Where Do You Spend Your Money?

By: Andrew Lak

Consumer’s wishes and wants are revealed by their spending habits, and how they allocate these expenditures has been an ongoing concern in marketing research. But why do consumers change their spending habits? Could the economy play a role in consumer decision making, for example, in a recession or expansion? These questions were answered in an article from the Journal of Consumer Research: “How Economic Contractions and Expansions Affect Expenditure Patterns,” by Wagner A. Kamakura and Rex Yuxing Du (http://jcr.oxfordjournals.org/content/jcr/39/2/229.full.pdf). They tested differences in household spending when the economy was in a recession and in an expansion. Their results were, overall, consistent with the two hypotheses they presented:

“Hypothesis H1: In a recession, positional goods are likely to see decreased budget shares and non-positional goods are likely to see increased budget shares and the opposite takes place in times of economic expansion.

Hypothesis H1a: In a recession, nonessential goods (not needed for day to day living) that are consumed in more visible circumstances are likely to see decreased budget shares, and essential goods that are consumed in less visible circumstances are likely to see increased budget shares; the opposite happens in times of economic expansion.” (Page 4)

They tested the hypotheses in more than 30 major expenditure categories from 66,368 US households, over 2 decades (1982-2003), covering 3 recessions (Page 2) (Please see table 4 in the article link for the categories). To test them, they used a mathematical model to project how consumers would react based on the economy improving or worsening and how this economic change affects their expenditure allocations. For their second hypothesis, they considered more detailed information based on several different scenarios and the actual fluctuations in the expenditure categories. The scenarios were designed to reflect an increase or decrease in GPD and a reduced consumer budget. This was an easy to understand model in which we can get more detailed information on what expenditures consumers would decrease and increase based on “life-like” scenarios. The conclusions were that consumers gain additional value from consuming the same amount of a certain good, if they see others consuming less of it. This suggests why, during a recession, consumers reduce their expenditures on nonessential and visible goods even when they do not experience a reduction in budget (page 17). More visible non-essential (positional) goods become less desired in a recession, while less visible essential (non positional) goods gain in relative desirability during a recession (page 17). Consumers’ decisions and how they allocate expenditures is directly related to the increase/decrease in GDP.

This model has potential to make a difference for marketers. They can take economic trends and use them to their advantage by implementing effective marketing campaigns that adapt to a fluctuating economy. Also, it shows how consumers react in specific ways to economic trends, where for example, if there was a recession, consumers may cut back on jewelry and watches, but when the economy picks back up consumption of jewelry and watches increases dramatically. It would not be ideal to reveal your most expensive niche brand during a 3 quarter recession; perhaps, when consumer budgets are increasing, it would be a better time to launch such a marketing campaign. It will provide a more cost effective and more efficient campaign based on the economy. This gives marketers another tool to use when developing their marketing strategy.

There is also room for additional research to establish the relationship between other external factors and consumer decision making. This is a great stepping stone to help understand other variables that may impact a brand. Without considering environmental factors, it is difficult for a marketer to understand how or why a brand could be deteriorating compared to projections, and the adjustments needed to bring it back to success. Having greater understanding of these variables and how they all play a role into the marketing strategy should increase the gross profit for any company.

I would have to agree with this analysis. From personal experience, when the recession hit I personally became more aware of non-essential goods and how I could more efficiently use my consumer budget. For example, going out to eat or buying new home furniture was not the best idea, and having a few drinks at home was cheaper than going out with friends. Also, investing was not a good idea at the time, for the stock market was unstable, and I preferred to save in a more secure type of commodity, thus reducing my consumer budget.

I do not agree with some of the findings in the article though. In their “Counterfactual Analysis” scenario in which GPD dropped by 2%, they discovered that tobacco increased, charity increased (dramatically), and medical prescriptions dropped. I feel like I would save more by not spending money on tobacco and, perhaps, take care of my health with buying my needed prescriptions. I can understand how charity did increase by 35%, for people want to help out those in need during hard times. Perhaps there needs to be more detailed research to see why these trends exist (please see table 4 in the article link for the categories and their trends).

In sum, this is a new area of expertise in which marketers should be putting more emphasis on continuing to perfect their marketing strategy in the context of various environmental situations. I feel that companies that use this type of model, taking into account environmental variables, will be ahead of the competition.

 

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Loyalty Programs and Consumer Behavior: Is Personalization Really More Effective?

By: Stephanie Lee

Each day, consumers face countless decisions regarding where to shop, what to buy, and how much. Though purchase behaviors remain fairly constant over time, they vary slightly based on various internal and external factors. Internally, consumer decisions are influenced by demographics and psychological factors. Demographics include physical characteristics such as age, race, gender, and socio-economic status (SES), while psychological factors include personal attitudes, perceptions, motivation. These are all factors that drive consumers to make the decisions that they do. However, the influence of external factors can often overpower internal factors. Cultural norms and values have heavy influence on the development of one’s personality traits; we are social beings by nature and want to be accepted by our community. Social circumstances and factors such as physical location, time and place within the family have been shown to strongly drive consumer decisions. In order to gain or retain acceptance, people want products and services that are considered desirable by their surrounding community.

This creates a challenge for companies: they need to remain desirable to their current customers while making themselves attractive to new business. They need to make sure that they remain relevant in the market in order to avoid losing business from consumers switching products. In order to solidify their brand image and commitment to customers, more and more companies are implementing loyalty programs (LPs). With membership, these programs allow consumers to accrue various discounts based on a total amount they spent in the store. The actual effectiveness of LPs has been debated, but memberships are continuing to rise across the markets.

Article: The Impact of an Item-Based Loyalty Program on Consumer Purchase Behavior

This particular study focuses on switching to a new kind of LP design – the item-based loyalty program (IBLP). This design replaces general price discounts with reward promotions based on individual purchase habits. Now, rather than getting rewards based off of their total spending habits, consumers can accrue redeemable points for frequently purchased items.

The intent of an IBLP is to encourage nonmembers to join the program, increase current customer tendency to visit the retailer and the average amount they spend per trip. This study takes place in a supermarket chain (“The Market”) with an established loyalty program already in place. The switch allows them to reframe their brand image in a way that emphasizes personalized service and customer satisfaction. The Market advertised their conversion to IBLP in various media, and amended their promotional tactics accordingly. The monetary values of rewards remain about the same as the previous discounts.

What They Found:

Overall, consumers were more responsive to the IBLP program, despite the fact that the monetary value of the rewards remained the same. This led them to become less responsive to competitive promotions, increasing the market’s customer retention. The amount of member attrition towards The Market was significantly reduced by this switch as well. While about half of these current consumers increased their tendency to visit that particular market, their average spending amounts only slightly increased. The IBLP makes their brand appear more innovative and novel, but is not enough to drive current customers to spend significantly more money. On the other hand, nonmembers increased their spending at The Market by 15.2% after the implementation of the IBLP, and many of them converted to member status. Additionally, those who joined the IBLP had more positive feelings towards it than those who were members of the previous LP.

Possible Explanations:

The item-based loyalty program provided more opportunities for customers to be reminded of promotions. Each time they made a purchase, they were immediately reminded of their earnings, which not only sensitizes them to these tactics, but it also keeps the brand name fresher in their minds. It also acts as a reminder of their need for specific items; if they get a reward points for a product, they are more likely to go visit the store and buy it. While The Market does not make money on the redeemed reward, the hope is that the member will purchase additional items. The more they are exposed to these programs within the company, the more likely they will be to join or increase their tendency to frequent that particular store.

Customers may not always effectively translate monetary worth from these reward points. Most consumers are reluctant or lack the desire to complete the conversion math, which can cause them to overestimate the value of the rewards. In other words, it leads them to believe that they are getting a better deal than they actually are. This approach assumes that the consumer is lazy and will not take the time to compute the actual value of their rewards. This particular study yielded that nonmembers were more prone to fall for the novelty of the new rewards program than current members. Current members were less responsive to the change, which did not significantly alter their spending habits. It would be interesting to see where the company is today in terms of their loyalty programs and consumers.

References:

Zhang, J. & Breugelmans, E. (2012). The Impact of an Item-Based Loyalty Program on Consumer Purchase Behavior. Journal of Marketing Research, Vol. XLIX (2), 50-65.