Customer preference formation 1205

Developing Customer Insight:

The Determination of Customer Preference

The Need to Understand Customer Preference

Have you ever wondered why your company often loses relatively satisfied customers? Why is it that customers will often indicate they are satisfied with how they have been treated but then leave for a competitor at the first opportunity? Why is customer defection often unrelated to price? The answers to these and other related questions are found in coming to an understanding of customer preference.

The idea that customers prefer one product or one service over another is not new. The ability to identify and measure the elements of such preference decisions with any accuracy and reliability has only recently become available.

Research into this area of consumer behavior has brought understanding to some of the major issues with standard customer satisfaction research. Most importantly, we have come to realize that high customer satisfaction does not assure continued customer preference. Satisfaction research over the past fifteen years demonstrates that high satisfaction scores, while a measure of corporate performance on a set of important criteria, do not adequately explain the composition of preference formation and therefore often serve as insufficient predictors of sustained preference or what is normally referred to as customer loyalty. Loyalty as a concept has also shown itself to be difficult to define. Like beauty, loyalty is truly in the eye of the beholder. We understand there are different types and degrees of loyalty and some of these are not appropriate in describing the relationship between a consumer and a company. However, preference (defined as The power or ability to choose one thing over another with the anticipation that the choice will result in greater satisfaction, greater capability or improved performance) has demonstrated the ability to be effectively measured and to provide meaningful insight into the choices consumers make when selecting one provider over another and when determining to continue a relationship over time.

The Application of the Theory of Reasoned Action Model

The theory of reasoned action represents a comprehensive integration of the attitude components that ultimately are the building blocks of preference. The model is designed to provide a better understanding of how consumer preference is formed and, correspondingly, to provide the means to accurately predict consumer preference behavior. Figure one provides an overview of customer preference formation from the theory of reasoned action point of view

In order to understand preference we need to determine the functional or performance demands involved in the purchase, the desired emotive outcomes, and the subjective norms consumers use to determine their desire for one product or service over another. The primary assumption of the model is that individuals make considered purchases. In some cases the consideration may be minimal and the purchase behavior almost habitual (as when deciding to buy a new comb while standing in line at Target). In another the period of consideration (incubation) may be extensive and each element of the consideration process carefully examined (as when deciding to purchases a new home).

Figure One – Basic Structural Model of Customer Preference FormationConsumer Behavior by Leon Schiffman and Leslie Kanuk

The important contribution of the reasoned action model is the realization that consumers utilize the model in all purchase experiences to a lesser or greater extent. Of equal importance is the realization that the components used to make a preference decision are also the ones employed by a consumer to evaluate the performance success of the product or service purchased and the company responsible for them. Therefore, as the components of preference change, the elements influencing satisfaction change accordingly. The relationship is dynamic and fluid therefore static or predetermined satisfaction analytic packages often miss the most important elements of preference and can create a false sense of security on the part of companies who think that since their customer satisfaction scores are high they must in turn have relatively loyal customers.

Let’s look at the last part of our definition of preference.

The power or ability to choose one thing over another with the anticipation that the choice will result in greater satisfaction, greater capability or improved performance.

The theory of reasoned action assumes a consequence for the action taken. We prefer some product, someone, or some service because we determined the object was best aligned with our performance and emotive requirements as judged through our comparative norms. We evaluate the performance in light of how well the product, person or service meets our preference expectations. Here is the problem with most “preordained” customer satisfaction programs. Companies tend to ask their customers about corporate performance on a predetermined set of behavioral topics which may or may not align to the preference expectations of those customers. This mistake is amplified when companies treat their customers monolithically and assume that the

Conviction that the choice leads to certain

desired functional outcomes Evaluation of the

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Conviction that the choice is considered

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desired emotive outcomes

Attitude toward the behavior

Subjective comparison norm

IntentionPreference Behavior

preference drivers for one group of customers are the same as that for another. It is essential, especially for companies attempting to serve highly competitive markets with many product/service offerings, to differentiate preference formation components and preference expectations within “naturally forming” or emergent customer segments.

With-In Segment Deployment of Customer Preference

Customer preference analysis is really a call to action. By understanding the preference formation components and the preference expectation evaluations by group or segment of customers, companies can design response strategies that are truly responsive to vital customer expectations and that differentiate in the marketplace.

Figure Two – Delivering Performance at the Intersection of Preference and Expectation

Within the framework customer satisfaction can begin to play a very important role as a measure of a company’s ability to deliver and execute against preference evaluation elements of a given customer segment. These expectations can now be differentiated into expectants - basic, cost-of-entry preference expectations, satisfiers - preference expectations that help to constrain abandonment or churn and attractors - preference enhancements (often focused on the emotive components) that attract new customers.

Figure Three – Customer Expectation across the Lifetime of a Single Product/Service Experience

R.L. Oliver (1994) observed that customer satisfaction results from a process of internal evaluation that actively compares expectations before purchase of a product/service with perceived performance during and at the conclusion of a purchase experience. The deployment of the theory of reasoned action as a model for preference formation explains why such evaluation takes place. Satisfaction is a product of the alignment between prescribed functional and emotive performance elements and the ability of the company to meet the performance expectations. Sustained preference is a product of meeting these requirements over time.

What we have referred to as functional and emotive performance elements Oliver defines as “evaluative elements” (expectants, satisfiers and attractors) that, in turn, comprise a single product/service evaluative experience. Sustained preference can be thought of as a series of experience interactions that are continuously being modified as the components of preference are modified over time.

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An Example

Let’s consider an individual considering the purchase of a new automobile. This is, for most people, a highly considered purchase. The potential automobile customer may have a preference profile like the one below with a number of emotive and functional components that must be met for preference to form.

Notice that the evaluation experience, to use Oliver’s words, is not simply focused on the performance and reliability issues of the automobile; but also on how the customer is treated and that the emotive elements of customer treatment can be as clearly defined and measured as the functional components of the automobile. However, just as different individuals want different types of automobiles with different functional capabilities; different people have different emotive demands as well. The key to understanding customer preference is to understand how many evaluation experiences exist within a single market, what the mix of emotive and functional attributes are with each experience, and which of the attributes provide the greatest return on investment, that is, comprise a

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Figure Four – Changing customer expectation experiences over time

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preference demand that is a requirement within several of the identified customer segments. Such understanding requires both qualitative and quantitative rigor.

How ICR Accomplishes the Analysis

If we overlay the theory of reason action with the stages of the purchase experience we are able to interpret the evaluation experiences in light of a given purchase journey.

Figure Five – Evaluation Purchase Experience – Utilization of the Reasoned Action Model within Different Stages of the Purchase Journey

Each stage in the purchase journey contains emotive and performance preference components. The resulting deliverables for an ICR client provide insight into which components of the preference formation for an individual customer, segment of customers or consumers in a specific marketplace are essential to a positive preference decision. The determined relationships between the prominent constructs comprise the issues of increased customer satisfaction and the required relationships necessary for developing sustained customer preference.

ICR guides a client through the entire preference formation model development process. Our research design formalizes the complicated decision making process consumers employ and what is required of our clients to influence that decision-making process to result in consumer preference for their product or service. The ICR methodology requires the development of a research plan that includes the development of a formal customer preference formation theory for either the entire marketplace of determined customer segments depending upon the needs of our client. The client-specific preference formation models have different analytical requirements depending upon their



outcomes


correct by others


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Intention Preference Behavior

Incubation Stage

Preference Formation

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Preference Formation can include: Choice of channel Choice of retailer Choice of product feature Choice of service level

organization and complexity. There is no such thing as one design or a single statistical model that meets the needs of every client or every market environment. The ICR methodology results in detailed customer requirement information focused on our client’s market position and unique to the client’s customer demands and expectations.

ICR’s Preference Formation Model (PFM)

Preference is formed when the customer is bonded to your company through the establishment of a mutual benefit. Successful companies therefore go beyond delivery of a commodity or service; they pursue the development of a relationship with their customers. This bonded relationship will be more likely to survive competitive attacks than the mere purveying of goods or services or an over reliance on aggressive pricing models.One of the components of the Preference Formation Process is the development of a Preference Formation Profile. This profile breaks out the required attributes of each stage of preference formation.



outcomes


correct by others


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Intention Preference Behavior

Incubation Stage

Preference Formation

Index

Trigger Stage

Product Selection

Post-Purchase Expectations

Stage

Shopping / Purchase Stage

Preference Formation can include:

• Choice of channel

• Choice of retailer

• Choice of product feature

• Choice of service level

The profile further differentiates the required attributes of preference into emotive or functional attributes and defines EACH as attractor, satisfier or expectant. The PFM results in a likelihood of preference formation index (PFI) which represents the strength of preference for a given product/service. We have found that the preference formation index (a standardized score ranging from one to one hundred) can range dramatically given the market and population under consideration. When the index is weak (seventy-five or below) it means that while the elements of preference are “in play” there is a reasonable amount of indifference toward the preference target. For example, the preference drivers for breakfast cereals may not drive to a prominent index due to the fact that many consumers are relatively indifferent to many of the considered preference drivers and focus on price and availability almost exclusively. A strong index (one hundred and fifteen or above) indicates there is a prominent panoply of formation drivers that, in combination and often in some sequence, are required for a declared preference to be formed. An excellent example is a preference for a financial provider. Price and availability may still be considerations but now many other attributes are required. These attributes will be both functional and emotive because of the complex nature of preference development for a financial advisor.

The PFI and the overall PFM model represent both a global assessment and a diagnostic examination of the developmental requirements of customer preference for a particular product or service. When used in concert with a brand audit for a particular company or organization the end result is a strategic roadmap of how to develop loyal customers (defined operationally as those who identify that organization with their preference), attract new customers (determine market or segment specific PFM models), and retard customer departure (by focusing on preference attributes where corporate performance is weak).

Conclusion

John McKean, in an excellent book, Customers are People – The Human Touch thinks of the organization-customer interaction as a series of cascading touch points. Those touch points comprise the customer environment and it is through interacting with that environment that customer preference is formed. The ICR PFM process is an excellent analytical tool for discovering the nature of these touch points, their essentiality for preference formation and the combination and sequence of such touch points that result in a customer environment that maximizes corporate ability to construct sustained customer preference.

Customer preference formation 1205

Business

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