraft
manufacturing is
found in Seattle, St Louise, and Dallas/Fort Worth where suppliers
have to
manufactures often locate close to the manufactures to lower
distribution costs
and facilitate communication.
The direct distribution sales tend to be made directly to the buyer
because such
sales frequently involve large quantities or custom made items like
heavy
machinery, consumers goods are more likely to be sold through
intermediaries
like wholesalers and retailers.
Also the rational purchase decision consumers, business buyers
usually approach
purchasing rather formally; businesses use professionally trained
purchasing
agents or buyers who spend their entire career purchasing a limited
number of
items, they got to know the items and the sellers quite well.
Decision making is the cognitive process leading to the selection of
a course of
action among variations. Every decision making process produces a
final choice.
8
GENERAL ANALYSIS
It can be an action or an opinion. It begins when we need to do
something but
know not what.
Therefore, decision making is a reasoning process which can be
rational or
irrational, and can be based on explicit assumptions or tacit
assumptions.
Common examples include shopping, deciding what to eat, when to
sleep, and
deciding whom or what to vote for in an election or referendum.
Decision making
is said to be a psychological construct. This means that although we
can never, we
can infer from observable behaviour that a decision has been made.
Therefore, we
conclude that a psychological event that we call decision making"
has occurred. It
is a construction that imputes commitment to action. That is, based
on observable
actions, we assume that people have made a commitment to affect the
action.
Structured rational decision making is an important part of all
science-based
professions, where specialists apply their knowledge in a given area
to making
informed decisions. For example, medical decision making often
involves making
a diagnosis and selecting an appropriate treatment. Some research
using
naturalistic methods shows, however, that in situations with higher
time pressure,
higher stakes, or increased ambiguities, experts use intuitive
decision making
rather than structured approaches, following a recognition primed
decision
approach to fit a set of indicators into the expert's experience and
immediately
arrive at a satisfactory course of action without weighing
alternatives. Also, recent
robust decision efforts have formally integrated uncertainty into
the decision
making process.
9
ACTUALISATION
A well-developed and tested model of buyer behaviour is known as the
stimulus-
response model, which is summarised in the diagram below:
In the above model, marketing and other stimuli enter the customers
"black box"
and produce certain responses. Marketing management must try to work
out what
goes on the in the mind of the customer the black box.
The Buyers characteristics influence how he or she perceives the
stimuli; the
decision-making process determines what buying behaviour is
undertaken.
Characteristics that affect customer behaviour The first stage of
understanding
buyer behaviour is to focus on the factors that determine he buyer
characteristics
in the "black box.
10
ACTUALISATION
These can be summarised as follows:
Each of these factors is discussed in more detail in our other
revision notes on
buyer behaviour.
If a marketer can identify consumer buyer behaviour, he or she will
be in a better
position to target products and services at them. Buyer behaviour is
focused upon
the needs of individuals, groups and organizations. It is important
to understand
the relevance of human needs to buyer behaviour (remember, marketing
is about
satisfying needs).
11
ACTUALISATION
Let's look at human motivations as introduced by Abraham Maslow by
his
hierarchy of needs the hierarchy is triangular. This is because as
you move up it,
fewer and fewer people satisfy higher level needs. We begin at the
bottom level.
Physiological needs such as food, air, water, heat, and the basic
necessities of
survival need to be satisfied. At the level of safety, man has a
place to live that
protects him from the elements and predators. At the third level we
meet our
social and belongingness needs i.e. we marry, or join groups of
friends, etc.
The final two levels are esteem and self actualization. Fewer people
satisfy the
higher level needs. Esteem means that you achieve something that
makes you
recognised and gives personal satisfaction, for example writing a
book. Self-
actualisation is achieved by few. Here a person is one of a small
number to
actually do something. For example, Neil Armstrong self actualized
as the first
person to reach the Moon.
The model is a little simplistic but introduces the concept a
differing consumer
needs quite well.
12
ACTUALISATION
To understand consumer buyer behaviour is to understand how the
person
interacts with the marketing mix. As described by Cohen (1991), the
marketing
mix inputs (or the four P's of price, place, promotion, and product)
are adapted
and focused upon the consumer. The psychology of each individual
considers the
product or service on offer in relation to their own culture,
attitude, previous
learning, and personal perception. The consumer then decides whether
or not to
purchase, where to purchase, the brand that he or she prefers, and
other choices.
It is often said that the central purpose of economic activity is
the production of
goods and services to satisfy consumers needs and wants i.e. to meet
peoples
need for consumption both as a means of survival but also to meet
their ever-
growing demand for an improved lifestyle or standard of living.
Economics is a social science that studies human behaviour as a
relationship
between ends and scarce means which have alternative uses. That is,
economics is
the study of the trade-offs involved when choosing between alternate
sets of
decisions.
Road space throughout the world is becoming increasingly scarce as
the demand
for motor transport increases each year what do you think are some
of the best
solutions to reducing the problem of congestion on our roads?
13
ACTUALISATION
It is often said that the central purpose of economic activity is
the production of
goods and services to satisfy consumers needs and wants i.e. to meet
peoples
need for consumption both as a means of survival but also to meet
their ever-
growing demand for an improved lifestyle or standard of living.
The basic economic problem is about scarcity
and choice since there are only a
limited amount of resources available to produce the unlimited
amount of goods
and services we desire. All societies face the problem of having to
decide:
The economy uses its resources to operate more hospitals or hotels?
Do we make
iPod Nanos or produce more coffee? Does the National Health Service
provide
free IVF treatment for thousands of childless couples? Or, do we
choose instead
to allocate millions of pounds each year to providing
beta-interferon to sufferers
of multiple sclerosis?
The best use of our scarce resources of land labour and capital
should school
playing fields be sold off to provide more land for affordable
housing? Or are we
contributing to the problem of obesity by selling off these playing
fields?
The best method of distributing products to ensure the highest level
of wants and
needs are met? Who will get expensive hospital treatment - and who
not? Should
there be a minimum wage? If so, at what level should it be set?
We use an average of 158 liters of water a day in Britain, for which
we pay a
price of 28p per liter but much of it is just cash down the drain,
according to water
companies. Most are campaigning to cut the amount we use. And the
front-line
weapon in their campaign is the water meter. They want us all to
have one and
one company is seeking powers to make them compulsory. When a meter
is
installed, in most homes, consumption drops by 20 per cent and, in
some, it goes
down by a third. According to Ofwat, the water industry regulator,
the average
water and sewerage bill for homes with a meter is �248 compared with
�289 for
those with flat-rate bills.
At present only 25% of households have meters and most of those are
in East
Anglia. They are installed free by water companies but households
then have
about �43 added to each bill to cover the cost of installing and
reading the meter.
Unsurprisingly, we use more water in summer. Peak demand on hot days
can be
50%to 70% above average. Most of this is for lawns, flowers,
paddling pools and
extra showers and baths.
Source: Adapted from an article by Valerie Elliott, the Times,
9 July 2005
14
ACTUALISATION
If the supply of a good or service is low, the market price will
rise, providing
there is sufficient demand from consumers. Goods and services that
are in
plentiful supply will have a lower market value because supply can
easily meet
the demand from consumers. Whenever there is excess supply in a
market, we
expect to see prices falling. For example, the prices of new cars in
the UK have
been falling for several years and there have been huge falls in the
prices of
clothing as supply from countries such as China and Vietnam has
surged.
Human beings want better food; housing; transport, education and
health services.
They demand the latest digital technology, more meals out at
restaurants, more
frequent overseas travel, more leisure time, better cars, cheaper
food and a wider
range of cosmetic health care treatments. Opinion polls consistently
show that the
majority of the electorate expects government policies to deliver
improvements in
the standard of education, the National Health Service and our
transport system.
Economic resources are limited, but human needs and wants are
infinite. Indeed
the development of society can be described as the uncovering of new
wants and
needs which producers attempt to supply by using the available
factors of
production. For a perspective on the achievements of countries in
meeting
peoples basic needs, the Human Development Index produced annually
by the
United Nations is worth reading. Data for each country can be
accessed and cross-
country comparisons can be made.
Because of scarcity, choices have to be made on a daily basis by all
consumers,
firms and governments. For a moment, just have a think about the
hundreds of
millions of decisions that are made by people in your own country
every single
day. Take for example the choices that people make in the city of
London about
how to get to work. Over six million people travel into London each
day, they
have to make choices about when to travel, whether to use the bus,
the tube, to
walk or cycle or indeed whether to work from home. Millions of
decisions are
being taken, many of them are habitual but somehow on most days,
people get to
work on time and they get home too! This is a remarkable
achievement, and for it
to happen, our economy must provide the resources and the options
for it to
happen.
Making a choice made normally involves a trade-off in simple terms,
choosing
more of one thing means giving up something else in exchange.
Because wants
are unlimited but resources are finite, choice is an unavoidable
issue in
economics. For example: Housing, Choices about whether to rent or
buy a home a
huge decision to make and one full of uncertainty given the recent
volatility in the
British housing market! There are costs and benefits to renting a
property or
choosing to buy a home with a mortgage. Both decisions involve a
degree of risk.
15
ACTUALISATION
Choosing between full-time or part-time work, or to take a course in
higher
education lasting three years how have these choices and commitments
been
affected by the introduction of university tuition fees, the choice
between using
Euro-Tunnel, a speedy low-cost ferry or an airline when traveling to
Western
Europe Your choices about which modes of transport to use to get to
and from
work or school each day.
Despite several decades of rising living standards do surveys of
happiness suggest
that people are not noticeably happier than previous generations?
When we study
the decisions of consumers in different markets, we can start to
consider and
explore what their aims are. Our working assumption for the moment
is that
consumers make choices about what to consume based on the aim of
maximising
their own welfare. They have a limited income and they seek
to allocate their
funds in a way that improves their standard of living. Of course in
reality
consumers rarely behave in a perfectly informed and rational way. We
will see
later that often decisions by people are based on imperfect or
incomplete
information which can lead to a loss of satisfaction and welfare not
only for
people themselves but which affect other and our society as a whole.
As consumers we have all made poor choices about which
products to buy. Do we
always learn from our mistakes? To what extent are our individual
choices
influenced and distorted by the effects of persuasive advertising?
Multinational
companies have advertising and marketing budgets that often run into
hundreds of
millions of pounds. We are all influenced by them to a lesser or
greater degree
and there is always the risk
that advertising can be misleading.
An economic system is best described as a network of organizations
used by a
society to resolve the basic problem of what, how and for whom to
produce.
There are four categories of economic system, Traditional economy,
where
decisions about what, how and for whom to produce are based on
custom and
tradition. Land is typically held in common i.e. private property is
not well
defined.
Free market economy, where households own resources and free
markets allocate
resources through the workings of the price mechanism. An increase
in demand
raises price and encourages firms to switch additional resources
into the
production of that good or service.
The amount of products consumed by households depends on their
income and
household income depends on the market value of an individuals work.
In a free
market economy there is a limited role for the government.
16
ACTUALISATION
Indeed in a highly free market system, the government limits itself
to protecting
the property rights of people and businesses using the legal system,
and it also
seeks to protect the value of money or the value of a currency.
Planned or command economy, in a planned or command system
typically
associated with a socialist or communist economic system, scarce
resources are
owned by the state i.e. the government. The state allocates
resources, and sets
production targets and growth rates according to its own view of
people's wants.
The final income and wealth distribution is decided by the state. In
such a system,
market prices play little or no part in informing resource
allocation decisions and
queuing rations scarce goods.
Mixed economy, in a mixed economy, some resources are owned by the
public
sector government and some resources are owned by the private
sector. The
public sector typically supplies public, quasi-public and merit
goods and
intervenes in markets to correct perceived market failure. We will
come back to
all of these concepts later on in our study of microeconomics.
There is a well known saying in economics that "there is no
such thing as a free
lunch!" Even if we are not asked to pay a price for consuming
a good or a service,
scarce resources are used up in the production of it and there must
be an
opportunity cost involved. Opportunity cost measures the cost of any
choice in
terms of the next best alternative foregone. Many examples exist for
individuals,
firms and the government.
The opportunity cost of deciding not to work an extra ten hours a
week is the lost
wages foregone. If you are being paid �6 per hour to work at the
local
supermarket, if you choose to take a day off from work you might
lose �48 from
having sacrificed eight hours of paid work. Government spending
priorities, the
opportunity cost of the government spending nearly �10 billion on
investment in
National Health Service might be that �10 billion less is available
for spending on
education or the transport network.
Investing today for consumption tomorrow the opportunity cost
of an economy
investing resources in new capital goods is the current production
of consumer
goods given up. We may have to accept lower living standards now, to
accumulate increased capital equipment so that long run living
standards can
improve. Making use of scarce farming land The
opportunity cost of using arable
farmland to produce wheat is that the land cannot be used in that
production
period to harvest potatoes.
17
ACTUALISATION
Sectors of production in the economy
Primary sector this involves extraction of natural resources e.g.
agriculture,
forestry, fishing, quarrying, and mining
Secondary sector this involves the production of goods in the
economy, i.e.
transforming materials produced by the primary sector e.g.
manufacturing and the
construction industry
Tertiary sector the tertiary sector provided services such as
banking, finance,
insurance, retail, education and travel and tourism
Quaternary sector the quaternary sector is involved with information
processing
e.g. education, research and development
18
GENERAL RECOMMENDATION
Customers have different reservation prices they are willing to pay
for your goods
or services. Price increases will probably cause a decrease in
sales, and price
decreases will probably have the reverse effect. But how can you
tell how much
volume will change as a result of a price change?
Producers often take advantage of consumer surplus when setting
prices. If a
business can identify groups of consumers within their market who
are willing
and able to pay different prices for the same products, then sellers
may engage in
price discrimination the aim of which is to extract from the
purchaser, the price
they are willing to pay, thereby turning consumer surplus into extra
revenue.
Airlines are expert at practicing this form of yield
management, extracting from
consumers the price they are willing and able to pay for flying to
different
destinations are various times of the day, and exploiting
variations in elasticity of
demand for different types of passenger service. You will
always get a better deal
/ price with airlines such as Easy Jet and Ryan Air if you are
prepared to book
weeks or months in advance. The airlines are prepared to sell
tickets more cheaply
then because they get the benefit of cash-flow together with the
guarantee of a
seat being filled. The nearer the time to take-off, the higher the
price. If a
businessman is desperate to fly from Newcastle to Paris in 24 hours
time, his or
her demand is said to be price inelastic and the corresponding price
for the ticket
will be much higher.
One of the main arguments against firms with monopoly power is that
they
exploit their monopoly position by raising prices in markets where
demand is
inelastic, extracting consumer surplus from buyers and increasing
profit margins
at the same time. We shall consider the issue of monopoly in more
detail when we
come on to our study of markets and industries.
When the demand for a good or service is perfectly elastic, consumer
surplus is
zero because the price that people pay matches precisely the price
they are willing
to pay. This is most likely to happen in highly competitive markets
where each
individual firm is assumed to be a ,,price taker in their chosen
market and must
sell as much as it can at the ruling market price.
In contrast, when demand is perfectly inelastic, consumer surplus is
infinite.
Demand is totally invariant to a price change. Whatever the price,
the quantity
demanded remains the same. Are there any examples of products that
have such a
low price elasticity of demand?
The majority of demand curves are downward sloping. When demand is
inelastic,
there is a greater potential consumer surplus because there are some
buyers
willing to pay a high price to continue consuming the product. This
is shown in
the diagram below:
19
GENERAL RECOMMENDATION
20
GENERAL RECOMMENDATION
Changes in demand and consumer surplus
When there is a shift in the demand curve leading to a change in the
equilibrium
market price and quantity, then the level of consumer surplus will
alter. This is
shown in the diagrams above. In the left hand diagram, following an
increase in
demand from D1 to D2, the equilibrium market price rises to from P1
to P2 and
the quantity traded expands. There is a higher level of consumer
surplus because
more is being bought at a higher price than before.
In the diagram on the right we see the effects of a cost
reducing innovation which
causes an outward shift of market supply, a lower price and an
increase in the
quantity traded in the market. As a result, there is an increase in
consumer welfare
shown by a rise in consumer surplus.
Consumer surplus can be used frequently when analysing the impact of
government intervention in any market for example the effects of
indirect taxation
on cigarettes consumers or the introducing of road pricing schemes
such as the
London congestion charge.
Adam Smith, one of the Founding Fathers of economics famously wrote
of the
invisible hand of the price mechanism". He described how the
invisible or hidden
hand of the market operated in a competitive market through the
pursuit of self-
interest to allocate resources in societys best interest.
21
GENERAL RECOMMENDATION
This remains the central view of all free-market economists, i.e.
those who
believe in the virtues of a free-market economy with minimal
government
intervention.
The price mechanism is a term used to describe the means by which
the many
millions of decisions taken each day by consumers and businesses
interact to
determine the allocation of scarce resources between competing uses.
This is the
essence of economics!
Firstly, prices perform a signaling function this means that
market prices will
adjust to demonstrate where resources are required, and where they
are not.
Prices rise and fall to reflect scarcities and surpluses. So, for
example, if market
prices are rising because of high and rising demand from consumers,
this is a
signal to suppliers to expand their production to meet the higher
demand.
Consider the left hand diagram on the next page. The demand for
computer games
increases and as a result, producers stand to earn higher revenues
and profits from
selling more games at a higher price per unit. So an outward shift
of demand
ought to lead to an expansion along the market supply curve.
In the second example on the right, an increase in market supply
causes a fall in
the relative prices of digital cameras and prompts an expansion
along the market
demand curve Conversely, a rise in the costs of production will
induce suppliers
to decrease supply, while consumers will react to the resulting
higher price by
reducing demand for the good or services.
Through the signaling function, consumers are able through their
expression of
preferences to send important information to producers
about the changing nature
of our needs and wants. When demand is strong, higher market
prices act as an
incentive to raise output (production) because the supplier stands
to make a higher
profit. When demand is weak, then the market supply contracts. We
are assuming
here that producers do actually respond to these price signals!
One of the features of a free market economy is that decision-making
in the
market is decentralised in other words, the market responds to the
individual
decisions of millions of consumers and producers, i.e. there is no
single body
responsible for deciding what is to be produced and in what
quantities. This is a
remarkable feature of an organic market system.
Prices serve to ration scarce resources when demand in a market
outstrips supply.
When there is a shortage of a product, the price is bid up leaving
only those with
sufficient willingness and ability to pay with the effective demand
necessary to
purchase the product.
22
GENERAL RECOMMENDATION
Be it the demand for tickets among England supporters for the 2006
World Cup or
the demand for a rare antique, the market price acts a rationing
device to equate
demand with supply.
The prices for using the good example of the rationing function of
the price
mechanism. A toll road can exclude those drivers and vehicles that
are not
businesses and other road users are paying for the right to use the
road, road space
has a market price instead of being regarded as something of a free
good.
23
CONCLUSION
The best way is to examine customer behaviour. Their behaviour tells
you what
their needs are. We identify simple but powerful facts about buying
behaviour -
who buys, what they buy, and how do they buy.
We supplement this information
with why do they buy. The results give you amazing insights
into what customer's
needs are, and how they differ across different background variables
such as age
or gender.
Research suggests that children are exerting more influence over
family buying
decisions. What are the implications of this for retailers, brands
and marketers?
Children are an important part of the family buying process. But
what roles do
they play? Marketing theory suggests five main roles in a family
buying process:
- Initiator
- Influencer
- Decider
- Buyer
- User
Which roles do children play in addition to the obvious one the user
Children
certainly influence family buying decisions from cars to holidays?
They are also
the buyers of the future. Provide children with Penguin bars and
McVitie's may be
able to hold on to the adult due to brand awareness and brand
loyalty formed at
such an early age.
But how should businesses market to children? Are there conflicts
with being
seen to specifically target the child audience can it alienate
parents?
Products have to appeal to the conflicting agendas of child and
parent, while
fighting off increasing competition. A marketer of childrens foods
was recently
quoted as follows:
Ten years ago children wouldn't have given a damn about cheese. It
used to be
just Dairylea, but now children's dairy products encompass
everything from
cheese to yogurts, and fromage frais. Our brands also face more
intense
competition than ever and it's not just from other chocolate
biscuits - it's from
products such as Dairylea Dunkers and Fruit Winders. These things
didn't exist
before.
Marketers also have to recognise that children are moving into new
markets.
Children as young as seven buy DVD's, and no teenage lifestyle is
complete
without a mobile phone. This has a knock-on effect. For example, the
money
children spend on mobile phone cards reduces the money they spend on
snacks.
24
CONCLUSION
Marketers also need to be sensitive to the peculiarities of
children-related markets.
It may be tempting to use a daring marketing campaign to make a
product stand
out. But a poorly thought-through campaign could result in the
product and/or
brand being attacked by ethical campaigners, outraged mothers,
educationalists,
health and safety organisations and others.
A good example of how things can go wrong is Sunny Delight. Sunny
Delight
enjoyed boom sales after its initial launch. However, the drink's
popularity
crashed when the media realised that it was sold from chiller
cabinets purely as a
marketing ploy to make it seem fresh and, therefore, healthy. The
actual product
formulation was far from healthy.
Retailers face a challenge to display products in a way that
attracts children.
Promotional displays have to be able to handle child usage (or
abuse) and capture
a childs imagination and attention. Disney has a reputation as being
particularly
good at interactive promotional marketing. Many children also prefer
Woolworth's to supermarkets because of features such as pick 'n' mix
sweets. The
Early Learning Centre succeeds by creating a playground which allows
children
to play with toys rather than leaving them wrapped in plastic.
For a marketing manager, the challenge is to understand how
customers might
respond to the different elements of the marketing mix that are
presented to them.
If management can understand these customer responses better than
the
competition, then it is a potentially significant source of
competitive advantage.
Consumer behaviour is the study of how people buy, what they buy,
when they
buy and why they buy. It blends elements from psychology, sociology,
sociopsychology, anthropology and economics. It attempts to
understand the
buyer decision making process, both individually and in groups. It
studies
characteristics of individual consumers such as demographics,
psychographics,
and behavioural variables in an attempt to understand people's
wants. It also tries
to assess influences on the consumer from groups such as family,
friends,
reference groups, and society in general.
Buyer decision processes are the decision making processes
undertaken by
consumers in regard to a potential market transaction before,
during, and after the
purchase of a product or service. More generally, decision making is
the cognitive
process of selecting a course of action from among multiple
alternatives.
Common examples include shopping, deciding what to eat. Decision
making is
said to be a psychological construct. This means that although we
can never see a
decision, we can infer from observable behaviour that a decision has
been made.
Therefore we conclude that a psychological event that we call
decision making
has occurred. It is a construction that imputes commitment to
action.
25
CONCLUSION
That is, based on observable actions, we assume that people have
made a
commitment to effect the action.
In an early study of the buyer decision process literature, Frank
Nicosia (Nicosia,
F. 1966; pp 9-21) identified three types of buyer decision making
models. They
are the univariate model (He called it the "simple scheme".) in
which only one
behavioural determinant was allowed in a stimulus-response type of
relationship;
the multi-variate model (He called it a "reduced form scheme".) in
which
numerous independent variables were assumed to determine buyer
behaviour; and
finally the system of equations model He called it a structural
scheme" or
"process scheme. In which numerous functional relations either
univariate or
multi-variate) interact in a complex system of equations. He
concluded that only
this third type of model is capable of expressing the complexity of
buyer decision
processes. Nicosia builds a comprehensive model involving five
modules. The
encoding module includes determinants like attributes of the brand,
environmental
factors", "consumer's attributes, attributes of the organization",
and "attributes of
the message". Other modules in the system include consumer decoding,
search
and evaluation, decision, and consumption.
26
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