Maximizing Customer Lifetime Value

TABLE OF CONTENTS
• Summary
• Building Customer Value, Satisfaction and Loyalty
• Maximizing Customer Lifetime Value
• Cultivating Customer Relationships

SUMMARY
• Customers are value maximizers. They form an expectation of
value and act on it. Buyers will buy from the firm that they
perceive to offer the highest customer-delivered value,
defined as the difference between total customer benefits and
total customer cost.
• A buyer’s satisfaction is a function of the product’s perceived
performance and the buyer’s expectations. Recognizing that
high satisfaction leads to high customer loyalty, companies
must ensure that they meet and exceed customer
expectations.
• Losing profitable customers can dramatically affect a firm’s
profits. The cost of attracting a new customer is estimated to
be five times the cost of keeping a current customer happy.
The key to retaining customers is relationship marketing.

SUMMARY
• Quality is the totality of features and characteristics of a
product or service that bear on its ability to satisfy stated or
implied needs. Marketers play a key role in achieving high
levels of total quality so that firms remain solvent and
profitable.
• Marketing managers must calculate customer lifetime values
of their customer base to understand their profit implications.
They must also determine ways to increase the value of the
customer base.
• Companies are also becoming skilled in customer relationship
management (CRM), which focuses on developing programs
to attract and retain the right customers and meeting the
individual needs of those valued customers.

LEARNING OBJECTIVES
• In this chapter, we will address the following questions:
• What are customer value, satisfaction, and loyalty, and how can
companies deliver them?
• What is the lifetime value of customers, and how can marketers
maximize it?
• How can companies attract and retain the right customers and
cultivate strong customer relationships?
• What are the pros and cons of database marketing?

BUILDING CUSTOMER VALUE,
SATISFACTION, AND LOYALTY
Section 1
7

BUILDING CUSTOMERVALUE,SATISFACTION, AND
LOYALTY
Customer-OrientedOrganization
• The cornerstone of a well-conceived holistic marketing
orientation is strong customer relationships.
• Marketers must connect with customers—informing,
engaging, and maybe even energizing them in the process.

LOYALTY
• Customer
orientation
organizations are
adept at building
customer
relationships, not just
products; they are
skilled in market
engineering, not just
product engineering.
Product
Engineering
Market
Engineering

LOYALTY
• Creating loyal customers is at the
heart of every business.
• As marketing experts Don
Peppers and Martha Rogers say:
“The only value your company will
ever create is the value that comes
from customers— the ones you
have now and the ones you will
have in the future. Businesses
succeed by getting, keeping, and
growing customers.
Customers are the only reason you
build factories, hire employees,
schedule meetings, lay fiber-optic
lines, or engage in any business
activity. Without customers, you
don’t have a business.”

LOYALTY
• Managers who believe the
customer is the company’s only
true “profit center” consider
the traditional organization chart
in
• —a pyramid with the
president at the top,
management in the middle,
and frontline people and
customers at the bottom—
obsolete.

LOYALTY
• Successful marketing companies invert
the chart.
• At the top are customers; next in
importance are frontline people who
meet, serve, and satisfy customers;
under them are the middle managers,
whose job is to support the frontline
people so they can serve customers
well; and at the base is top
management, whose job is to hire and
support good middle managers.
• We have added customers along the
sides to indicate that managers at every
level must be personally involved in
knowing, meeting, and serving
customers.

LOYALTY
Customer-PerceivedValue
• Customers tend to be value maximizers within the bounds of
search costs and limited knowledge, mobility, and income.
• Customers choose the offer they believe will deliver the
highest value and act on it
Total
Customer
Benefit
Total
Customer
Cost
Customer-
perceived
value

LOYALTY
• Customer-perceived value is the difference between the
prospective customer’s evaluation of all the benefits and costs
of an offering and the perceived alternatives
Total
Customer
Benefit
Total
Customer
Cost
Customer-
perceived
value

LOYALTY
• Total customer benefit is the perceived monetary value of the
bundle of economic, functional and psychological benefits
customers expect from a given market offering because of the
product, service, people, and image
Total
Customer
Benefit
Total
Customer
Cost
Customer-
perceived
value

LOYALTY
• Total customer cost is the perceived bundle of costs
customers expect to incur in evaluating, obtaining, using and
disposing of the given market offering, including monetary,
time, energy, and psychological costs
Total
Customer
Benefit
Total
Customer
Cost
Customer-
perceived
value

LOYALTY
Total Customer
Cost
Total Customer
Benefit
Customer-
perceived Value
Functional
Economic
Psychological
Evaluating
Obtaining
Using
Disposing

LOYALTY
• Customers estimate which
offer they believe—for
whatever reason—will deliver
the most perceived value and
act on it.
Highest Perceived
Value
Make
Purchasing
Decision

Customer-
perceived value
Total customer
benefit
Total customer
cost
Product benefit
Monetary
cost
Services
benefit
Time
cost
Personal benefit
Energy
cost
Image
benefit
Psychological
cost
LOYALTY
DeterminantsofCustomerPerceivedValue

LOYALTY
ApplyingValueConcepts
• Customer value analysis is used to reveal the company’s
strengths and weaknesses relative to those of competitors.
• The goal is to find out how our product/services value are
viewed by the customers compared to those of competitors

LOYALTY
• Steps in the analysis
Identify the major attributes and benefits
that customers value
Assess the quantitative importance of the
different attributes and benefits
Assess the company’s and competitor’s
performances on the different customer
values against their rated importance
Examine how customers in a specific segment
rate the company’s performance against a
specific major competitor on an individual
attribute or benefit basis
Monitor customer values over time

Buyer Choice Processes and Implications
• The buyer might be under orders to buy at the lowest price
• The buyer might make choices to look good in the short-run
• The buyer might have more weight to their personal benefit than
the company’s benefit
• Example
• Even if Caterpillar showed the buyer that its tractors were of
better value (lower overall costs, etc.) the buyer may still select a
competitor's product.
• The reasons could be because he was under orders to buy at the
lowest price, he didn’t realize that the operating expenses
would be significantly higher, or he could have had a friendship
with the competitor’s salesperson.
LOYALTY

LOYALTY
• The seller must assess the
total customer benefit and
total customer cost
associated with each
competitor’s offer in order to
know how its own offer rates
in the buyer’s mind.
• The seller at a disadvantage
has two alternatives to win
the sales:
• increase total customer benefit
• decrease total customer cost
Decrease
Total
Customer
Cost
Increase
Total
Customer
Benefit

BUILDING CUSTOMERVALUE,SATISFACTION, AND LOYALTY
ConsumerLoyalty
• Consumers have varying degrees of loyalty to specific brands,
stores, and companies.
• Loyalty is a deeply held commitment to rebuy or repatronize a
preferred product or service in the future despite situational
influences and marketing efforts having the potential to cause
switching behavior.

ConsumerLoyalty
• The value proposition consists of the whole cluster of benefits
the company promises to deliver; it is more than the core
positioning of the offering.

LOYALTY
ConsumerLoyalty
• For example, Volvo’s core positioning has been “safety,” but
the buyer is promised more than just a safe car; other benefits
include good performance, design, and safety for the
environment.
• The value proposition is thus a promise about the experience
customers can expect from the company’s market offering
and their relationship with the supplier.
• Whether the promise is kept depends on the company’s
ability to manage its value delivery system.

LOYALTY
ConsumerLoyalty
Core positioning:
• Safety
Volvo
Other benefits:
• Good performance
• Design
• Environmentally friendly

LOYALTY
ConsumerLoyalty
• The value delivery system includes all the experiences the
customer will have on the way to obtaining and using the
offering. At the heart of a good value delivery system is a set
of core business processes that help deliver distinctive
consumer value.

LOYALTY
ConsumerSatisfaction
• Satisfaction is a person’s feeling of pleasure or
disappointment that result from comparing a product or
service’s perceived performance (or outcome) to expectations
• If the performance or experience falls short of expectations, the
customer is dissatisfied.
• If it matches expectations, the customer is satisfied.
• If it exceeds expectations, the customer is highly satisfied or
delighted

LOYALTY
• If the performance or experience falls short of expectations, the
customer is dissatisfied.
• If it matches expectations, the customer is satisfied.
• If it exceeds expectations, the customer is highly satisfied or
delighted
Expectations

LOYALTY
• Consumer Expectations - Expectations result from past buying experience,
friends’ and associates’ advice, public information and discourse, and
marketers’ and competitors’ information and promises.
Consumer
Expectation
Past Buying
Experience
Friends’ And
Associates’
Advice
Public
Information
Marketers’ And
Competitors
Information
And Promises

MonitoringConsumerSatisfaction
Measuring Satisfaction
• Many companies systematically
measure how well they treat
customers, identify factors
shaping satisfaction and change
operations and marketing as a
result because satisfaction affects
retention and word of mouth
• High satisfaction or delight
creates an emotional bond with
the brand or company, not just a
rational preference.
High Satisfaction
Or Delight
Creates
An Emotional
Bond With Brand
And Company

LOYALTY
MEASUREMENT TECHNIQUES
• Periodic Surveys.
• Customer Loss Rate
• Hire Mystery Shopper
• Firsthand Experience
Periodic Surveys.
Customer Loss
Rate
Hire Mystery
Shopper
Firsthand
Experience

LOYALTY
• Periodic surveys can track
customer satisfaction directly and
ask additional questions to
measure repurchase intention
and the respondent’s likelihood
or willingness to recommend the
company and brand to others.
Periodic Surveys.
Customer Loss
Rate
Hire Mystery
Shopper
Firsthand
Experience

LOYALTY
• Companies need to monitor their
competitors’ performance too.
They can monitor their customer
loss rate and contact those who
have stopped buying or who
have switched to another
supplier to find out why.
Periodic Surveys.
Customer Loss
Rate
Hire Mystery
Shopper
Firsthand
Experience

LOYALTY
• Companies can hire mystery
shoppers to pose as potential
buyers and report on strong and
weak points experienced in
buying the company’s and
competitors’ products.
Periodic Surveys.
Customer Loss
Rate
Hire Mystery
Shopper
Firsthand
Experience

LOYALTY
• Managers themselves can enter
company and competitor sales
situations where they are
unknown and experience
firsthand the treatment they
receive, or they can phone their
own company with questions and
complaints to see how
employees handle the calls.
Periodic Surveys.
Customer Loss
Rate
Hire Mystery
Shopper
Firsthand
Experience

LOYALTY
INFLUENCE OF CUSTOMER
SATISFACTION
• For customer-centered
companies, customer satisfaction
is both a goal and a marketing
tool.
• Companies need to be especially
concerned with their customer
satisfaction level today because
the Internet provides a tool for
consumers to quickly spread
both good and bad word of
mouth to the rest of the world.
• Some customers set up their own
Web sites to air grievances and
galvanize protest, targeting high-
profile brands such as United
Airlines, Home Depot, and
Mercedes-Benz.
Customer
satisfaction
is
A goal
A
marketing
tool (Word
of Mouth)

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

LOYALTY
25%
Dissatisfied
5%
Complain
95%
Stop buying
54% - 70%
Buy again if resolved
95%
If resolved quickly
Tell 5
people
Tell 11
people

LOYALTY
ProductandServiceQuality
• Satisfaction will also depend on product and service quality.
Satisfaction
Product and
Service Quality

LOYALTY
• What exactly is
quality?
Quality is the totality
of features and
characteristics of a
product or service
that bear on its
ability to satisfy
stated or implied
needs. This is clearly
a customer-centered
definition.

LOYALTY
• We can say the seller has delivered quality whenever its product or
service meets or exceeds the customers’ expectations.
Product or
Service
meets or
exceeds
Customer
Expectations
Quality
Product and
Services

LOYALTY
• A company that satisfies most of its customers’ needs most of the
time is called a quality company.
Consistently
satisfies most
of its
customers
needs
Quality
Company

LOYALTY
• A company that satisfies most of its
customers’ needs most of the
time is called a quality company,
but we need to distinguish
between conformance quality and
performance quality (or grade).
• A Lexus provides higher
performance quality than a
Hyundai: The Lexus rides smoother,
goes faster, and lasts longer.
• Yet both a Lexus and a Hyundai
deliver the same conformance
quality if all the units deliver their
respective promised quality.
Quality
Company
Conformance
Quality
Performance
Quality

LOYALTY
VideoTime–“Customerloyaltyprogrammes...whybother!”
 Lance Walker is the CEO of
Loyalty NZ, the company that
runs New Zealand's largest
and most successful coalition
loyalty programme, Fly Buys.
 Lance will be exploring how
loyalty programmes have
become a very common
marketing strategy, with most
businesses offering them in
one form or another, and
most NZ consumers being
involved in several. But do
they really work, and do they
still have a place in the
marketing

MAXIMIZING CUSTOMER LIFETIME
VALUE
Section 2
47

MAXIMIZING CUSTOMER LIFETIME
VALUE
• Maximizing Customer
Lifetime Value
• The 80-20 rule states
that 80 percent or
more of the
company’s profits
come from the top 20
percent of its
customers.
20% of
Customers
80% of
Profits
Customers

MAXIMIZINGCUSTOMER LIFETIME VALUE
ReturnonCustomer
• Companies need to concern
themselves with Return on
Customer (ROC) and how
efficiently they create value from
the customers and prospects
available
• Key Components of Return on
Customer (ROC)
• Definition of A Profitable
Customer
• Assessing Customer
Profitability
• Strategies to Maximize ROC
• Activity-based Costing
Accounting
Definition of A
Profitable Customer
Assessing Customer
Profitability
Strategies to
Maximize ROC
Activity-based Costing
Accounting

ReturnonCustomer
• A profitable customer is a
person, household, or company
that over time yields a revenue
stream exceeding by an
acceptable amount the
company’s cost stream for
attracting, selling, and serving
that customer.
Definition of A
Profitable Customer
Assessing Customer
Profitability
Strategies to
Maximize ROC
Accounting

ReturnonCustomer
• Marketers can assess customer
profitability individually, by
market segment, or by channel
Definition of A
Profitable Customer
Assessing Customer
Profitability
Strategies to
Maximize ROC
Accounting

ReturnonCustomer
• Companies that conduct
customer profitability analysis:
• Can raise the price of its less
profitable products or
eliminate them
• Can try to sell less profitable
profit-making products
• Can ignore unprofitable
customers/encourage them to
switch to competitors
Definition of A
Profitable Customer
Assessing Customer
Profitability
Strategies to
Maximize ROC
Accounting

ReturnonCustomer
• Customer profitability analysis
(CPA) is best conducted with the
tools of an accounting technique
called activity-based costing
(ABC).
• Activity-based costing
accounting tries to identify the
real costs associated with serving
each customer and estimates all
revenue coming from the
customer, less all costs (including
making and distriuting the
products and services, taking
phone calls, traveling,
entertainment and gifts, etc.)
Definition of A
Profitable Customer
Assessing Customer
Profitability
Strategies to
Maximize ROC
Accounting

CustomerLifetimeValue
• Customer lifetime value describes the net present value of
the stream of future profits expected over the customer’s
lifetime purchases
• Expected revenues minus the expected costs of attracting, selling
and servicing the account, after the appropriate discount rate is
applied
• Provide a formal framework for planning customer investment
• Help marketers adopt a long-term perspective
• Lifetime value can be estimated for three to five years or use an
infinite time horizon

MAXIMIZING CUSTOMERLIFETIME VALUE
VideoTime–“HowtocalculateCustomerLifetimeValuein
Marketing”
 Dr. Scott Davis, a professor of
Marketing and founder of
SilverPlane video automation,
interviews successful
marketers to help you start a
business, lead a team,
understand consumer
behavior, deliver and
communicate benefits to your
customers, and market new
products.

CULTIVATING CUSTOMER RELATIONSHIPS
Section 3
56

CustomerInformation
• Information is easy to differentiate, customize, personalize, and dispatch
over networks at incredible speed.
• Companies are using information about customers to enact precision
marketing designed to build strong long-term relationships.
Customer
Information
Differentiate
Customize Personalize
Share

CustomerInformation
• But information cuts both ways.
• For instance, customers now have a
quick and easy means of doing
comparison shopping through sites
such as Bizrate.com, Shopping.com,
and PriceGrabber.com.
• The Internet also facilitates
communication between customers.
Web sites such as Epinions.com and
Yelp.com enable customers to share
information about their experiences
with various products and services.
Information
Companies used
information to
conduct precision
marketing
Customer use
information to do
comparison
shopping
Customer share
information about
their experience
with products and
services

CustomerInformation
• Customer empowerment has become a way of life for many
companies that have had to adjust to a shift in the power with
their customer relationships.

Customerrelationshipmanagement
• Customer relationship
management is the process of
carefully managing detailed
information about individual
customers and all customer
“touch points to maximize
loyalty.
• Key Concepts of CRM
• Real Time
• Behavioral Targeting
• Customer Value Management
• Personalizing Marketing
• Permission Marketing
• Participatory Marketing
• One to One Marketing
Real Time
Behavioral Targeting
Customer Value
Management
Personalizing Marketing
Permission Marketing
Participatory Marketing
One to One Marketing

• Enables real-time customer
service through effective use of
individual account information
Real Time
Customer Value
Management

• Behavioral targeting allows
companies to track online
behavior of target customers and
find the best match between ads
and prospects
Real Time
Customer Value
Management

• Customer value management
describes the company’s
organization of the value or the
customer base
Real Time
Customer Value
Management

• The widespread usage of the
Internet allows marketers to
abandon the mass market
practices that built brand
powerhouses in the 1950s,
1960s, and 1970s for new
approaches that are a throwback
to marketing practices from a
century ago, when merchants
literally knew their customers by
name.
• Personalizing marketing is about
making sure the brand and its
marketing are as relevant as
possible to as many customers as
possible—a challenge, given that
no two customers are identical.
Real Time
Customer Value
Management

• Permission marketing is the
practice of marketing to
consumer only after gaining their
expressed permission (in contrast
to interruption marketing via
mass media campaigns)
Real Time
Customer Value
Management

• Participatory marketing is more
appropriate since consumers
participate in the solution
Real Time
Customer Value
Management

• One-to One Marketing
• Don Peppers and Martha Rogers
outline a four-step framework for
one-to-one marketing that can be
adapted to CRM marketing . The
step is outline on the next slide.
Real Time
Customer Value
Management

Customer relationship management
Identify your
prospects and
customers
•Don’t go after
everyone.
•Build, maintain, and
mine a rich
customer database
Differentiate
customers in
terms of
•their needs and
•their value to
your company
Interact with
individual
customers to
improve your
knowledge about
their individual
needs and to build
stronger
relationships
Customize
products, services,
and messages to
each customer

CustomerEmpowerment
• Customers are empowered to
become evangelists and
demonstrate their passion.
• Key Concepts of Brand Evangelist
• Reviews and
Recommendation
• Quality and Integrity of
Reviews
• Rise of Influencer
• Important to Small Brand
Reviews and
Recommendation
Quality and Integrity
of Reviews
Rise of Influencer
Important to Small
Brand

CustomerEmpowerment
• Reviews and recommendations
are an important source of
information for consumer
decision-making
Reviews and
Recommendation
of Reviews
Rise of Influencer
Important to Small
Brand

CustomerEmpowerment
• The quality and integrity of
reviews can be in question Reviews and
Recommendation
of Reviews
Rise of Influencer
Important to Small
Brand

CustomerEmpowerment
• Bloggers who review many
products can be influential Reviews and
Recommendation
of Reviews
Rise of Influencer
Important to Small
Brand

CustomerEmpowerment
• Online word of mouth is
especially critical for small brands Reviews and
Recommendation
of Reviews
Rise of Influencer
Important to Small
Brand

CustomerRetention
• A company must keep customers
and increase their business, or
avoid customer churn
• To reduce the defection rate, the
company must:
Define and measure its
retention rate
Distinguish the causes
of customer attration
and identify those that
can be managed better
Compare the lost
customer’s lifetime value to
the costs of reducing the
defection rate

CustomerRetention
• Winning companies improve the
aggregate value of the customer
base by:
Reducing the rate of customer
defection
Increasing the longevity of the
customer relationship
Enhancing customer growth through
share of wallet, cross-selling and up-
selling
Making low-profit customers more
profitable or terminating them
Focusing disproportionate effort on
high-profit customers

CustomerRetention
• Companies that want to build
loyalty should: Interact closely with
customers
Develop loyalty
programs/frequency
programs/club membership
programs
Create institutional ties

CustomerRetention
• Listening to customers is crucial
to customer relationship
management. Some companies
have created an ongoing
mechanism that keeps their
marketers permanently plugged
in to frontline customer
feedback.
• But listening is only part of the
story. It is also important to be a
customer advocate and, as much
as possible, take the customers’
side and understand their point
of view.
Interact closely with
customers
Develop loyalty
programs/frequency
programs

CustomerRetention
• Frequency programs (FPs) are
designed to reward customers
who buy frequently and in
substantial amounts. They can
help build long-term loyalty with
high CLV customers, creating
cross-selling opportunities in the
process.
customers
Develop loyalty
programs/frequency
programs

CustomerRetention
• Pioneered by the airlines, hotels,
and credit card companies, FPs
now exist in many other
industries. Most supermarket
chains offer price club cards that
grant discounts on certain items.
Typically, the first company to
introduce an FP in an industry
gains the most benefit, especially
if competitors are slow to
respond.
• After competitors react, FPs can
become a financial burden to all
the offering companies, but some
companies are more efficient and
creative in managing them.
customers
Develop loyalty
programs/frequency
programs

CustomerRetention
• The company may supply
customers with special
equipment or computer links
that help them manage orders,
payroll, and inventory.
• Customers are less inclined to
switch to another supplier when
it means high capital costs, high
search costs, or the loss of loyal-
customer discounts.
customers
Develop loyalty
programs/frequency
programs

CustomerRetention
Win-Backs
• Regardless of how hard companies may try, some customers inevitably
become inactive or drop out.
• The challenge is to reactivate them through win-back strategies.
• It’s often easier to reattract ex-customers (because the company knows
their names and histories) than to find new ones.

CustomerRetention
Win-Backs
• Exit interviews and lost-customer
surveys can uncover sources of
dissatisfaction and help win back
only those with strong profit
potential.
Win Back
Strategies
Exit
Interviews
Lost
Customer
Surveys

CustomerDatabase
• Marketers must know their
customers. And in order to
know the customer, the
company must collect
information and store it in a
database from which to
conduct database marketing.
• Key Components:
Customer
Database
Database
Marketing
Data Warehouses
And Data Mining

CustomerDatabase
• A customer database is an
organized collection of
comprehensive information
about individual customers or
prospects that is current,
accessible, and actionable for
lead generation, lead
qualification, sale of a product or
service, or maintenance of
customer relationships.
Customer
Database
Database
Marketing
Data Warehouses
And Data Mining

CustomerDatabase
• Database marketing is the
process of building, maintaining,
and using customer databases
and other databases (products,
suppliers, resellers) to contact,
transact, and build customer
relationships.
Customer
Database
Database
Marketing
Data Warehouses
And Data Mining

CustomerDatabase
• Savvy companies capture
information every time a
customer comes into contact
with any of their departments,
whether it is a customer
purchase, a customer-requested
service call, an online query, or a
mail-in rebate card.
Customer
Database
Database
Marketing
Data Warehouses
And Data Mining

CustomerDatabase
• Banks and credit card companies,
telephone companies, catalog
marketers, and many other
companies have a great deal of
information about their
customers, including not only
addresses and phone numbers,
but also transactions and
enhanced data on age, family
size, income, and other
demographic information.
Customer
Database
Database
Marketing
Data Warehouses
And Data Mining

MAXIMIZING CUSTOMERLIFETIME VALUE
VideoTime–“BuildaCustomerRelationshipIn100Days”
 In this video, Kristina Mand-Lakhiani
from MindValley shares how you can
build strong customer relationships
through your database and email
marketing campaigns — so you can
earn their devoted trust and make
more sales — all on autopilot

TABLE OF CONTENTS
• Summary
• What Influences Consumer Behavior?
• Key Psychological Processes
• The Buying Decision Process: The Five-Stage Model
• Behavioral Decision Theory and Behavioral Economics

SUMMARY
• Consumer behavior is influenced by three factors: cultural (culture,
subculture, and social class), social (reference groups, family, and
social roles and statuses), and personal (age, stage in the life cycle,
occupation, economic circumstances, lifestyle, personality, and self-
concept). Research into these factors can provide clues to reach and
serve consumers more effectively.
• Four main psychological processes that affect consumer behavior
are motivation, perception, learning, and memory.
• To understand how consumers actually make buying decisions,
marketers must identify who makes and has input into the buying
decision; people can be initiators, influencers, deciders, buyers, or
users. Different marketing campaigns might be targeted to each type
of person.
•

SUMMARY
• The typical buying process consists of the following sequence of
events: problem recognition, information search, evaluation of
alternatives, purchase decision, and postpurchase behavior. The
marketers’ job is to understand the behavior at each stage.
• Consumers will not necessarily go through the buying process in an
orderly fashion and make skip and reverse stages and alternative
between going online and offline.
• The attitudes of others, unanticipated situational factors, and
perceived risk may all affect the decision to buy, as will consumers’
levels of postpurchase product satisfaction, use and disposal, and
the company’s actions.
• Consumers are constructive decision makers and subject to many
contextual influences. They often exhibit low involvement in their
decisions, using many heuristics as a result.

LEARNING OBJECTIVES
In this chapter, we will address the following questions:
• How do consumer characteristics influence buying behavior?
• What major psychological processes influence consumer
responses to the marketing program?
• How do consumers make purchasing decisions?
• In what ways do consumers stray from a deliberative, rational
decision process?

WHAT INFLUENCES CONSUMER
BEHAVIOR?
Section 1
95

WHAT INFLUENCES CONSUMER BEHAVIOR
WhatisConsumerBehaviour
•Consumer behavior is the study of
how individuals, groups, and
organizations select, buy, use, and
dispose of goods, services, ideas, or
experiences to satisfy their needs and
wants

FactorsInfluencingConsumerBehaviour
• A consumer’s buying behavior is
influenced by:
Cultural
Factors
Social
Factors
Personal
Factors

CulturalFactors
• Of these, cultural factors exert
the broadest and deepest
influence
• Culture is the fundamental
determinant of a person’s wants
and behavior.
• Marketers must closely attend to
cultural values in every country
to understand how to best
market their existing products
and find opportunities for new
products.
Cultural
Factors
Social
Factors
Personal
Factors

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

SocialFactors
• In addition to cultural factors, the
following social factors affect our
buying behavior.
• reference groups,
• family, and
• social roles and
• statuses
Cultural
Factors
Social
Factors
Personal
Factors

SocialFactors
• Social Factors
Reference
Groups
Family
Social Roles
And Statuses

SocialFactors
• A person’s reference groups are
all the groups that have a direct
(face-to-face) or indirect
influence on their attitudes or
behavior.
• Reference groups influence
members in at least three ways.
• They expose an individual to
new behaviors and lifestyles
• They influence attitudes and
self-concept
• They create pressures for
conformity that may affect
product and brand choices.
Reference
Groups
Family
Social Roles
And Statuses

SocialFactors
• Reference groups influence
members in at least three ways.
• They expose an individual to
new behaviors and lifestyles
• They influence attitudes and
self-concept
• They create pressures for
conformity that may affect
product and brand choices.
Reference
Groups
Family
Social Roles
And Statuses

SocialFactors
Membership
Groups
Groups having a direct influence are called membership groups.
Primary
Groups
Some of these are primary groups with whom the person interacts
fairly continuously and informally, such as family, friends,
neighbors, and coworkers.
Secondary
Groups
People also belong to secondary groups, such as religious,
professional, and trade-union groups, which tend to be more
formal and require less continuous interaction.
Aspirational
Groups
Aspirational groups are those a person hopes to join
Dissociative
Groups
dissociative groups are those whose values or behavior an
individual rejects

SocialFactors
• Family is the most
important consumer
buying organization in
society; family
members constitute
the most influential
primary reference
group
• Family of orientation
consists of parents and
sibling; affects
consumption choices
Reference
Groups
Family
Social Roles
And Statuses

SocialFactors
• Roles and status in
groups are an
important source of
information and help
to define norms for
behavior.
• A role consists of the
activities a person is
expected to perform.
Reference
Groups
Family
Social Roles
And Statuses

PersonalFactors
• Personal characteristics that
influence a buyer’s decision
include
• age and stage in the life cycle;
• occupation and economic
circumstances;
• personality and self-concept;
and
• lifestyle and values.
• Because many of these have a
direct impact on consumer
behavior, it is important for
marketers to follow them
closely.
Cultural
Factors
Social
Factors
Personal
Factors

PersonalFactors
• Our taste in food, clothes,
furniture, and recreation is often
related to our age.
• Consumption is also shaped by
the family life cycle and the
number, age, and gender of
people in the household at any
point in time.
• Marketers should also consider
critical life events or transitions—
marriage, childbirth, illness,
relocation, divorce, first job,
career change, retirement, death
of a spouse—as giving rise to
new needs.
• These should alert businesses to
ways they can help.
Age And Stage In The
Life Cycle
Occupation And
Economic Circumstances
Personality And Self-
concept
Lifestyle And Values

PersonalFactors
• Occupation also influences
consumption patterns. Marketers
try to identify the occupational
groups that have above-average
interest in their products and
services and even tailor products
for certain occupational groups:
Computer software companies,
for example, design different
products for brand managers,
engineers, lawyers, and
physicians.
Life Cycle
Occupation And
concept

PersonalFactors
• As the recent recession clearly
indicated, both product and
brand choice are greatly affected
by economic circumstances:
spendable income (level,
stability, and time pattern),
savings and assets (including the
percentage that is liquid), debts,
borrowing power, and attitudes
toward spending and saving.
Luxury-goods makers such as
Gucci, Prada, and Burberry are
vulnerable to an economic
downturn.
Life Cycle
Occupation And
concept

PersonalFactors
• Each person has personality
characteristics that influence his
or her buying behavior.
• By personality, we mean a set of
distinguishing human
psychological traits that lead to
relatively consistent and
enduring responses to
environmental stimuli (including
buying behavior).
• We often describe personality in
terms of such traits as self-
confidence, dominance,
autonomy, deference, sociability,
defensiveness, and adaptability.
Life Cycle
Occupation And
concept

PersonalFactors
• Personality can be a useful
variable in analyzing consumer
brand choices. Brands also have
personalities, and consumers are
likely to choose brands whose
personalities match their own.
• We define brand personality as
the specific mix of human traits
that we can attribute to a
particular brand.
Life Cycle
Occupation And
concept

PersonalFactors
• People from the same
subculture, social class, and
occupation may lead quite
different lifestyles.
• A lifestyle is a person’s
pattern of living in the world
as expressed in activities,
interests, and opinions. It
portrays the “whole
person” interacting with his
or her environment.
• Marketers search for
relationships between their
products and lifestyle groups.
Life Cycle
Occupation And
concept

PersonalFactors
• A computer manufacturer might
find that most computer buyers
are achievement-oriented and
then aim the brand more clearly
at the achiever lifestyle.
• By appealing to thrifty
consumers, Walmart has become
the largest company in the world.
Its “everyday low prices” have
wrung tens of billions of dollars
out of the retail supply chain,
passing the larger part of savings
along to shoppers in the form of
rock-bottom bargain prices.
Life Cycle
Occupation And
concept

VideoTime–“HowAmazon,Apple,FacebookandGoogle
manipulateouremotions”
 The combined market
capitalization of Amazon, Apple,
Facebook and Google is now
equivalent to the GDP of India.
How did these four companies
come to infiltrate our lives so
completely?
 Prof. Dr. Scott Galloway
 Scott Galloway is a Professor of
Marketing at NYU Stern School of
Business where he teaches Brand
Strategy and Digital Marketing to
second-year MBA students and is
the author of the Digital IQ Index
®, a global ranking of prestige
brands' digital competence. In
2012, Professor Galloway was
named "One of the World's 50
Best Business School Professors"
(Poets & Quants).

KEY PSYCHOLOGICAL PROCESSES
Section 2
116

Stimulus ResponseModel
• The starting point for understanding consumer behavior is the
stimulus-response model (see next slide)
• Marketing stimuli and environmental stimuli enter the
consumer’s consciousness, and a set of psychological processes
combine with certain consumer characteristics to result in
decision processes and purchase decisions.

Stimulus ResponseModel

Stimulus Response Model
• The marketer’s task is to understand what happens in the
consumer’s consciousness between the arrival of the outside
marketing stimuli and the ultimate purchase decisions.

The Four Key PsychologicalProcesses
• The following key psychological
processes fundamentally
influence consumer responses:
Motivation
Perception
Learning
Emotions
Memory

Motivation
A need becomes a motive when it is
aroused to a sufficient level of
intensity to drive us to act.
• Freud – Psychological forces that
shaped peoples behavior are
unconscious.
• Maslow – People are driven by
different needs at different
times. According to Maslow,
human needs are arranged in a
hierarchy from most to least
pressing.
• Herzberg – Developed two-factor
theory that distinguishes
dissatisfiers (factors that cause
dissatisfaction) from satisfiers
(factors that cause satisfaction)
Motivation
Perception
Learning
Emotions
Memory

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

Perception
• A motivated person is ready to
act—how is influenced by his or
her perception of the situation.
In marketing, perceptions are
more important than reality,
because perceptions affect
consumers’ actual behavior.
Motivation
Perception
Learning
Emotions
Memory

Perception
• Perception is the process by
which we select, organize, and
interpret information inputs to
create a meaningful picture of
the world. It depends not only on
physical stimuli, but also on the
stimuli’s relationship to the
surrounding environment and on
conditions within each of us.
• One person might perceive a
fast-talking salesperson as
aggressive and insincere;
another, as intelligent and
helpful. Each will respond to the
salesperson differently.
Motivation
Perception
Learning
Emotions
Memory

Perception
• People emerge with different
perceptions of the same
object because of three
perceptual processes: Selective attention
Selective distortion
Selective retention

Perception
• Selective attention: because we
cannot possibly attend to all
these, we screen most stimuli out
• People are more likely to
notice stimuli that relate to a
current need
notice stimuli they anticipate
notice stimuli whose
deviations are large in
relationship to the normal size
of the stimuli
• People are influenced by
unexpected stimuli
Selective attention
Selective retention

Perception
• Selective distortion: the tendency
to interpret information in a way
that fits our preconceptions/prior
beliefs and expectations
Selective attention
Selective retention

Perception
• Selective retention: consumers
are likely to remember good
points about a product we like
and forget good points about
competing products.
Selective attention
Selective retention

Perception
• Subliminal Perception
• no evidence supports the notion that marketers
can systematically control consumers at a
subliminal level

Learning
• Learning induces
changes in our
behavior arising from
experience.
Motivation
Perception
Learning
Emotions
Memory

Learning
• Learning theorists believe learning is
produced through the interplay of
drives, stimuli, cues, responses, and
reinforcement.
• A drive is a strong internal
stimulus impelling action.
• Cues are minor stimuli that
determine when, where, and
how a person responds.
• Generalization transfers beliefs to
other products
• Discrimination means we have
learned to recognize differences
in sets of similar stimuli and can
adjust our responses accordingly.
Motivation
Perception
Learning
Emotions
Memory

Learning
Driver
Cues
Discrimination

Emotions
• Consumer response may be
emotional and invoke different
kinds of feelings.
• Marketers are increasingly
recognizing the power of
emotional appeals—especially if
these are rooted in some
functional or rational aspects of
the brand.
• An emotion-filled brand story has
been shown to trigger’s people
desire to pass along things they
hear about brands, through
either word of mouth or online
sharing.
Motivation
Perception
Learning
Emotions
Memory

Memory
• Cognitive psychologists
distinguish between short-
term memory (STM)—a
temporary and limited
repository of information—
and long-term memory
(LTM)—a more permanent,
essentially unlimited
repository.
• Most widely accepted views
of long-term memory
structure assume we form
some kind of associative
model.
Motivation
Perception
Learning
Emotions
Memory

Memory
• Brand associations consist of all brand related thoughts, feelings,
perceptions, images, experiences, beliefs, attitudes, and so on that
become linked to the brand node in the brain.
Brand
Association
Association
Association
Association
Association

THE BUYING DECISION PROCESS: THE
FIVE-STAGE MODEL
Section 3
136

THEBUYINGDECISIONPROCESS:THEFIVE-STAGEMODEL
BuyingDecisionProcess
• Smart companies try to
fully understand
customers’ buying
decision process—all the
experiences in learning,
choosing, using, and
even disposing of a
product.
Learning
Choosing
Using
Disposing

• Marketing scholars have
developed a “stage model”
of the process.
• The consumer typically passes
through these five stages.
• Consumers don’t always pass
through all five stages—they
may skip or reverse some.
• Clearly, the buying process
starts long before the actual
purchase and has
consequences long afterward
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• An internal stimulus is
triggered by a person’s
normal needs – hunger,
thirst – when the need
rises to a threshold level.
• A need can also be
aroused by an external
stimulus, such as seeing
a commercial for a
vacation. A person then
begins to consider the
possibility of taking a
vacation.
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• Marketers need to
identify the
circumstances that
trigger a particular need
by gathering information
from a number of
consumers so they can
then develop marketing
strategies that spark
consumer interest.
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• Surprisingly, consumers
often search for limited
amounts of information.
• Surveys have shown that
for durables, half of all
consumers look at only
one store, and only 30
percent look at more
than one brand of
appliances.
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• We can distinguish between
two levels of engagement in
the search.
• The milder search state is
called heightened attention.
At this level a person simply
becomes more receptive to
information about a product.
• At the next level, the person
may enter an active
information search: looking
for reading material, phoning
friends, going online, and
visiting stores to learn about
the product.
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• No single process is used by all
consumers, or by one consumer
in all buying situations. It is
important that marketers
understand that:
1. The consumer is trying to
satisfy a need.
2. The consumer is looking for
certain benefits from the
product solution.
3. The consumer sees each
product as a bundle of
attributes with varying
abilities to deliver the
benefits. The attributes of
interest will vary based on the
product.
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• Through experience and
learning, people acquire
beliefs and attitudes that
influence buying behavior.
• A belief is a descriptive
thought that a person holds
about something. Attitudes
are a person’s enduring
favorable, or unfavorable
evaluations, emotional
feelings, and action
tendencies toward some
object or idea.
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• A consumer may make
as many as five
subdecisions: brand
(brand A), dealer (dealer
2), quantity (one
computer), timing
(weekend), and payment
method (credit card)
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• Even if consumers form brand
evaluations, two general
factors can intervene
between the purchase
intention and the purchase
decision.
• Attitudes Of Others
• Unanticipated Situational
Factors

• The first factor is the attitudes of
others. The influence of another
person’s attitude depends on
two things:
• the intensity of the other
person’s negative attitude
toward our preferred
alternative and
• our motivation to comply with
the other person’s wishes.
• The more intense the other
person’s negativism and the
closer he or she is to us, the
more we will adjust our purchase
intention. The converse is also
true.

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

• A consumer may make
as many as five
subdecisions:
• brand (brand A),
• dealer (dealer 2),
• quantity (one computer),
• timing (weekend), and
• payment method (credit
card)
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

• The expectancy-value model is a compensatory model, in that
perceived good things about a product can help to overcome
perceived bad things.
• Consumers often take “mental shortcuts” called heuristics or
rules of thumb in the decision process.

• With noncompensatory
models of consumer choice,
positive and negative
attribute considerations don’t
necessarily net out.
Conjunctive heuristic: the consumer sets a
minimum acceptable cutoff level for each
attribute and chooses the first alternative
that meets the minimum standard for all
attributes.
Lexicographic heuristic: the consumer
chooses the best brand on the basis of its
perceived most important attribute.
Elimination-by-aspects heuristic: the
consumer compares brands on an
attribute selected probabilistically—where
the probability of choosing an attribute is
positively related to its importance—and
eliminates brands that do not meet
minimum acceptable cutoffs

• Postpurchase
Satisfaction is a
function of the
closeness between
expectations and the
product’s perceived
performance
Problem
Recognition
Information
Search
Evaluation Of
Alternatives
Purchase
Decision
Postpurchase
Behavior

POSTPURCHASE SATISFACTION
• If performance falls short of expectations, the consumer is
disappointed
• If it meets expectations, the consumer is satisfied;
• If it exceeds expectations, the consumer is delighted.
• These feelings make a difference in whether the customer buys the
product again and talks favorably or unfavorably about it to others.
• The larger the gap between expectations and performance, the
greater the dissatisfaction.
• Here the consumer’s coping style comes into play. Some
consumers magnify the gap when the product isn’t perfect and are
highly dissatisfied; others minimize it and are less dissatisfied.

POSTPURCHASE ACTIONS
• A satisfied consumer is more likely to purchase the product again
and will also tend to say good things about the brand to others.
• Dissatisfied consumers may abandon or return the product. They
may seek information that confirms its high value. They may take
public action by complaining to the company, going to a lawyer, or
complaining to other groups (such as business, private, or
government agencies).
• Private actions include deciding to stop buying the product (exit
option) or warning friends (voice option).

Postpurchase Satisfaction
Postpurchase ActionsDefect
Loyal
Dissatisfied
Satisfied
Delighted
Stay or Go

VideoTime–“HowConsumersMakeProductPurchaseDecisions”
 The consumer buying process
consists of a series of stages that
we--as consumers--go through
when purchasing a product of
service. In this video the steps of
the consumer buying process is
explained, and it will also explain
how companies tailor their
promotional efforts as consumers
occupy different stages of the
prices.

THE BUYING DECISION PROCESS: THE FIVE-STAGE MODEL
Moderating Effects on Consumer Decision Making
• The manner or path by which
a consumer moves through
the decision-making stages
depends on several factors,
including the level of
involvement and extent of
variety seeking.
Level Of
Involvement
Extent Of
Variety
Seeking

LOW-INVOLVEMENT
CONSUMER DECISION MAKING
• The expectancy-value model
assumes a high level of
consumer involvement, or
engagement and active
processing the consumer
undertakes in responding to a
marketing stimulus.
Level Of
Involvement
Extent Of
Variety
Seeking

VARIETY-SEEKING BUYING
BEHAVIOR
• Some buying situations are
characterized by low involvement
but significant brand differences.
• Here consumers often do a lot of
brand switching. Think about
cookies. The consumer has some
beliefs about cookies, chooses a
brand without much evaluation,
and evaluates the product during
consumption.
• Next time, the consumer may
reach for another brand out of a
desire for a different taste. Brand
switching occurs for the sake of
variety, rather than
dissatisfaction.
Level Of
Involvement
Extent Of
Variety
Seeking

ModeratingEffectsonConsumerDecisionMaking
Low-involvement
Variety seeking

• Four techniques to
try to convert a low-
involvement product
into one of higher
involvement.
They can link the product to an
engaging issue
They can link the product to a
personal situation
They might design advertising to
trigger strong emotions related
to personal values or ego defense
They might add an important feature

BEHAVIORAL DECISION THEORY AND
BEHAVIORAL ECONOMICS
Section 4
163

BEHAVIORAL DECISION THEORY AND BEHAVIORAL
ECONOMICS
• Consumers don’t always
process information or make
decisions in a deliberate,
rational manner.
• One of the most active
academic research areas in
marketing over the past three
decades has been behavioral
decision theory (BDT).
• Behavioral decision theorists
have identified many
situations in which consumers
make seemingly irrational
choices such as:
Consumers are more likely to choose an
alternative (a home bread maker) after a
relatively inferior option (a slightly better but
significantly more expensive home bread maker)
is added to the available choice set
Consumers are more likely to choose an
alternative that appears to be a compromise in
the particular choice set under consideration,
even if it is not the best alternative on any one
dimension
The choices consumers make influence their
assessment of their own tastes and preferences
Getting people to focus their attention more on
one of two considered alternatives tends to
enhance the perceived attractiveness and choice
probability of that alternative

ECONOMICS
• (Cont) Behavioral decision
theorists have identified
many situations in which
consumers make seemingly
irrational choices such as:
The way consumers compare products that vary
in price and perceived quality (by features or
brand name) and the way those products are
displayed in the store (by brand or by model
type) both affect their willingness to pay more
for additional features or a better-known brand
Consumers who think about the possibility that
their purchase decisions will turn out to be
wrong are more likely to choose better-known
brands
Consumers for whom possible feelings of regret
about missing an opportunity have been made
more relevant are more likely to choose a
product currently on sale than wait for a better
sale or buy a higher-priced item
Consumers’ choices are often influenced by
subtle (and theoretically inconsequential)
changes in the way alternatives are described

BEHAVIORALDECISION THEORYAND BEHAVIORAL
ECONOMICS
Decision Heuristics
Decision Framing

ECONOMICS
Decision Heuristics
• Previously we reviewed some
common heuristics that occur
with noncompensatory
decision making.
• Other heuristics similarly
come into play in everyday
decision making when
consumers forecast the
likelihood of future outcomes
or events.
The availability heuristic—Consumers base their
predictions on the quickness and ease with which a
particular example of an outcome comes to mind. If
an example comes to mind too easily, consumers
might overestimate the likelihood of its happening.
The representativeness heuristic—Consumers base
their predictions on how representative or similar
the outcome is to other examples. One reason
package appearances may be so similar for different
brands in the same product category is that
marketers want their products to be seen as
representative of the category as a whole.
The anchoring and adjustment heuristic—
Consumers arrive at an initial judgment and then
adjust it based on additional information. For
services marketers, a strong first impression is critical
to establish a favorable anchor so subsequent
experiences will be interpreted in a more favorable
light.

ECONOMICS
Framing
• Decision framing is the
manner in which choices are
presented to and seen by a
decision maker.
• A $200 cell phone may not seem that
expensive in the context of a set of $400
phones but may seem very expensive if those
phones cost $50. Framing effects are
pervasive and can be powerful.
• University of Chicago professors Richard
Thaler and Cass Sunstein show how marketers
can influence consumer decision making
through what they call the choice
architecture—the environment in which
decisions are structured and buying choices
are made.
• According to these researchers, in the right
environment, consumers can be given a
“nudge” via some small feature in the
environment that attracts attention and alters
behavior. They maintain Nabisco is employing
a smart choice architecture by offering 100-
calorie snack packs, which have solid profit
margins, while nudging consumers to make
healthier choices

BEHAVIORAL DECISION THEORY
VideoTime–“WhatAreHeuristics?”
 We all use heuristics to make
everyday decisions — but
sometimes they blind us to
the truth. So we need to do
something that doesn’t come
easy: accept that our ideas
might be wrong.

TABLE OF CONTENT
• Summary
• What Is Organizational Buying?
• Buying Situations
• Participants in the Business Buying Process
• The Purchasing/Procurement Process
• Stages in the Buying Process: Eight buy phases, buy grid
framework
• Developing effective business-to-business marketing programs
• Managing Business-to-Business Customer Relationships
• Institutional and Government Markets

SUMMARY
• Organizational buying is the decision-making process by which
formal organizations establish the need for purchased products and
services, then identify, evaluate, and choose among alternative
brands and suppliers. The business market consists of all the
organizations that acquire goods and services used in the production
of other products or services that are sold, rented, or supplied to
others.

SUMMARY
• Compared with consumer markets, business markets generally
have fewer and larger buyers, a closer customer supplier
relationship, and more geographically concentrated buyers. Demand
in the business market is derived from demand in the consumer
market and fluctuates with the business cycle. Nonetheless, the
total demand for many business goods and services is quite price
inelastic. Business marketers need to be aware of the role of
professional purchasers and their influencers, the need for multiple
sales calls, and the importance of direct purchasing, reciprocity, and
leasing.

SUMMARY
• The buying center is the decision-making unit of a buying
organization. It consists of initiators, users, influencers, deciders,
approvers, buyers, and gatekeepers. To influence these parties,
marketers must consider environmental, organizational,
interpersonal, and individual factors.
• The buying process consists of eight stages called buyphases: (1)
problem recognition, (2) general need description, (3) product
specification, (4) supplier search, (5) proposal solicitation, (6)
supplier selection, (7) order-routine specification, and (8)
performance review.

LEARNING OBJECTIVES
In this chapter, we will address the following questions:
• What is organizational buying?
• What buying situations do business buyers face?
• Who participates in the business-to-business buying process?
• How do business buyers make their decisions?

WHAT IS ORGANIZATIONAL BUYING?
Section 1
177

• Organizational buying is the decision-making process by which
formal organizations establish the need for purchased
products and services and identify, evaluate, and choose
among alternative brands and suppliers

The Business Market versus the Consumer Market
• The business market consists of all the organizations that acquire
goods and services used in the production of other products or
services that are sold, rented, or supplied to others.
• Some of the major industries making up the business market
are aerospace; agriculture, forestry, and fisheries; chemical;
computer; construction; defense; energy; mining;
manufacturing; construction; transportation; communication;
public utilities; banking, finance, and insurance; distribution;
and services
• More dollars and items change hands in sales to business
buyers than to consumers

TheBusinessMarketversustheConsumerMarket
Agriculture
Communications
Banking & Finance
Transportation &
Distribution
Construction
Forestry
Manufacturing

• Similarities to
Consumer Market
Understanding deep customer needs
Identify areas for growth
Improving value management
techniques
Calculating better marketing metrics
Competing and growing in global
markets
Countering product commoditization
Gain support for the marketing
concept

Fewer, larger buyers
Close supplier–customer relationships
Professional purchasing
Multiple buying influences
Multiple sales calls
Derived demand
Inelastic demand
Fluctuating demand
Geographically concentrated buyers
Direct purchasing
• Differences to
Consumer Market

VideoTime–“B2Bvs.B2C:DifferencesinCustomerJourneys”
 A customer's a customer,
right? Not so fast. There are
some big differences between
business buyers and
consumers, especially in how
they make purchasing
decisions along their
respective customer journeys.

BUYING SITUATION
Number of Decisions
• The number of decisions faced
by a business buyer depends on
the
Complexity Of The
Problem Being Solved
Newness Of The
Buying Requirement
Number Of People
Involved
Time Required

BUYING SITUATION
Types of Buying Situations
• Three types of buying situations
• The business buyer makes the
fewest decisions in the straight
rebuy situation and the most in
the new-task situation
Straight Rebuy
Modified Rebuy
New Task

BUYING SITUATION
• Straight rebuy: the purchasing
department reorders items like
office supplies and bulk
chemicals on a routine basis and
chooses from suppliers on an
approved list
Straight Rebuy
Modified Rebuy
New Task

BUYING SITUATION
• Modified rebuy: the buyer in a
modified rebuy wants to change
product specifications, prices,
delivery requirements, or other
terms. This usually requires
additional participants on both
sides.
Straight Rebuy
Modified Rebuy
New Task

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

PARTICIPANTS IN THE BUSINESS BUYING
PROCESS
Section 3

PARTICIPANTS IN THE BUSINESS BUYING PROCESS
Who are the buyers?
• Who buys the trillions of
dollars’ worth of goods
and services needed by
business organizations?
Purchasing agents are influential
in straight-rebuy and modified-
rebuy situations, whereas other
employees are more influential in
new-buy situations
Engineers are usually influential
in selecting product components,
and purchasing agents dominate
in selecting suppliers
The buying center is the decision-
making unit of a buying
organization

Who are the buyers?
• The buying center is the
decision-making unit of a
buying organization
• They are are all those
individuals and groups who
participate in the purchasing
decision-making process, who
share some common goals
and the risks arising from the
decisions.
• They are listed here:
Initiators
Users
Influencers
Deciders
Approvers
Buyers
Gatekeepers

Whoarethebuyers?
Influencer
Buyers Gatekeeper
DeciderInitiator/
Users
Approver

Who are the buyers?
Initiators: Users or others in the
organization who request that
something be purchased
Users: Those who will use the product
or service.
Influencers: People who influence the
buying decision, often by helping define
specifications and providing information
for evaluating alternatives.
Deciders: People who decide on
product requirements or on suppliers
Approvers: People who authorize the
proposed actions of deciders or buyers
Buyers: People who have formal
authority to select the supplier and
arrange the purchase terms
Gatekeepers: People who have the
power to prevent sellers or information
from reaching members of the buying
center. For example, purchasing agents,
receptionists, and telephone operators
may prevent salespersons from
contacting users or deciders

Who are the buyers?
• Buying Center Influences Participants with differing interests, authority,
status, susceptibility to persuasion, and
sometimes very different decision criteria
Business buyers also have personal
motivations, perceptions, and preferences
influenced by their age, income, education,
job position, personality, attitudes toward
risk, and culture.
Individuals, not organizations, make
purchasing decisions
Businesspeople are buying solutions to two
problems: the organization’s economic and
strategic problem and their own personal
need for achievement and reward.

Targeting Firms and Buying Centers
• Firms should uncover those
business sectors that have high
future growth potential, most
profitable customers, and the
most promising opportunities.
Once target firms are identified
the firm must determine how
best to sell to them.
• Marketers must determine:
Who are the major
decision makers?
What decisions do the
influence?
What is their level of
influence?
What evaluation
criteria do they use?

THE PURCHASING/PROCUREMENT
PROCESS
Section 4

Targeting Firms and Buying Centers
• In principle, business buyers seek the highest benefit package
(economic, technical, service, and social) in relationship to a
market offering’s costs.
• New, more strategically oriented purchasing departments
have a mission to seek the best value from fewer and better
suppliers

STAGES IN THE BUYING PROCESS
Section 5

Eight buy phases
• The stages in the buying
process
Problem
Recognition
Description
and
Characteristics
Supplier Search
Proposal
Solicitations
Supplier
Selection
Order
Specification
Performance
Review

Eight buy phases
• Problems can be discovered
from internal or external
stimuli.
• A broken machine, low stock
levels, or a new product being
developed.
• External stimuli can trigger
the process as well.
Problem
Recognition
Description
and
Characteristics
Supplier Search
Proposal
Solicitations
Supplier
Selection
Order
Specification
Performance
Review

Eight buy phases
• Product value analysis is an
approach to cost reduction
that studies whether
components can be
redesigned or standardized or
made by cheaper methods of
production without affecting
the product performance.
Problem
Recognition
Description
and
Characteristics
Supplier Search
Proposal
Solicitations
Supplier
Selection
Order
Specification
Performance
Review

Eight buy phases
• Includes electronic marketplaces
like catalog sites, vertical
markets, auction sites, spot
markets, private exchanges,
barter markets, buying alliances
• Online business buying shaves
transaction costs for both buyers
and suppliers, reduces time
between order and delivery,
consolidates purchasing systems,
and forges more direct
relationships between partners
and buyers
• For disadvantages, it may help to
erode supplier–buyer loyalty and
create potential security
problems
Problem
Recognition
Description
and
Characteristics
Supplier Search
Proposal
Solicitations
Supplier
Selection
Order
Specification
Performance
Review

Eight buy phases
• Buyers next invites suppliers
to submit proposals. Complex
or expensive items will
require written and detail
proposals and suppliers who
make the cut may often be
required to make formal
presentations of their
proposals.
• Marketers must be skilled in
researching, writing, and
presenting proposals.
Materials should stress the
value and benefits in
customer terms.
Problem
Recognition
Description
and
Characteristics
Supplier Search
Proposal
Solicitations
Supplier
Selection
Order
Specification
Performance
Review

Eight buy phases
• Buyers will often specify and
rank desired supplier
attributes, often using a
supplier-evaluation model. In
some cases, companies are
reducing the overall number
of suppliers they deal with.
They want to choose suppliers
who can be responsible for
large component systems.
• Marketers should develop
compelling value propositions
and understand how buyers
arrive at their valuations.
Problem
Recognition
Description
and
Characteristics
Supplier Search
Proposal
Solicitations
Supplier
Selection
Order
Specification
Performance
Review

Eight buy phases
• Negotiation of the final order,
listing the technical
specifications, the quantity
needed, the expected time of
delivery, return policies,
warranties, etc.
• After selecting suppliers, the
buyer negotiates the final order.
Depending on the product, the
buyer may end up leasing the
product. Advantages of leasing
include: Latest product, better
service, conservation of capital,
and tax advantages.
Problem
Recognition
Description
and
Characteristics
Supplier Search
Proposal
Solicitations
Supplier
Selection
Order
Specification
Performance
Review

Eight buy phases
• Buyers periodically review the
performance of chosen suppliers
using one of three methods.
• Buyers contact end users and
ask for their evaluations of
the product/supplier
• Rate the supplier on several
criteria using a weighted-
score method.
• Aggregate the cost of poor
performance to come up with
adjusted costs of purchase,
including price.
Problem
Recognition
Description
and
Characteristics
Supplier Search
Proposal
Solicitations
Supplier
Selection
Order
Specification
Performance
Review

VideoTime–“ATypicalB2BBuyingProcess”
 Randy Whitcroft.
 Has over 25 years of hands-on
sales, management, and customer
engagement experience with the
majority of it in selling technology
solutions within the B2B
marketplace.
 Has engaged and sold to many of
the Fortune 500 companies as
well as government agencies right
across North America.

Maximizing Customer Lifetime Value

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