5.

ANALYZING CONSUMER BEHAVIOUR (Ch4-PP6/7)

The objective is to develop a complete picture of consumer behaviour in the relevant product category or
market; in order to have a complete view, a consumer analysis should include elements other than current
consumers, such as competitors’ consumers (may be useful to understand why they buy competitors’
products instead of yours), analysing former customers (to understand weaknesses of the product), and
analysing those who never purchased (to understand how to expand the market).
Consumer behaviour analysis addresses five questions, or issues:

1. WHO ARE THE CONSUMERS? MARKET SEGMENTATION

This first step of consumer analysis deals with a fundamental concept, market segmentation, defined as the
process of subdividing the mass market into distinct subsets of customers (segments) that behave in the same
way or have similar needs; these segments must be internally homogenous and externally heterogenous
with regard to the aspect analysed; these segments, therefore, can be treated differently in terms of
marketing and product attributes. In practice, this means that variance (or standard deviation) must be very
low inside the group, and high instead across different groups.
Segmentation can be thought as a kind-of compromise between two more extreme situations:
 Homogenous market, in which firms provide the same product to each customer: no differentiation
of any kind across firms.
 Heterogenous market, in which companies provide a specific and tailor-made product to each
customer; the heterogenous market is much more similar to the current trend of firms, which are
valuing more and more the possibility of providing tailor-made products for each customer (NIkeID,
M&Ms, …) to better satisfy them and provide the best experience possible. Yet, segmentation is still
a widespread approach.
Generally, there are some fundamental reasons why segmentation is so important:
1. Segmentation usage and importance depends on the product: segmenting commodities is much more
difficult – even if many firms actually do it.
2. Segmentation can be considered as a compromise between the high costs of tailor-made product and
the low satisfaction of customers related to mass production; the segmentation approach to the market
rather than a mass-marketing approach is efficient because money is spent only on those whom the
manager has determined are potential customers: thus, less money is wasted. At the same time,
segmentation is more effective than mass-marketing because of the “semi-tailored nature” of the
programs: in the mass-marketing approach, none of the segments would be totally satisfied, while the
segmentation approach can develop separate advertising campaigns focusing on each benefit desired
by the members of each segment: segmentation can be expensive, but the overall response in terms of
sales will be much better.
3. The firm can better design some of the core issues of its relationship with the customers:
 Product: Product/service design and more in line with the needs of consumers in each
segment
 Pricing: More precise guidelines for price discrimination by levels of price sensitivity in each
segment
 Distribution: Selection of distribution channels consistent with segment buying patterns
 Promotion, advertising and communications: Better directed media selection and advertising
messages
4. Its crucial as a strategic part of marketing, useful in creating a differentiated position related to
competitors.
Moreover, we should differentiate when:
 During the maturity phase of a market, during which competition is fierce and firms are trying to
steal to each other market shares; in this context, segmentation can be useful to better satisfy needs of
consumers.
 When competition is intense;
 When market has complex and differentiated demand;
 When the firm has limited productive capacity (simply because it cannot serve the whole market).
In practice, segmentation can be performed following some steps:
1. Choosing the “unit of analysis”, among final consumers, firms, professionals, intermediaries, …
since product and services selection might reflect the decision of more than one individual, we should
 take into consideration all the ones that may have importance in diffusion and sales of our product. In
the specific case of new products, a relevant unit of analysis are distributors.
It’s crucial to not miss any target in this phase, otherwise all the successive analysis will be biased.
2. Choosing the variables to use as basis for segmentation, considering variables as the potential set
of information used to then create segments; different variables can be used to identify segments, and
different variables may identify different segmentation approaches, giving different results. The
crucial part in this step is not selecting the highest possible number of variables, but the most relevant
variables instead (other variables can then be used in successive phases to describe the target). There
are different segmentation approaches available, depending on variables used:
 Socio-demographic segmentation, based on variables such as age, gender, education, social
class, income, race, nationality, … this kind of variables are clearly not so linked with
internal needs and values of people, however, they’re used a lot in segmentation because
they’re easy and cheap to get (widely available). The assumption behind the usage of these
variables is that different socio-demographic groups actually have different needs,
preferences and interests. Limitations of this kind of variable is that different demographic
segments may have similar preferences; they’re good variables to describe segments, but they
cannot explain or cause behaviour in anyway, so they’ve weak forecasting power.
 Geographic segmentation, which implies the division of the market in countries, nations,
regions, cities, climate, … Again, these variables are not that meaningful in explaining
behaviour and needs of people, however, they’re extremely useful to get. One example of
geographic segmentation is given by the “patchwork nation” segmentation, which assumes
that each region of America can be described with some specific characteristics. The
assumption is that customers, needs, preferences and interests vary depending on their place
of residence.
 Psychographic segmentation uses variables that characterize the psychological differences
among people in terms of personalities, and social class, such as values, interests, hobbies,
lifestyle, … certainly more efficient in describing internal needs of people. However, it has a
problem: it’s way more difficult, long and costly to use, because data is not readily available
often, and questionnaires are long and intrusive; results may be biased, mainly because of
self-declared behaviours (people may lie in some of the questions) non-response bias
(because of the intrusive nature of the questionnaire, some of the respondents may not
answer, and results would have a self-selection problem, meaning that all people decide to
answer may already form a precise segment with defined characteristics); moreover, to deal
with psychographic segmentation you’ll certainly need experts to make sense of results. One
example of psychographic segmentation is the VALS SYSTEM by SRI International, one of
the most popular psychographic systems. This system is a segmentation scheme developed by
Marketing Consulting Agency with the purpose of understanding consumer psychology and
buying behaviour; they developed a questionnaire which should be able to capture two
dimensions, “primary motivation of customers” (ideals, achievement, desire of sel-
expression, …) and “resources” (tendency to consume goods and services). In the end,
VALS defines 8 segments of adult consumers who have different attitudes and exhibit
distinctive behaviour and decision-making patterns:
 Innovators: successful, sophisticated and active people with high self-esteem and
significant resources; these are the most receptive to new products and ideas.
 Thinkers, mature, satisfied people who value order, knowledge and responsibility.
Usually well educated, they’re conservative and practical consumers.
 Experiencers, young, enthusiastic, impulsive. They’re avid consumers and spend much
of their money on clothing, fast food, music, …
 Achievers are successful career people who feel in control of their lives, and buy
established, prestige products and services.
 Believers are conservative, conventional people whose beliefs revolve around family,
church and their country; they usually favour national products and established brands.
 Strivers are fun loving, striving to find a place in their lives, and low in socio-economic
status. They usually purchase products to emulate more successful people.
 Makers are practical people who have constructive skills and value self-sufficiency.
They’re usually suspicious of new ideas.
  Survivors are poor, ill-educated, and usually are very cautious consumers.
When matched against purchasing and media habits, psychographics can provide useful
information about the consumers of a product that goes beyond demographic information.
 Behavioural segmentation, based on variables as occasion, user status (non-user, regular
user, …) usage rate (light user/heavy user) or loyalty status. This kind of segmentation is
particularly relevant because behavioural variables can really capture and monitor costumer
behaviour, and also those differences across consumers that are ultimately of interest to the
marketer. Moreover, all behavioural variables are strictly linked with purchase behaviour and
therefore with profits of the company. One particular part of behavioural segmentation is
benefit segmentation, based on the differences in specific benefits that different groups of
consumers look for in a product; products, in fact, can be defined as “bundle of benefits”, and
consumers differ in the importance they attach to different benefits. Consumers can be
segmented on basis of how they value benefit of products.
Regardless the variables we choose for
segmentation, we need to consider the
concept of relevance of variables: we want
that variables with which we segment
customers are relevant and strongly linked to
our purpose (sales, or whatever); for a
variable to be relevant, segments that come
from it must be well defined, externally
heterogenous and internally homogenous;
Moreover, we should keep in mind that
there’s not a pre-existent set of relevant
variables: we can choose different variables
for each analysis, applying personal judgement, if we think they’re relevant; the listed variables are
just the ones more used, and deemed to be effective.
3. Segment creation. There are two main approaches for segment creation:
 “A priori” segmentation design, when the market is split according to pre-existing criteria
and we know in advance the number and the nature of groups, such as with gender, …
 “A posteriori” segmentation design, also called “data-driven” or “clustering-based”; here the
number and the type of segments aren’t known in advance, and are determined from
clustering of unit of analysis on their similarities
on some selected set of relevant variables. There
are different classification procedures for
determining membership to specific groups and
to identify these groups; the most common is the
cluster analysis, which is a statistical multivariate
technique developed to classify units into
homogenous groups; it’s usually performed by
software, who find a small number of groups with
minimized internal variance and maximized
variance across groups.
When we’re dealing with more than one variable, we can represent pairs in a scatter-plot, and
compute distance between each pair with Euclidean distance; results are then summarized in
a matrix, and the ones with lower results are closer (potential cluster – slides??).
4. Profiling consumer segments. Once segments have been created, we can profile (describe) them
using other variables that we did not used in segmentation (socio-demographic, …), as descriptor
variables. This gives a more complete picture of segments and of their needs and characteristics.
At last, once we’ve described segments, we can evaluate them to understant whether they’re actually
relevant for implementing the marketing strategy; there are 5 important criteria to follow in this step;
segments, in fact, must be
 Measurable: size, purchasing power and profiles of the segments must be measurable.
 Substantial, market segments must be large or profitable enough;
 Accessible¸ market segments must be effectively reached and served;
  Differentiable, segments must be conceptually distinguishable and must respond differently to
different marketing mix elements and programs;
 Actionable, effective programs can be designed for attracting and serving the segment.
Technology based markets – Rogers’ curve segmentation. Customers react to the characteristics of an
innovation and to perceived risk differently: some are risk-averse, while others are risk-takers. In the
technology market this implies that some customer will adopt an innovation sooner than others; moreover,
the rate of adoption of new technologies is highly dependent on how many customers are in this early
adoption group: if the group grows, the technology is likely to be adopted by a large fraction of the potential
user group. The model we use to describe the diffusion of innovations is the Rogers’ Curve: here the basic
idea is that the spread of innovations is affected by the amount of inoculation that occurs from the first
buyers (the innovators): if they spread a positive word-of-mouth, this, combined with marketing efforts, will
make the product to spread through the population.

The five types of adopters are:

 Innovators, who are eager to try new ideas; since they’re interested in being the first owners of a
new technological product, they’re often price insensitive.
 Early adopters are not interested in technology for its own sake, but they can detect the value of a
new product and how it will enhance their lives or their businesses; this group is critical in making a
new technologically based product successful.
 Early majority; these buyers are interested in new technologies, but take a wait-and-see attitude to
determine if the product is worthy. It’s a large group and it’s necessary to attract them for the
product to be commercially viable.
 Late majority adopters are similar to the early majority, but are much more conservative in terms of
how much of an industry infrastructure must be built before they’ll buy.
 Laggards are often not interested in new technologies, sceptic approach.
The actual percentages in each buyer group may differ by product category, but also a given point in time it’s
not necessarily clear which stage you are in; from the marketing point of view, it’s important to understand
the characteristics of the buyers who are the largest group at a particular stage in the technology product’s
life cycle.
Data collection for market segmentation. Both primary and secondary data can be used to collect
information for market segmentation; surveys are commonly used, also to obtain behavioural data indicating
quantities purchased and other information. However, the difficulty in developing segments is to choose
among the large number of variables that can be taken into consideration, and their potential combinations.
As usually, secondary data is always a good place to start, also in case of market segmentation; a major
source of secondary information on market segments is syndicated data, which cover a large number of
product categories and are sold to companies requesting the reports. A common source of this kind of
information is Mediamark Research INC, or also Nielsen with their PRIZM NE system (which links together
census and psychographics data). Syndicated research studies can show only what has happened in the past,
and therefore it may be inaccurate to extrapolate from these data the potential of a particular segment
because the segments may reflect only historical marketing patterns of the companies in the market; primary
research, obviously, is more capable of determining potential by asking appropriate questions that probe
possible future behaviour.

TARGETING
It’s important to separate the act of segmenting the market from the act of targeting, which means choosing
which segment or segments to pursue actively: the former is where the marketing manager considers the
many possible ways to segment the market for the product, using both primary and secondary marketing
research to develop profiles of the customers, while in the second phase marketing managers actually chose
which segment to serve, using many different techniques. Given the myriad ways of segmenting markets, the
task of determining which segments are better than others, and consequently choose which to focus on
(selection of market targets) is very difficult and is one of the strategic aspects of marketing.
Often in the first phase (segmentation) researchers use qualitative variables, which are the best choice in
order to describe and differentiate segments; however, it’s crucial not to base the targeting choice on the
qualitative variable analysis, since it cannot provide any information on the proportions and size of the
segments: in order to properly estimate segment attractiveness, quantitative research is needed; having the
results and variables resulting from the qualitative analysis, we can divide variables in three categories:
 Those related to customer dissatisfaction about the current product: if there’s dissatisfaction, then
there’s space for a new product to enter in the market.
 Those related to customer’s behaviours and preferences, related to the product space.
 Those related to the willingness to pay for product.
On this basis, we should analyse the size and the profit potential of each market segment, to check if its
substantial.
Then, a table is created highlighting the average score of each variable, for each segment; the most important
variables are willingness to pay and size of the market: if these are not positive, then the segment is not
interesting (multiply fee, or willingness to pay, by size of the segment to rank them). Once we’ve recognized
substantial segments, we need to consider response of each other segment to other variables; there are two
methods for this:
 Horizontal analysis, to compare different response of each segment for one variable;
 Vertical analysis, to compare responses to each variable in one group;
This process leads the researcher to discover the best 2/3 segments to target; choice on how many actually
targeting depends on resources and other strategies of the firm. One criterion that should always be applied is
parsimony; although having a large number of segments sounds appealing, it’s expensive and inefficient to
pursue too many segments, because all of them should receive different levels and types of marketing, and a
budget stretched over too many segments results in an insufficient concentration of resources in any one
segment.
The successive phase is product positioning, which implies identifying the core-value proposition of the firm
and occupying a distinct position relative to competing brands in the mind of consumers.

WHY DO CONSUMERS BUY?

The first step in any kind of purchasing behaviour is need recognition, the reason why people make
purchases. Needs are motivating forces that compel action for their satisfaction: in considering people needs,
we can refer to Maslow’s pyramid of human needs, that are divided in five ordered levels, physiological –
safety – social – ego – self-actualization; each of these needs imply the need of different products, even if we
also need to consider that products may satisfy several of these needs simultaneously (cars).
Another way to think about what motivates people to purchase g/s is to think of them as offering not physical
attributes but benefits instead, so that the consumer purchases to obtain the benefits the purchase delivers; for
this reason, one of the core jobs of the marketer is to translate characteristics into product benefits (also using
focus groups and surveys to have better understanding),which then have to be communicated to the market
through advertising, … For this reason, it’s crucial to develop an analysis of benefits by market segment,
since all segments will value product benefits differently; marketing research should, therefore, not only
attempt to uncover the benefits that consumers attach to the product features, but also match them with the
target segments.
HOW DO CONSUMERS BUY? UNDERSTANDING PURCHASING BEHAVIOUR
So, as we’ve just recognized, each purchase decision process begins
with need recognition;
2. Search for alternatives; in this phase, customers look for
all the alternative products that deliver the desired benefits
or satisfy the desired needs; generally, in this process
costumers use both internal and external sources of
information. Internal sources of information are mainly
those retrieved from memory (past experience and past
conversations with others); external forms of information
are information the customer obtains from the environment
after establishing the need: examples may be advice from
experts, internet research, discounts and offers, … as we can
see, internal and external sources of information overlap.
Generally, word-of-mouth is deemed to be the more reliable
among all the other sources, and one of the most important
drivers of consumers’ behaviour in general (especially true
in case of adoption of new technologies and new products).
Word-of-mouth communication can be stimulated by firms
both personally (giving incentives to recommend the
product) or electronically (user groups, …).
As a result of the search for alternatives, customers form two different sets of options:
 Evoked or consideration set, which is the set of products from which the customer will
choose to purchase; it’s crucial for brands to be present at least in this set, to have the
possibility of being evaluated and then purchased. Especially for new products, the manager
must devote a large portion of the marketing budget to making customers aware that the
product exists; if awareness is not low in the beginning, presence in the evoked set depends
on performance, quality and image.
 Inert set, the set of products the customer is sure he won’t consider when buying;
Primary data can help in determining in which set consumers place the brand.
3. Evaluation of alternatives, the phase in which the customer makes a choice from the evoked set.
Costumers, unconsciously, decompose the product in attributes (quality, brand name, price, …)
which are then evaluated according to the multi-attribute model, which is used to make a choice.
Basically, the model works by applying the equation
𝐾

𝐴𝑖𝑗 = ∑ 𝑤𝑖𝑘 𝑥𝑖𝑗𝑘

𝑘=1
Where:
 w stands for weight, the importance customer i gives to attribute k.
 x stands for the customer’s (i) rating of the specific attribute k for specific brand j.
In the end, the multi-attribute model works like a weighted average of ratings against importance.
So, the key issue here for the marketing manager is, at first, to determine the set of attributes
customers use in making purchase decisions, which is usually done using qualitative analysis
(managerial judgement, focus groups, …); the second question is how customers perceive the
different brands on these attributes (rating, usually discovered with quantitative analysis¸ asking
consumers through surveys and questionnaires).

Another key issue of the analysis is determining determinance of the attribute k on which brands are
rated. Determinance of the attribute is related to two problems:
 Importance of the attribute k for customers: if the attribute is not important for customers, it
won’t have any weight in influencing the decision-making process.
  Common perception: if customers have more or less the same perception of all brands
relative to the attribute k, then the attribute is not able to differentiate brands, and not
meaningful in influencing the decision-making process. Therefore, it’s not relevant for our
analysis – in other words, not determinant.
Generally, determinance can be computed as
𝐷𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑎𝑛𝑐𝑒𝑘 = 𝐷𝑖𝑓𝑓𝑒𝑟𝑒𝑛𝑡𝑖𝑎𝑡𝑖𝑜𝑛 × 𝐼𝑚𝑝𝑜𝑟𝑡𝑎𝑛𝑐𝑒
Importance can be inferred from surveys and other tools already used in the previous step;
differentiation, instead, is how much customers’ perception of attribute k varies among different
brands, and can be determined by using standard deviation of attribute k.
4. Purchase and use of the product and Evaluation of consumption (post-purchase behaviour).
After the purchase is made, the buyer “consumes” the g/s; it’s important to note that the buyer’s
purchase experiences and evaluation of consumption of the product become part of the internal
memory search: this means that good experience create favourable memories, and enhances the
probability of future purchases, while bad experiences increase the probability that the product won’t
be re-purchased and the customer won’t give a positive word-of-mouth. The evaluation process is
strongly affected by expectations customers have prior to usage: during and after consumption, in
fact, customer will evaluate the product relative to these expectations (low exp, good perf  good
evaluation, high exp, good perf  ok, …). Generally, products that meet or exceed expectations
receive a favourable post-purchase evaluation and the opposite reaction results for those that do not
achieve expected levels.

PURCHASE INFLUENCES
There are some influences on customer behaviour external to those listed above; these include a variety of
interpersonal and social interactions that shape the way consumers make purchasing decisions. Such
influences can be divided in:
1. Group influences, including
 Family and friends, and especially the family life cycle, where each stage brings with it a
different set of values and attitudes. Typical stages of family life cycle are: bachelor stage 
newly married couples  full nest 1,2,3  empty nest 1,2  solitary survivor. Obviously,
each of these phases imply different needs.
 Social class, sometimes referred to as socioeconomic status, often highly correlated with
occupation. There are four groups: upper, middle, working, lower.
 Culture. Culture values are transmitted by religious organizations, educational institutions, and
the family; culture is made of unique traditions and tastes, and marketers should offer products
that take into account these traditions and tastes.
Cultural differences are particularly important in a global marketing context: significant
differences in culture, in fact, can affect the way customers respond to the product and to the
marketing strategy of the brand. The main elements of culture are: language, religion, values
and attitudes, education, … As a general rule, sensitivity to cultural differences is necessary for
successful marketing of a product into a foreign country.
2. Product class influences, Problems associated with the marketing of technology-based products are
concentrated largely in the earliest stages of the product life-cycle: after the category is established,
most products (both high or low-tech) become well known, and are marketed in much the same way
as other kinds of products and services. Further analysis on this issue in the Rogers’ curve. Rogers,
moreover, defined 5 attributes to explain why customers adopt new technologies:
 Relative advantage: customers will adopt a new product only if they consider it to be an
improvement over the current product being used to satisfy the same need; relative advantage
can be stated in many different terms (economic, psychological, utilitarian).
 Compatibility of the innovation with existing systems, values and beliefs, or previously
introduced ideas. Higher compatibility leads to faster adoption of innovation, because it
implies lower costs (both mental and actual) of adoption for customers.
 Complexity; perceived complexity of an innovation is negatively related to the success of the
innovation itself: simple innovations are clearly more likely to be adopted: simplicity and
immediate comprehension is what consumers want.
  Trialability, which is the ability of potential users to try a product on a limited basis before
adopting it; this is particularly a problem for new technologies, where uncertainty about the
product is high, and for services, because of their inherent intangibility.
 Observability, the degree to which an innovation and its results are visible to others.
 Network externalities, even if not listed by Rogers. For many g/s, the value of owning them
increases as the number of owners increases (telephone, fax, …); thus, attractiveness of many
products is driven by how many others are on the network.
Another important concept linked to these factors is perceived risk, which is the uncertainty involved
with relative advantage, complexity, … Perceived risk can be defined as the “extent to which the
customer is uncertain about the consequences of an action”; therefore, the two components of
perceived risk are uncertainty (likelihood that certain outcome might occur) and consequences
(whether these outcomes will be positive or negative, and how severe); thus, the challenge for high-
tech marketing managers is to reduce the uncertainty or the severity of possible negative
consequences, which is often done by offering extensive employee training (b2b), generous warranty,
return policies, …
3. Situational influences, those that are unique to a particular time/space, including:
 Physical surroundings, such as the weather.
 Social surroundings, the people with you when you shop
 Temporal factors, such as time pressure.
 Task definition factors, such as buying something as a birthday present.
 Antecedent states, such as mood or current financial situation.
One last thing to consider in purchase influences are buying roles; although purchasing decisions involving
multiple people are more common for b2b situations, the purchasing decisions for many consumer products
and services involve multiple people in the household. Different roles in a group buying decisions are the
initiator (recognizes the need), the influencers, decider, purchaser, users. These microsegments have
different needs and seek different benefits, so it’s important to decide on who to focus.

WHEN DO CONSUMERS BUY? – PURCHASE TIMING

For each segment, it’s important to understand when customers purchase in terms of
 Time of the day (for fast food, utilities, …)
 Day of week (for retail shopping, movies, ..)
 Month or season (for products such as ice creams, surf boards, skis, …)
 Cycles defined in years, such as durable goods replacement cycle.
Timing issues affect both marketing and operations personnel, because communications in media such as
radio, television, the Internet, … can be timed precisely, demand can be generated by placing the
communications near the appropriate time of demand; moreover, channels of distribution must have
sufficient stocks of products when demand occurs.