MKTG330:

Introduction

Studying consumer behavior is fun and interesting. Why, for example, do people turn right more often than left when they enter a grocery store? Why do consumers shop on their tablets and laptops at night from the couch but not on their mobile devices in the store or at home? As marketers, we want answers to these questions so that we can better predict and meet the needs of buyers.

Consumer behavior (CB) is driven by both internal and external influences. 

External examples are environmental, such as the ambience or cleanliness of a restaurant or even the weather, the accessibility of a product we want (is it close by, a far drive but worth it, or able to be purchased online?), and the opinions, advice, and expertise of others we trust. 

Internal factors include preconceived perceptions and attitudes, personal beliefs and interests, the way we process information and learn, and so on. For example, if your attitude toward a brand is positive, it may be the first place you look when you need a new item that that brand makes. Likewise, if you are an adventurous personality with interest in the outdoors, you may purchase items such as a skydiving excursion or a kayak. 

Marketers need to know what is driving the purchasing behavior of their intended consumers in order to stimulate desire for their products.

In this first lesson, you will be introduced to the importance of the study of consumer behavior. The consumer value framework and its components will also be discussed.

Learning Objectives

After completing this lesson, students will be able to do the following:

1. Define consumption and consumer behavior (CB).
2. Explain the role of consumer behavior in business and society.
3. Describe basic approaches to studying consumer behavior.
4. Explain why consumer behavior is so dynamic and how recent trends affect consumers.
5. Describe the consumer value framework, including its basic components.
6. Apply marketing concepts to explain how marketers create value for consumers.
7. Analyze consumer markets using elementary perceptual maps.
8. Distinguish disciplines that comprise the relatively new field of consumer behavior, including marketing, marketing research, psychology, sociology, anthropology, and neuroscience.

Road Map

Lesson 01 Road Map

Readings	Online Lesson 1: Consumer Behavior Babin and Harris Text—Ch. 1: "What is CB, and Why Should I Care?" Babin and Harris Text—Ch. 2: "Value and the Consumer Behavior Value Framework" White Paper: Purpose and Audience, Purdue University, Online Writing Lab (OWL) White Paper: Organization and Other Tips, Purdue University, Online Writing Lab (OWL)
Assignments	Complete the Introduce Yourself Discussion Forum (I, U). Complete the Perceptual Mapping Assignment (I, G). Propose topic for Partner White Paper (T, G).

Marketing and Consumer Behavior

Consumer behavior is an input for marketers to develop better marketing strategies, tactics, and plans. To get an overview of the significant role that consumer behavior plays in marketing decisions, watch the following video.

Video 1.1. Expert Interview: The Importance of Studying and Understanding Consumer Behavior

The Meaning of Consumption and Consumer Behavior

We will be exploring two perspectives of consumer behavior: human thought and action, and consumer behavior as a field of study.

Let’s get started with a question:

Your textbook defines the following basic concepts related to consumer behavior: 

• Consumer behavior is the set of value-seeking activities that take place as people go about addressing realized needs. 
• Consumption represents the process by which goods, services, or ideas are used and transformed into value.
• Economics is the study of production and consumption. (Babin & Harris, 2015)

Next we will examine the process, field, treatment of customers, and importance of relationships and competition.

The Basic CB Process

Let’s examine the basic CB process with this example: Ahmed wanted a new car.

• Need: In the first step, the consumer determines a need for a new car that has good gas mileage, which would help with his commute to college.
• Want: The want is to have better mobility and access to friends, family, school, and fun; therefore, Ahmed (the consumer) visits a car lot and speaks with a sales person.
• Exchange: The exchange occurs when money is exchanged for the chosen car.
• Costs and benefits: The costs involve the actual financial price (with interest) of the product, as well as the time and physical effort to visit the retailer. The benefits are the positive results of the purchase, such as a feeling of independence and freedom, and getting to class on time.
• Reaction: The reaction follows the purchase when the consumer evaluates the effectiveness of the car.
• Value: Ultimately, the process results in a perception of value. It is likely that Ahmed will spread the news via word of mouth (WOM), and may post a review online or on Twitter or Facebook.

The figure below shows the steps of the CB process, as well as Ahmed's thoughts during each phase.

Figure 1.1. Steps in the CB Process text description

This graphic shows the steps in the CB process. 1. need - I'm going to college and need a new car; 2. want - A car would allow me to have fun with my friends too.; 3. exchange - This is a great car! I'll take it. 4. Cost and benefits - I paid 3,000 and love the gas mileage I get because I save money. 5. Reaction - I'm very satisfied with my purchase.; 6. Value - I'll recommend the car dealership to my friend.

Figure 1.1. Steps in the CB Process

Consumer Behavior as a Field of Study

Initiated in the 1960s, consumer behavior as a field of study is, as described by your textbook, "the study of consumers as they go about the consumption process." Knowing how consumers seek value when identifying and satisfying their needs is a core function in marketers’ ability to successfully position their products to fulfill those needs. Consumer behavior is dynamic because there are many disciplines that are applied to understanding buyer behavior, including anthropology, economics, psychology, social psychology, and sociology.

Treatment of Customers Varies

The customer may be treated differently depending on the place of business and type of service being performed. Consider the following two questions to understand the importance any given organization places on providing good service to customers:

Figure 1.2. Considerations for Customer Service

Competition and Consumer Orientation

Let’s be clear. There actually is a difference—however subtle—between consumer orientation and market orientation.

According to a study by Slater and Narver (1998), “The first, a customer-led philosophy, is primarily concerned with satisfying customers’ expressed needs, and is typically short term in focus and reactive in nature.” Think of it as good customer service in response to a consumer inquiry or complaint.

“The second, a market-oriented philosophy, goes beyond satisfying expressed needs to understanding and satisfying customers’ latent needs and, thus, is longer term in focus and proactive in nature” (p. 1001).

Businesses who engage in market research to determine or even anticipate consumer needs and who then make decisions about the four Ps (product, pricing, place, and promotion) based on these insights are implementing a market orientation. It follows, though, that businesses that are market oriented are also consumer oriented, but those that are consumer oriented may not necessarily be market oriented.

Relationship Marketing and Consumer Behavior

Relationship marketing is described by your textbook as the group of "activities based on the belief that a firm's performance is enhanced through repeat business." Effective relationship marketing relies on creating a lasting connection with customers in order to turn one touchpoint into an ongoing series of interactions with those customers.

In the car buying example presented earlier, the car dealership established a relationship with Ahmed during the sales transaction. Every instance of contact Ahmed had with the dealership was a touchpoint (any time a brand touches the customer).

What other touchpoints will Ahmed experience throughout the buying process? How will they contribute to the dealer’s efforts at relationship marketing? Why is this type of marketing preferred?

Consumer Behavior and Marketing Strategy

Consumer behavior is not only an interesting subject but also an important topic to understand from multiple perspectives. There are three key reasons for studying CB:

1. Consumer behavior is the basis for strategic and tactical marketing decisions about the marketing mix (also known as the four Ps: product, pricing, place, and promotion).
2. Consumer trends are both a reflection of and a driving force of societies.
3. Understanding why and how you make purchasing decisions can help you make responsible ones.

Resource-advantage theory is a general theory of competition that describes the process of competition (Babin & Harris, 2015). At its core, it involves in-depth analysis of a business’ resource availability and—in conjunction with the implementation of the market-orientation concept—identifies and fills gaps in resources needed to identify, anticipate, and satisfy consumer needs.

Doing so effectively determines competitive advantage; doing so efficiently determines financial success. Thus, resource-advantage theory explains why companies succeed or fail. Businesses have a goal of achieving long-term survival. Companies that achieve that goal do so by obtaining resources from consumers in return for the value they create. Businesses that create more value for consumers, and those that can continue to do so over time, are more likely to experience success. This exchange helps to explain resource-advantage theory.

Consumer Behavior and Society

The items that people buy and consume are representative of the type of society in which they live. For example, how does society treat tattoos? In recent years, tattoos have been more readily accepted as a form of self-expression. In years past, getting a tattoo was a taboo practice, accepted first for military personnel and blue-collar men. Then society accepted it for men in general and, long after, for women.

Fairly recently, as the U.S. consumer market became more enthralled with “ink”—enough to warrant reality television shows about people who get and create tattoos and their lifestyles—the U.S. military issued a policy of acceptable parameters regarding tattoos. Yet employers still frown on the messages that they imagine employee tattoos might send to their customers.

Think about what these decades of changes have meant for the ink industry and other related spin-off industries, such as tattoo removal services and television entertainment. What other industries may be or have been impacted by these changes in consumer and societal attitudes toward tattoos?

For more information about the tattoo industry, consider this 2014 market research on the tattoo industry. (See Report OD4404 - Tattoo Artists. Click on the tabs or download as a PDF.)

Consumer Behavior and Personal Growth

Studying CB helps consumers make better decisions by understanding each of the elements in Figure 1.3. 

Figure 1.3. Consumer Reasons for Studying CB

This section is based on life stages. Many college students are acquiring large amounts of credit card debt, contributing to the total American consumer debt, which approached $12 trillion in 2013 (Federal Reserve Bank of New York, 2014). Several topics can be particularly helpful in enlightening consumers about consumer behavior, including the following:

1. consequences associated with poor budget allocation;
2. the role of emotions in consumer decision making;
3. avenues for seeking remedy for unsatisfactory purchases;
4. social influences on decision making, including peer pressure; and
5. the effect of the environment on consumer behavior.

The Motorola "Brick" phone of the 1980s led to smartphones being widely used today. In both the United States and the United Kingdom, a large population of children ages 10–14 own a cell phone. Restrictions are being put on mobile phone users ranging from safety issues while driving to etiquette issues for phone use in public places.

Further debates are looming. One can hear people using cell phones at theaters, in bathrooms, on airplanes, and at the dinner table. What are your thoughts on mobile phone etiquette? Do you engage in mobile phone activities that infringe upon or even endanger others?

Your thoughts represent your individual usage, preferences, and attitudes toward cell phone usage. Understanding consumer needs, attitudes, and behaviors (NABs), like product usage, for groups of consumers (segments) helps marketers select and satisfy appropriate segments to target with the decisions they make about the four Ps.

Different Approaches to Studying Consumer Behavior

There is no single best way to study consumer behavior. Both interpretive and quantitative research methods should be considered.

Interpretive Research

Interpretive research seeks to explain the internal drivers of specific consumption experiences. Some of these internal drivers include, but are not limited to, emotions, motivations, perceptions, and attitudes, and they will all be explored in detail in future lessons. In order to conduct interpretive research, experts may actively or passively observe consumer behaviors and may analyze the words used by consumers to describe purchasing and other events.

Interpretive research is usually considered to be qualitative research. Qualitative research refers to the act of gathering data in an open-ended and free-flowing way. Methods include but are not limited to case analysis, clinical interviews, and focus group interviews—all of which provide both the marketer and the subjects of the research a wide range of response potential through both observation and conversations.

Interpretive research is approached by using either a phenomenology or an ethnography orientation. Phenomenology refers to the study of consumption, an actual experience, whereas ethnography analyzes the artifacts and tangible items related with consumption.

Quantitative Consumer Research

Quantitative research is described just like it sounds: It utilizes numerical measurement and analysis to answer questions about consumer behavior. As such, this type of research is usually tightly constructed; in other words, the means for gathering data is usually prescribed so that the consumer chooses a response from among a list of options (think multiple-choice) provided by the researcher. Online, written, and oral questionnaires and surveys are typical formats for gathering quantitative data.

For example, if consumers have an average attitude score of 50 for Brand A and 75 for Brand B, it can objectively be said that consumers tend to prefer Brand B.

Consumer Behavior Is Dynamic

As you can imagine, what consumers like and buy today is different than what they liked and bought 10 years ago and what they could like and buy tomorrow! Consumer trends, as we call this dynamic environment, adapt based on changes in such things as technology, the economy, natural resources, societal movement, and personal preferences. In this lesson, we discuss trends and their effects on consumer value, purchasing behavior, and on marketing decisions and behaviors that result from those insights. For example, how do you feel about companies analyzing your web travels and social networking communications to find out about products?

There are five major trends in consumer behavior. Click on each of the trends below to learn more about each one.

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Section Comment

You are about to embark on a learning journey that will make you think, think, think about your own behavior and the behavior of others! You will get as much out of the course as you put in, so decide up front that you are going to keep up in the course, meet deadlines, and be a contributing member to your teams!

Let's now take a look at the consumer value framework.

The Consumer Value Framework: Introduction

Consumer segments play a vital and sometimes surprising role in marketing. In the United States, women account for 85% of overall consumer spending (Marketing to Women Conference, 2015). The number of minority-owned businesses has increased to 5.8 million, employing nearly 6 million workers and generating in excess of $1 trillion in sales (U.S. Census Bureau, 2012). These facts are reflective of a growing trend, and the growth in women-consumer spending in particular has sparked industries like construction and manufacturing to more aggressively target women consumers.

Consider the paint industry. For example, Sherwin-Williams (S-W) utilized this type of data, along with internal research, to develop a new marketing program aimed at women. Instead of selling paint and paint-related products to men, S-W began to sell home decorating ideas, wall coverings (including wallpaper and paint), and related products to women. S-W also brought in a talented marketing communications (MARCOM) professional named Bob Wells, to spearhead the change. Thus, the advertising campaign theme of "Ask How, Ask Now, Ask Sherwin-Williams" was created in 2009. The 2011 and 2013 campaigns, “Color in Motion” and “Oh, the Places You’ll Go,” respectively, continue to address the NABs of women as well as men. The focus of this chapter is the consumer value framework and its components.

The Consumer Value Framework and Its Components

As outlined in the textbook, the consumer value framework (CVF) is a consumer behavior theory that determines the value associated with consumption. All of the elements in the model are related and consist of the following elements:

Table 1.1. Components of the Consumer Value Framework

Internal influences	External influences	Consumption process	Value	Relationship quality
Consumer psychology Learning Perception Implicit memory Information processing Memory Categorization Attitudes Personality of consumer Motivation Personal values Personality Lifestyle Emotional expressiveness	Social environment Acculturation/enculturation Culture and cultural values Reference groups Social class Family influence Situational influences Atmospherics Time/timing Conditions	Needs Wants Exchange Costs and benefits Reactions	Utilitarian Hedonic	CS/D Switching behavior Customer share Customer commitment

^{Source: Adapted from Babin & Harris (2011)}

Customer Relationship Management

A term used to describe this relationship that has gained popularity over the years is customer relationship management (CRM). According to strategic marketing experts Cravens and Piercy (2012), “CRM aims to increase the value of a company’s customer base by developing better relationships with customers and retaining their business. CRM can play a vital role in market targeting and positioning strategies. Since CRM is an enterprise-spanning initiative, it needs to be carefully integrated with marketing strategy." As such, internal infrastructures like policy and operations must support and enhance all customer touchpoints to build and maintain quality relationships.

Your textbook describes relationship quality as "the connectedness between a consumer and a retailer, brand, or service provider." 
 

The Consumption Process

The consumption process contains many factors, which can be divided into internal, external, and situational influences.

Internal Influences: The Psychology and Personality of the Consumer

Watch the following video about the psychology of consumer behavior.

Video 1.3. Psychology of Consumer Behavior

Some points from the video include the following:

• Learning, perception, memory, attitudes, and group behavior are used by marketers to influence buying decisions.
• Perceptions from marketers and consumers affect buying behavior.
• Possessions influence the way we feel about ourselves and others.

Internal influences constitute the psychology of the consumer. For example, how will customers react to a price increase from $30 to $50? Does it matter whether an item is priced at $29.99 or $30.00? The psychology of the consumer involves both cognition and affect.

Individual differences are the traits, including personality and lifestyle differences, that help determine consumer behavior. This is the personality of the consumer. So a consumer with a serious personality may enjoy spending time in the library in comparison to the outgoing person who can’t sit still. Thus, internal influences consist of the following:

1. Psychology of the consumer
   • Cognition: how consumers process and store stimuli and information that then becomes knowledge
   • Affect: how consumers feel when experiencing activities, including those associated with consumption.
2. Personality of the consumer
   • Individual differences: include things like personality and lifestyles

Social Environment and Situational Influences

Have you ever wondered why consumers have such varied tastes in clothes? Those tastes are “fed” by external influences, which include consumers’ social and cultural environment.

• The social environment refers to the people and groups who shape consumers’ attitudes and beliefs. For example, the clothes we purchase could be shaped by our families, our friends or coworkers, or even groups of which we aspire to be a part (green consumers or affluent consumers, for example).
• Your textbook describes situational influences as those that "include the effect that the physical environment has on consumer behavior." For example, some people choose their clothes only from stores that have a “cool” vibe, like specialized boutiques or maybe Abercrombie and Fitch, whose stores offer music, scents, and lighting that some consumer markets find exciting (Khan, 2014). Other consumers may like the situational atmosphere of a high-end department store where personalized attention is provided by the sales staff.

 

Value and Two Basic Types of Value

Table 1.2. What You Get Versus What You Give

What you get	What you give
Benefits Quality Convenience Emotions Prestige Experience Other factors Scarcity Nostalgia	Sacrifices Time Money Effort Opportunity Emotion Image

^{Source: Adapted from Babin & Harris (2015)}

Your textbook describes value as "a personal assessment of the net worth obtained from an activity." Consumers are never willing to sacrifice value, but they are often willing to sacrifice one or more of its components in the name of value. Another way to look at value is as a balance of price (in money, time, and/or effort), quality, and satisfaction. For example, on one day a consumer may dine at their favorite restaurant and pay more in money and time to do it because its value—a reward after a hard week at work or school, or time spent with a good friend—is "worth it.” On another day, this same consumer may sacrifice the satisfaction of service and ambience for a less expensive restaurant, because they really just need a decent meal and don't feel like cooking. Finally, perhaps on another day, they are willing to sacrifice virtually all quality and culinary satisfaction by driving through a fast-food restaurant because they have barely enough time to eat between work and their child’s sporting event. A way of quantifying this value is through the value equation. Think of it as a formula:

Figure 1.4. Value Formula

Value = (What you get) minus (What you give)

• What can a consumer get? Quality, convenience, prestige, and nostalgia to name a few. For Ahmed, when he bought his car, he got freedom, great gas mileage, and the ability to travel to college.
• What can a consumer give? Time, money, and/or effort are most often the price consumers pay. For Ahmed, this was the time he took to research cars, go to the car lot, and pay for the car.

The value that each individual consumer places on an activity or product, including purchases, is derived from motivations that manifest themselves in needs and desires. In order to better understand the concept, let’s look at the types of value that result in motivations, needs, and desires.

Types of Value

Utilitarian value is a value assigned to something designed to help complete a task. An example of utilitarian value is the value Ahmed receives by having the ability to drive from one place to the next in his new car.

Hedonic value is the immediate, usually emotional, gratification as a result of a product or activity. An example of hedonic value is the value that Ahmed receives from the fun experiences he enjoys while driving his car.

It should be noted that consumers can derive both a utilitarian and a hedonic value from the same experience. For example, if you buy a blender to make smoothies, then the utilitarian value you get is simply that it performs the task you intend: the blending of food into a smoothie. If you want that smoothie to lose weight, bulk up, or regularly eat breakfast on the go, then the emotional satisfaction you get from working toward that goal is the hedonic value.
 

Marketing Strategy and Consumer Value

Marketing Strategy

There are different levels of marketing strategy:

1. Corporate strategy—High level, overall direction of a firm or brand.
2. Marketing strategy—Direction guiding the decisions about creating value for customers.
3. Marketing tactics—The way corporate and marketing strategies are implemented. They include how we price, promote, build, package, and distribute products (the marketing mix decisions).

Total Value Concept

Is Coca-Cola just a soft drink? No. Coca-Cola’s soft drinks represent 42.4% of the carbonated soft drink (CSD) market share and 34.2% of the larger liquid refreshment beverages (LRB) market share. Yet it is definitely not the cheapest product on the market. The total value concept is successfully implemented when a company or brand understands that products provide value in multiple ways and makes marketing mix decisions based on that understanding. Look at the market share distributions from 2013, provided below. Why do you think Coca-Cola has such a large portion of the market share? What consumer behaviors and preferences are lowering Coca-Cola’s market share in the larger LRB category?

Figure 1.5. Carbonated Soft Drink (CSD) Market Share by Company, 2013

Figure 1.6. Liquid Refreshment Beverages (LRB) Market Share by Company, 2013

The Total Value Concept Illustrated

Why are you willing to pay more for milk that you buy at a convenience store compared to a grocery store? If you understand this question, you understand the total value concept. Here are some likely value factors:

1. It is convenient.
2. There is an immediate need.
3. You are on your way home and getting gas anyway.
4. You don’t want to be in a big store.

Thus, you are paying for more than just the product. These extra things (convenience, immediate need, positive feelings you get from saving time) create total value.

Value Is Co-Created

Value is not created only by the marketer; the consumer adds their own resources to the consumption process. The way a consumer feels about a product is an important component of how they value that product. A marketer’s intention, though, is to create a marketing mix that helps consumers to derive their desired feelings from the overall net benefit of all four Ps so that each customer readily recognizes a unique value of the marketer’s product or brand compared to the competitors.

Market Characteristics: Market Segments and Product Differentiation

Target market is a common term signifying the particular market segment that a company will serve with a specific marketing mix. Decisions about the marketing mix are used to position the brand in the marketplace, but marketers do so by identifying groups, or segments, of people with similar characteristics, beliefs, preferences, interests, and so on, with the intent of invoking the same feelings of value for their brand because of those similarities. What are some of the potential target markets that might be found on a college campus? Answers may include jocks, theater majors, freshmen, specific ethnic groups, and professors. All chose the college for different reasons, but by providing a marketing mix that attracts and satisfies each different segment, the college adds value that resonates with each unique group.

Your textbook defines market segmentation as "the separation of a market into groups based on the different demand curves associated with each group" (Babin & Harris, 2015). There may be many or few market segments (groups of people with similar characteristics) in any given market.

Elasticity refers to the degree of consumer sensitivity to changes in the marketing mix of competitive products. An example of an inelastic segment is a consumer segment that is less sensitive to a drug that has lifesaving capabilities and, thus, is willing to pay sometimes very high prices to get the drug, even if less expensive drugs are available.

Product differentiation is the process of distinguishing a product or brand from others in a way that attracts and adds value for particular target market. An example of product differentiation is that many people regard Coke and Pepsi as similar but different products. It is the goal of each brand to identify the different utilitarian and/or hedonic values that drive certain groups to buy their brand and, frankly, their competitor's. Once known, marketing mix decisions can be made to retain existing customer segments, attract new untapped segments, and/or lure customers away from the other brand’s targets.

Analyzing Markets With Perceptual Maps

Product differentiation is the foundation for product positioning. Product positioning refers to the way in which a product is perceived by a consumer. Positioning takes place in the mind of the consumer, but marketers take great pains to help formulate that perception. Before making any marketing mix decisions but after much research about various market segments, marketers create positioning statements that are intended to tap into the desired value of each targeted segment. A positioning statement is an internal directional document indicating, in a compelling manner, what marketers want the target market to think and feel when they purchase and use the brand or product. The view that marketers desire to create, however, must tap into the utilitarian and hedonic value that the target segment desires.

Example of a Perceptual Map

Perceptual mapping is a graphics technique that marketers use to display the perceptions of current or potential customers. Displayed may be products, product lines, brands, or the company relative to competitors. Although perceptual maps can have any number of dimensions, the most common is two dimensions, due to the simplicity of drawing and interpreting the map. Shown below is a perceptual map for Coca-Cola soft drinks developed on two dimensions: flavors (flavored vs. regular) and calorie content (high vs. low in calories).

Figure 1.7. Perceptual Map Example 

Perceptual Map of Competing Products

Coke products that are positioned close to each other are perceived by consumers as similar based on the dimensions indicated on the map. For example, on this map consumers identify Coca-Cola C2 and Diet Coke as similar with very little differentiation in regard to flavor or calories.

How do marketers use the information in a perceptual map? Some examples include the following:

• A company considering the introduction of a product will look for an area on the map free from similar products.
• Perceptual maps may be drawn with different sized circles to represent product sales volume or market share.
• Perceptual maps are also useful when a company wants to reposition the product.

In Lesson 2, we will explore the factors that contribute to consumers’ perceptions and how perception affects consumer purchasing and marketing decisions.

Value Today and Tomorrow—Customer Lifetime Value

Although marketers go to great lengths to gather just enough of the right data to target valuable (profitable) customers, the truth is that not all customers are equally valuable to a brand. Therefore, more and more brands want to know where to invest their money to retain and attract customers. One way they do this is to look at the long-term projected value of a customer or customer segment. Ideally, brands identify, attract, and retain their most profitable segment(s) and create a marketing mix that optimizes profit potential.

Customer lifetime value (CLV) is a projection tool that approximates the worth of a customer or segment to a brand in financial terms. Essentially it estimates the overall profitability of an individual consumer or segment. According to Babin and Harris, there is no generally accepted formula for CLV, however the basic premise is simple and can be represented as follows:

Figure 1.8. Customer Lifetime Value Formula

CLV = npv(sales - costs) + npv(equity)

where npv = net present value. Consider a customer who shops twice a week at JCPenney. On average, this customer spends $100 per week, or $5,200 per year, at the retailer. If we assume a 5% operating margin, this customer yields a net of $260 per year to JCPenney.

As seen from the formula above, the CLV calculation process consists of four steps:

1. Calculate the predicted remaining customer (or customer segment) lifetime.
2. Calculate projected future revenues year-by-year. Base your predictions on the expectation of future product purchases and the corresponding prices to be paid.
3. Estimate costs for delivering those products each year.
4. Calculate the net present value of these future amounts and determine the net difference (profit or loss).

Check out How to Compute Your Customer Lifetime Value from the Database Marketing Institute, which illustrates all the calculations involved in the CLV formula.

The Customer Lifetime Value Calculator at Harvard Business School Publishing is another tool used to calculate CLV. Change one variable at a time (using the "Tool" tab) and notice the difference in CLV for each of your entries.

Once marketers calculate the necessary CLV projections, what do they do with them? According to RJMetrics, some decisions that can be made based on CLV projections are the following:

• Promotion: How much should I spend to acquire a customer?
• Product: How can I offer products and services tailored for my best customers?
• Customer support: How much should I spend to service and retain a customer?
• Sales: What types of customers should sales reps spend the most time on trying to acquire? (RJ Metrics, n.d.)
   

Section Comment

As can be seen, consumer behavior is an important component to marketing strategy. The consumer value framework provides a greater understanding of the importance of building strong relationships with customers and the value provided by consumers. Long-term success depends on customers' perception of value.

Terms You Should Know

Review the terms at the end of the assigned chapters in the text. These terms may be on the quiz!

Chapter 1 — Terms You Should Know

Anthropology Attribute Benefits Cognitive psychology Consumer (customer) orientation Consumer behavior Consumer behavior (as a field of study) Consumption Costs Differentiated marketers Economics

Ethnography Exchange Interpretive research Market Market orientation Marketing Niche marketing One-to-one marketing Phenomenology Production orientation

Psychology Qualitative research tools Quantitative research Relationship marketing Researcher dependent Resource-advantage theory Social psychology Sociology Touchpoints Want

Chapter 2 — Terms You Should Know

Affect Augmented product Cognition Consumer Value Framework (CVF) Corporate strategy Customer Lifetime Value (CLV) Customer Relationship Management (CRM) Elasticity External influences Hedonic value

Ideal points Individual differences Internal influences Market segmentation Marketing mix Marketing myopia Marketing strategy Marketing tactics Perceptual map Product differentiation

Product positioning Relationship quality Situational influences Social environment Strategy Target market Total value concept Utilitarian value Value Value co-creation

References

Babin, B., & Harris, E. (2011). CB 3. Mason, OH: South-Western Publishing Co.

Babin, B., & Harris, E. (2015). CB 6—with access. Mason, OH: South-Western Publishing Co.

Cravens, D., & Piercy, N. (2012). Strategic marketing (10th ed.). Boston, MA: McGraw-Hill Education.

Ernst & Young. (2013). Hitting the sweet spot: The growth of the middle class in emerging markets. EYGM Limited: London, UK.

Federal Reserve Bank of New York. (2014, February). Quarterly report on household debt and credit. Retrieved from http://www.newyorkfed.org/householdcredit/2013-Q4/HHDC_2013Q4.pdf

FierceOnlineVideo. (2012, Nov 21). Top three Netflix competitors: Who's challenging the industry giant? Retrieved from http://www.fierceonlinevideo.com/special-reports/top-three-netflix-competitors-whos-challenging-industry-giant 

Khan, H. (2014, May 21). How retailers manipulate sight, smell, and sound to trigger purchase behavior in consumers. Retrieved from https://www.shopify.com/blog/14193377-how-retailers-manipulate-sight-smell-and-sound-to-trigger-purchase-behavior-in-consumers 

Marketing to Women Conference. (2015). Fast Facts, Marketing to Women: Spending. Retrieved from http://m2w.biz/fast-facts/

Mui, Y. (2015, June 29). What the crisis in Greece means for the U.S. and global economies. Washington Post, Wonkblog. Retrieved from http://www.washingtonpost.com/blogs/wonkblog/wp/2015/06/29/greece/

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