THE ROLE OF VALUE MAXIMIZATION IN CONSUMER BEHAVIOR

Submitted by- Saket Kumar Jha

Class roll no.- 1314

 What is Consumer Behavior?
Consumer behavior is the study of consumers and the processes they use to choose, use
(consume), and dispose of products and services, including consumers’ emotional,
mental, and behavioral responses. Consumer behavior incorporates ideas from several
sciences including psychology, biology, chemistry, and economics.
 Why is Consumer Behavior Important?

Studying consumer behavior is important because this way marketers can understand
what influences consumers’ buying decisions. By understanding how consumers decide
on a product they can fill in the gap in the market and identify the products that are
needed and the products that are obsolete. Studying consumer behaviour also helps
marketers decide how to present their products in a way that generates maximum
impact on consumers. Consumer behavior is often influenced by different factors.
Marketers should study consumer purchase patterns and figure out buyer trends. In most
cases, brands influence consumer behavior only with the things they can control; like
how IKEA seems to compel you to spend more than what you intended to every time
you walk into the store.
There are three categories of factors that influence consumer behavior:
 Personal factors: an individual’s interests and opinions that can be influenced by
demographics (age, gender, culture, etc.).

 Psychological factors: an individual’s response to a marketing message will depend on

their perceptions and attitudes.

 Social factors: family, friends, education level, social media, income, they all influence
consumers’ behavior.
 Types of Consumer Behavior
There are four main types of consumer behavior:

 Complex buying behavior:- This type of behavior is encountered when consumers are
buying an expensive, infrequently bought product. They are highly involved in the
purchase process and consumers’ research before committing to invest. Imagine buying a
house or a car; these are an example of a complex buying behavior.

 Dissonance-reducing buying behavior:- The consumer is highly involved in the purchase

process but has difficulties determining the differences between brands. ‘Dissonance’ can
occur when the consumer worries that they will regret their choice. Imagine you are
buying a lawnmower. You will choose one based on price and convenience, but after the
purchase you will seek confirmation that you’ve made the right choice.
 Habitual buying behavior:- Habitual purchases are characterized by the fact that the
consumer has very little involvement in the product or brand category. Imagine grocery
shopping: you go to the store and buy your preferred type of bread. You are exhibiting a
habitual pattern, not strong brand loyalty.

 Variety seeking behavior:-In this situation, a consumer purchases a different product not
because they weren’t satisfied with the previous one, but because they seek variety. Like
when you are trying out new shower gel scents.
 What affects Consumer Behavior?
 Marketing campaigns:- Marketing campaigns influence purchasing decisions a lot. If
done right and regularly, with the right marketing message, they can even persuade
consumers to change brands or opt for more expensive alternatives. Marketing campaigns
can even be used as reminders for products/services that need to be bought regularly but
are not necessarily on customers’ top of mind (like insurance for example). A good
marketing message can influence impulse purchases.

 Economic conditions:- For expensive products especially (like houses or cars) economic
conditions play a big part. A positive economic environment is known to make consumers
more confident and willing to indulge in purchases irrespective of their personal financial
liabilities. Consumers make decisions in a longer time period for expensive purchases and
the buying process can be influenced by more personal factors at the same time.
 Personal preferences:- Consumer behavior can also be influenced by personal factors,
likes, dislikes, priorities, morals, and values. In industries like fashion or food personal
opinions are especially powerful. Advertisement can, of course, help but at the end of the
day consumers’ choices are greatly influenced by their preferences. If you’re vegan, it
doesn’t matter how many burger joint ads you see, you’re probably not going to start
eating meat because of that.

 Group influence:- Peer pressure also influences consumer behavior. What our family
members, classmates, immediate relatives, neighbors, and acquaintances think or do can
play a significant role in our decisions. Social psychology impacts consumer behavior.
Choosing fast food over home-cooked meals, for example, is just one of such situations.
Education levels and social factors can have an impact.
 Purchasing power:- Last but not least, our purchasing power plays a significant role in
influencing our behavior. Unless you are a billionaire, you will take your budget into
consideration before making a purchase decision. The product may be excellent, the
marketing could be on point, but if you don’t have the money for it, you won’t buy it.
Segmenting consumers based on their buying capacity will help marketers determine
eligible consumers and achieve better results.
 Consumer Behavior Pattern
Buying behavior patterns are not synonymous with buying habits. Habits are developed as
tendencies towards an action and they become spontaneous over time, while patterns show a
predictable mental design. Each customer has his unique buying habits, while buying
behavior patterns are collective and offer marketers a unique characterization. Customer
behavior patterns can be grouped into:

 Place of purchase:- Most of the time customers will divide their purchases in several
stores even if all items are available in the same store. Think of our favorite
hypermarket: although we can find clothes and shoes there as well, we are probably
buying those from actual clothing brands. When a customer has the capability and the
access to purchase the same products in different stores, they are not permanently loyal
to any store, unless that’s the only store they have access to. Studying customer behavior
in terms of choice of place will help marketers identify key store locations.
 Items purchased:- Things to consider: the items that were purchased and how much of
each item was purchased. Necessity items can be bought in bulk while luxury items are
more likely to be purchased less frequently and in small quantities. The amount of each
item purchased is influenced by the perishability of the item, the purchasing power of
the buyer, unit of sale, price, number of consumers for whom the item is intended, etc.
Analyzing a shopping cart can give marketers lots of consumer insights.

 Time and frequency of purchase:- Customers will go shopping according to their

feasibility and will expect service even during the oddest hours; especially now in the
era of e-commerce where everything is only a few clicks away. It’s the shop’s
responsibility to meet these demands by identifying a purchase pattern and match its
service according to the time and frequency of purchases. One thing to keep in mind:
seasonal variations and regional differences must also be accounted for.
 Method of purchase:- A customer can either walk into a store and buy an item right then
and there, or order online and pay online via credit card or on delivery. The method of
purchase can also induce more spending from the customer (for online shopping, you
might also be charged a shipping fee for example). The way a customer chooses to
purchase an item also says a lot about the type of customer he is.
 What is Value Maximization?
The act or process of adding to an individual's net worth by increasing the share price of
the common stock in which that individual has invested.
 What is Customer Value Maximization?
Customer Value Maximization is the set of techniques and actions used to entice customers
to increase the frequency and amount of their transactions, and to increase the length of
time they remain active customers of a business.
Once a company has acquired a new customer, the ultimate goal of marketing and retention
efforts is to maximize the revenues that the customer generates for the company (assuming
a stable relationship between revenue and profit). The three primary factors which
contribute to the total revenues that any particular customer will generate are time (how
long the customer remains an active customer), purchase frequency (how often the
customer purchases something from a company) and monetary value of purchases (how
much money the customer spends with the company). Thus, maximizing the value of the
customer to the business means maximizing the time × purchase frequency × monetary
value equation.
 How to achieve Customer Value Maximization?
Providing customers with the products or services they seek, at competitive prices and with
terrific customer service is obviously the best way to ensure that a customer remains with a
company for the long term and continues to buy from it. However, there are always specific
actions available to a company which will encourage customers to stick around longer and
spend more. The challenge is knowing which actions to apply to which customers and when
to do so for maximum results.

 Customer segmentation:– It is important to segment customers into small groups and

address individual customers based on actual behaviors – instead of hard-coding any
pre-conceived notions, making assumptions of what makes customers similar to one
another or looking only at aggregated/averaged data (which hides important facts about
individual customers).
 Tracking customers over time:– It is critical to follow how customers move among
different segments over time (i.e., dynamic segmentation), including customer lifecycle
context and cohort analysis – instead of just determining in what segments customers are
now without regard for how or when they arrived there.

 Accurate prediction of future customer behavior:– One should always use predictive
customer behavior modeling techniques – instead of just looking in the rear-view mirror
of historical data.

 Customer lifetime value (LTV):– Customer value maximization modeling should be

based on the use of advanced calculations to determine the customer lifetime value
(LTV) of every customer and to base decisions on it – instead of looking only at the
short-term revenue that a customer may bring the company.
 Marketing action optimization:– The marketer or retention expert should know, based
on objective metrics, exactly what marketing actions to do now, for each customer, in
order to maximize the long-term value of every customer – instead of trying to figure
out what to do based on a dashboard or pile of reports.
 Components of Customer Value Maximization
The S-Q-I-P approach:-
Customer value can be summarized in one important question that all organizations must
ask themselves: “What do customers really want and how do we meet their demands”? or
in other words, “What do customers really value?”. These might seem like very simple
questions, especially if they are supplied with answers such as, “Customers want value!” or
“Customers want quality products and services!”. These are correct responses. However,
Professor Art Weinstein, in his customer value theory, or what he calls “superior customer
value”, would say that customers want more than just simple value; they want businesses to
overwhelm and surprise them by going above and beyond the ordinary to meet their needs
and wants (Weinstein, 2012). This means delivering above and beyond on every value-
point of the customer value spectrum in terms of four components: service, quality, image,
and price. Weinstein (2012) calls these the “The Essence of Customer Value”.
Customer value refers to the ability of companies to create and add value to the goods and
services, especially to the services they offer to customers, or the service aspects of their
business. Essentially, customer value entails extraordinary delivery on these four value-
points or components:
 Service: the intangible value offered to customers.
 Quality: customer’s perception of how well a company’s products and services meet
expectations.
 Image: customer’s perception of the company or business they interact with.
 Price: the price you can command for your goods and services and that your customers
are willing to pay.
Together, these form what Weinstein (2012), and Johnson and Weinstein (2004) refer to as
the SQIP Approach to customer value, where S stands for Service, Q for Quality, I for
Image, and P for Price (SQIP). Each of these four components contributes to customers’
perception of value or definition of value and affects their levels of dissatisfaction or
satisfaction with a product, service, or business. Thus, in order to design and deliver
superior customer value, each of these components must be treated with equal attention and
importance. As Figure in the previous slide shows, service, quality, image, and price are
what constitute customer value in terms of conferred benefits, meeting customers needs,
wants, and expectations, and hence affecting and determining customer satisfaction,
company performance, market share, competitive advantage, profits, revenue, market
position, brand loyalty, and ultimately company success and survival.
Essentially, everything that a company does ultimately funnels into customer value and this
translates into the bottom line that is so important to measuring and defining business success
in the globally competitive economy of the 21st century.
The prices of products and services depend highly on service quality, the quality of the
products and services offered, and the image of the company and the benefits that the
products and services bring to consumers. Organizations must remember that consumers are
unlimited and rapturous in their need and desire for value for their money. Consumers want to
experience the joy of every hard-earned dollar they spend on products and services and
companies must understand this as a basic idea in their approach to meeting customer needs
and wants. That is why Weinstein (2012) regards customer value as best defined from
customers’ perspectives as tradeoffs between benefits received from offers versus the
sacrifices including money, stress, and time to obtain products and services or these offers.
While the value of a dollar has experienced continuous decline over the past several decades,
consumers have a “dollar-constant perception” when it comes to value; they must feel that the
value of their dollar remains the same overtime with the services and products you offer in
terms of service, quality, and satisfaction. This might seem unreasonable on the part of
consumers. However, we must remember that our customers are value-seeking individuals,
dollar maximizing spenders, and difficult-to-please clients who are seeking great service,
exceptional quality, image-building, and fairly priced products and services. Describing the
SQIP approach; (S-Q-I-P) approach, Weinstein (2012) states that value is expressed in many
ways as a combination of service, product quality, image and price. Customer value
encompasses the total experience of the customer regarding the organization, its products and
services, purchase and post-purchase services and customer support, as well as the overall
impact of the interaction between consumer and product, the benefits conferred and how these
affect well-being and are perceived by influential others (Duncan, 2005; Kerin, Hartley and
Rudelius, 2009).
Quality service is critical to corporate success in today’s increasingly competitive
environment (McFarlane and Britt, 2007). Delivering high quality service is closely related to
profits, cost savings, and market share (Ham, 2003). Weinstein (2012) believes that the
service factor must reign supreme in value creating organizations as evident in companies
such as Nordstrom, Ritz-Carlton, Lexus, American Express, UPS, and FedEx. Delivering
service quality is an essential strategy for success in today’s economy (Parasuraman,
Zeithaml, and Berry 1985, 1986; Reicheld and Sasser, 1990; Zeithaml, Parasuraman, and
Berry, 1990; McFarlane, Britt, Weinstein, and Johnson, 2004; McFarlane and Britt, 2007).
Product quality and innovation have become especially important to producers and consumers
in the 21st century where competition and the need for change have forced both parties to
search for new means and ways to create value and to satisfy needs and wants using limited
resources. This entails using available and emerging technology and new methods and ideas
to satisfy an increasingly sophisticated and smarter customer-base and survive in both the
marketplace and marketspace characterizing the global economy.
Price is the fourth and an equally important element of customer value as service, quality,
and image. It is through price that customers and producers or providers of goods and
services express the presence of the other three elements in the SQIP model. As Weinstein
(2012) notes, tradeoffs exist among the S-Q-I-P elements and companies cannot expect to be
market leaders or absolutely superior in all areas. The best they should strive to do therefore
is to offer an effective and efficient combination of these that define the value they create
and deliver to their customers. Some companies have mastered offering great prices to
customers and make it their mission (value proposition) to do so.
 Strategic importance of Customer Value Maximization
Customers are the reason why businesses exist! While many individuals going into business
think first and foremost in terms of profits and earnings, and are motivated by these factors,
without having a good customer base or established needs and wants for their product or
service ideas, operating a business would be impossible. Thus, customers should be the first
starting point for developing and implementing a business idea. Starting with the customer
allows the entrepreneur or business leader to set priorities straight from the beginning –
understanding that businesses exist to meet and satisfy customer needs and wants, and that
those that fail to do so quickly disappear.
Businesses, leaders and managers, as well as employees must think of themselves as value
creators and value drivers or what Pohlman and Gardiner (2000) call value adders. They must
start thinking of customer value strategically by recognizing that every point of interaction
with customer affects the perception of value and the company’s ability to design and deliver
superior value. This means that customer value is not exclusively an upper management or
strategic concern, it is everyone’s business and an ongoing matter as customers come into
contact with products and services and their providers daily, whether direct in terms of face-
to-face interaction or indirectly via various channels and media. Both the S-Q-I-P approach
and Customer Value Funnel (CVF) developed and presented by Johnson and Weinstein
(2004), and Weinstein (2012) are effective tools that organizations can use to strategically
create customer value as the basis for organizational operations, performance, growth, and
success.
The strategic and overall importance of customer value can be summarized in ten (10) salient
points:-
 Designing and providing superior customer value are the keys to successful business
strategy in the 21st century.
 Value reigns supreme in today’s marketplace and marketspace.
 Customers will not pay more than a product is worth and will reward excellence.
 A customer centric culture provides focus and direction for the organization, ensuring that
exceptional value will be offered to customers.
 Designing and delivering superior customer value propels organizations to market
leadership positions in today’s highly competitive global markets – absolute advantage.
 Providing outstanding customer value has become a mandate for management.
 In choice-filled arenas, the balance of power has shifted from companies to value-seeking
customers.
 Managing customer value is even more critical to organizations in the new service and
information-based economy.
 Firms not providing adequate value to customers will struggle or disappear – customer
value is a key ingredient in building competitive advantage.
 Today’s customers are quite smart and sophisticated and are looking for companies that
(1) create maximum value for them based on their needs and wants, and (2) demonstrate
that they value their business (Weinstein, 2012).

Designing and delivering superior customer value will help organizations develop winning
and retention strategies in an environment where competition has eroded other bases for
differentiation and market leadership.
 CONCLUSION
Customers are more than just avid and hard-to-please individuals patronizing your business.
Businesses must come to understand that customers are their most valuable long-term
strategic partners. Organizations must understand that customer value is not simply a tactic
or short-term oriented endeavor; it is a way of doing business, and understanding the
dynamics of business value drivers and how they interact to create profitability and success
overtime. Value over time (VOT) is what builds strong and lasting businesses, as well as
what creates market drivers and leaders.