Introduction

The customer may always be right, according to the old adage, but the customer may not always be profitable. This is the reason that many retail companies are today rethinking their customer strategies. While the existence of the customer is integral to the existence of the retailer, the ability to understand consumers is the key to developing a successful retail strategy. To be able to satisfy the customer it is necessary to understand them, their needs and how they respond to various marketing efforts done by the retail organization. As competition increases and the customer becomes knowledgeable and demanding, the retailer needs this knowledge to stay ahead of his competitors and build a competitive advantage.

An integral part of understanding customers is identifying the customers for the product or service, i.e. the target segment and the demographics of this segment, their needs and buying behavior. We start this chapter by understanding what is consumer behavior and the need for studying the consumer; this is followed by a discussion on the factors while buying is then examined. We then examine the changes in the Indian consumer that affect the retail shopper. The decision-making process that a customer undergoes and understands what it means for the retailer. Lastly, we look at how the retailer can use research as a tool for understanding markets and consumers.

What is consumer behavior?

At the start let us first understand what is meant by the words consumer and customer which are often used interchangeably. Typically, the word consumer refers to individuals who buy for themselves or their family, whereas a customer is the person who buys the product, not necessarily for personal use or consumption. Thus, the one who buys the product is called a customer and who uses the product is called a consumer.

Consumer behavior is defined as the activities that people undertake when obtaining, consuming and disposing of products and services.

Schiffman and Kanuk state that consumer behavior is “the behavior that the customers display in searching for, purchasing, using, evaluating, disposing of products and services that they expect will satisfy their needs.”

Very simply put, consumer behavior is a process of understanding why a consumer makes a purchase, when he buys it, where does he buy the products and the frequency of the purchase. Thus, it helps us understand the why, when, where and how often of a purchase decision.

Over the years, the focus has shifted from the wholesaler to the consumer as is illustrated in following figure , with the consumer becoming more aware of the product offerings and also his own requirements.

The need for studying consumer behavior

A key challenge faced by the retailer is creating products and services, which would be successful in the market. The accurate understanding of customer needs helps the retailer create a product that is likely to be successful in the market. Customer understanding or an understanding of the customer buying behavior is the starting point of strategy creation. It is not only important to understand what customers know about a product, but also what they do not know. This helps in determining the channels of communication and the products that need to be created to cater to the needs of the customer. Understanding consumer knowledge can also help a firm assess how well it has achieved its product positioning goals. The firm needs to study customers to see how its product is perceived; if there is a good match, then the positioning strategy can be deemed a success. Retailers need to know the various influences that lead up to a purchase, not just the store where the purchase was made. This includes looking at a host of external and internal influences. The process starts with:

• Understanding how the need for a product/service was determined

• Understanding how information was sought by the customer

• The process of evaluation of various products and stores

• The payment process

• The post purchase behavior

While understanding consumer behavior completely may not really be possible, it is in the best interest of the retailer to know his customers. The earliest attempts to study consumer behavior were motivation research, which relied heavily on Freudian techniques. Consumers can be studied in a variety of ways, including observation, electronic surveillance, interviews and surveys, experimentation and sales analysis or consumption research. Firms must examine the demographics (even geo demographics) of customers, as well as the role of group influences and personal factors like attitudes, beliefs, motivations, etc. Population is not static in the long term; it moves around ebbing and flowing like the sea. Growth areas emerge over time, some quickly, some slowly. Corporations analyze these population trends, and start planning to enter or leave markets. This is the process of analyzing constantly changing consumer trends, competition, external sources of influence, and company strengths and weaknesses. This may all sound very easy, but in practice, it is often very difficult.

It is also important to know how, when, and where the customers use the product or service that the retailer sells. An objective analysis of internal strengths and weaknesses must also be made. This is often difficult, for strengths are often overstated, while weaknesses understated. An analysis of the competition is also in order. Some firms welcome competition, even trying to locate near competitors so that a "critical mass” can be created. Finally, the external market factors must be considered, not only the economy, but also technological and legal/political issues.

The retailer also needs to understand the competitors and how the customers perceive them. This would help the firm understand how they are perceived vis-à-vis the competition. It is also important to understand why consumers choose the competition over your product. This analysis may reveal some startling facts, and provide direction for future differentiation strategies. At the heart of every business strategy, there must be a deep understanding of consumers.

Paco Underhill in his famous book “Why we Buy, The Science of Shopping” brings out some key facts about how consumers buy and the various influences on the same. The book brings out a key fact that most purchasing decisions are influenced and made on the shop floor itself. He highlights the fact that various aspects like signages, shelf position, display space and fixtures all influence the shopper in his buying decision. The science of shopping is a hybrid discipline, part physical science and part social science and only part science at all because it is also an art." It is a practical field concerned with providing information that can improve the retailer's edge and the odds of making a wrong decision. Much of the value of the science lies in the ability to go beyond collecting data and making educated guesses about what it means and how best to respond.

Factors influencing the retail shopper

The behavior of retail shoppers is a subject of study across the world. The basic difference, however, continues to be the maturity of markets and formats. While retail in the West has evolved in terms of formats over the past hundred years, organized retail in India is still a new phenomenon. Shopping has, in fact, been termed as a science by Paco Underhill.

In India, retailers and retail formats are still evolving. Ten years ago, if a consumer wanted to buy soap, his only option was the local bania or the Sahakari Bhandar or the fair price shops run by the government. Today, he can still buy the bar of soap from the same places, but he also has an option of going to a Food World, Big Bazaar, Food Land, and an Apollo Pharmacy or from the neighbourhood bania who has developed a swank new self-service store. Where will he buy? What are the reasons for his choosing one store over the other?

Understanding the reasons for consumers choosing or patronizing a store is important for the retailer. This is true for retailers across the world. In India keep emerging, in many cases, the product offerings are similar. Consider this: most of the department stores, which exist in India today, house a menswear, womenswear, children's and home section. The menswear section in most of the stores houses various national brands like Zodiac, Allen Solly, Louis Philippe, Van Heusen, etc. and some private label/s created by the store. At the same time, all these brands have their own retail outlets. The range available at the stores is also similar. Why should a customer visit a particular department store and not the company's own decision retail outlet? An insight into what provokes a customer to visit and patronize a store helps the retailer in strategy formulation.

We now examine the factors, which influence the customer's decision-making process. These are depicted in following figure.

1. Range of merchandise

The range of merchandise is, perhaps, the most important reason for customers to patronise a particular outlet. The initial curiosity of the store may draw a consumer to a retail store, but to convert him into a buyer and to retain him over a period of time is largely dependent on the quality and the range of merchandise offered by the store. If the merchandise is similar to that of another store or what is commonly available, the customer may not see any reason why he should not switch stores. The range of merchandise offered plays an important role in case of categories like durables, books and music, apparel and other lifestyle products.

2. Convenience of shopping at a particular outlet

The element of convenience is fast gaining prominence in the world of organized retail. This is especially true in case of items like grocery/fruits and chemists. For example, while buying medicines most patients would prefer to buy from the chemist near the doctor's clinic or near the hospital.

3. Time to travel

The time required to reach a particular retail location is again fast becoming critical. This is especially true in case of metros like Mumbai, where travel time is high. This has resulted in many local areas developing in terms of shopping to facilitate buying. We see the appearance of multiple outlets for a brand, departmental stores and malls making their appearance across most Indian cities.

4. Socio-economic factors

Socio-economic factors are seen as fundamental to development. India is today a nation which has a large middle class, a youth population which is happy spending and a steady rate of growth of GDP. The socio-economic background of the consumer largely determines his lifestyle. This influences the kind of store that he may be comfortable shopping in. Consumer buying behavior varies from market to market and is largely influenced by the culture of the region for example Asian culture is very different from Western culture. The need hierarchy is different for each market. The need that the retailer can fulfill needs to be clearly understood by him. This will not only help him in the determining the right merchandise mix but will also help him in evolving an effective communication strategy.

The primary indicator of socio-economic change is the increase in life expectancy from 58 years in the year 1991-92 to an average of 66 years in 2006-07. India aims to achieve 100% literacy (15-35 age groups) by the year 2006-07. Basic amenities like drinking water and electricity are also likely to be commonly available. Thus, we can say that there is a definite improvement in the basic quality of life of an average Indian citizen. With the basic necessities being taken care of, there is a good chance that the demand for other products and services may increase.

5. The stage of the family life cycle

The stage of the family life cycle that the customer belongs to also largely influences his needs. For example, the needs of a young bachelor will be different from the needs of a family with children in their teens, which will again be different from the requirements of an elderly retired couple. The retailer needs to be clear about the target market that he is catering to, as he cannot be everything to everybody. Retail Snapshot 5.1 focuses on how consumer changes have influenced the emergence of new brand leaders.

Retail Snapshot 1: Big brands, big shifts

In March 2011, Subway announced that it had become the world's largest fast food chain, overtaking McDonald's in the total number of outlets worldwide. To a few keen observers, this was a sign of the time a fundamental consumer shift towards wellness and health, and therefore a hunger for relatively healthy food, even if it be fast food.

Consumers today are becoming increasingly health-conscious, and Subway is ideally positioned to leverage this insight as a healthy sandwich made from fresh ingredients. Contrast to this, McDonald's, which in essence continues to remain a processed burger restaurant for the family, with lots of delicious, but immensely fattening cheese and fries thrown in - despite its consistent efforts to introduce low-calorie and grilled foods on the menu. No wonder, Subway has forged ahead with 33,749 outlets globally, compared to McDonald's count of 32,737 outlets.

Clearly, this surprising change in the pecking order of fast-food brands indicates a deep-seated change in consumer preferences. This fundamental change has also been leveraged by many other foods and beverages brands in the recent past. Witness, for instance, the dramatic growth of Coke Zero, Diet Pepsi and Bud Light, the introduction of whole-wheat and high-fibre biscuits by Britannia, the increasing presence of calorie counts on restaurant menus.

In the retail industry, the online retailer Amazon.com has grown amazingly in the past two years. Amazon's brand value in this sector is now ranked second only to Wal-Mart, and well ahead of large retailers such as Tesco and Carrefour (Source: Millward Brown Brandz Ranking, 2010). As consumers shop on the Net, and also begin using mobile phones for online price comparison and shopping, we should expect that Amazon will grow much faster than most brick-and-mortar retailers. Will Amazon eventually trigger the big shift, and attain the No. 1 spot amongst global retailers, toppling the giant Wal-Mart itself? This would be a huge and unmistakable signal that online shopping is the future of the retail industry.

Source: Big brands, big shifts, The Hindu, Business Line, March 31, 2011.

The customer decision making process

After understanding the factors that affect the customer's buying process, it is necessary for the retailer to understand the manner in which a customer makes a decision. This requires understanding consumer behavior.

Typically, the need for a product or a service starts at the time when the need for that particular product or service is recognized. A need may be psychological or functional. Psychological needs are associated with personal gratification that the customer may get from purchasing or owning the product. A functional need, on the other hand, is directly related to the function of the product. The next stage is where the consumer seeks information about the product and the place where he can make the purchase. The source of this information may be a magazine, newspaper, family, friends, the internet, or the television. Any earlier experience of buying the product or the service also affects the decision to purchase. The process that a customer goes through while making a purchase decision is illustrated in following figure.

Depending on the criteria important to him the consumer evaluates the various options available and narrows down the choice to a few stores where he may make the purchase. He may also visit a couple of stores before making a decision to buy. A buying decision is then made. Thus, the steps involved in the consumer decision-making process are:

Stage 1: Identification of a Need for the Product or Service

This arises when the consumer becomes aware of his need of a particular product or service. Typically, a consumer may realize that he needs a product when the current product that he is using does not meet his expectations, or he is about to exhaust the stock that he has of a particular product or when he sees a product or an advertisement for the same and feels the need to purchase the same.

Stage 2: Search for Information

The second step involves gathering information on how to solve the problem. This search may be internal (from memory), or external (friends, family, published sources, salespersons, internet, etc). The extent to which the consumer needs to search for information depends on his current information levels and the perceived value of the additional information. If the consumer recalls past information from memory or past experiences, then it is termed as internal information search. The process of seeking information from the external environment is termed as external search for information. This may be from a marketing source (advertisements, packaging, salespersons, sales promotions, POP's, etc) or a non-marketing source (personal experience, experiences of friends, consumer reports, etc). Based on the information gathered the consumer arrives at an evoked set or a consideration set of products and services that he may choose from.

Stage 3: Evaluating Alternatives

These are the evaluative criteria consumers use to consider different options. This would vary from person to person and may be influenced by the situation. It also depends on the product to be purchased the occasion for purchase and the buying environment.

Stage 4: The Purchase Decision

At this stage, the decision is made first whether to buy or not. It is possible to get close to a purchase, but abort the decision to buy for a number of reasons, such as being declined for financing, getting “cold feet,” a stock-out, or other reasons. The next factor has to do with in-store influences. Numerous displays in a store may cause a person to change his/ her mind while in the store or perhaps a sales clerk may convince you to change brands or even the amount you planned to spend. Typically, consumers are influenced by various factors in determining the products or services that they finally select. The key factors influencing consumer behavior are listed below briefly:

a) Personality

Personality is often a good predictor of one's consumer behavior. Early attempts at understanding consumer behavior relied heavily on psychoanalytic theory, which said that the human personality system consists of the id, ego, and superego. Freudian theory was the foundation for this application, and produced the field of Motivation Research. Socio-psychological theory recognizes the connection between the individual and society. The theory says that social rather than biological instincts are the most important factors in building personality, and that our behaviors are motivated to meet those needs.

An understanding of the same enables marketers creates “personalities” for their brands. Consumers thus identify with a specific brand that best matches their own personality; A good example is cigarettes, which are fairly homogeneous, yet are marketed with dozens of brand names, each with its own “personality.”

b) Lifestyle

Another good indicator of consumer behavior is a person's lifestyle. Technically, a lifestyle is the ways in which a person lives and spends their money. Stated simply, it seeks to understand, what a person does with his life. What kind of vehicle does he drive/what type of house does he live in? What type of vacation does he take? How much leisure time does he have? How does he use it? All of these are important questions. Lifestyles and demographics are often combined to tailor their products and promotional campaigns to match the needs and wants of these select groups.

c) Culture

Culture provides its members with an identity, and also sets the parameters of what is expected and/or acceptable, as well as what is unacceptable. In doing so, it actually makes it easier for its members to lead their daily lives, even though they may not necessarily agree with everything that society has set as standards. Culture can influence many aspects of our daily lives, including how we view ourselves, how much “space” we need (physical and social), how we communicate (and what types of communication are appropriate), how we dress, how we eat, our attention to time, value placed on family and friends, our values and norms, and beliefs and attitudes, our work ethic, and much more. Culture influences consumer behavior throughout the buying process, starting at the pre-purchase levels, and extending all the way to purchase and actual consumption of the product. It can influence the recognition of the problem, the search for information, how the information is evaluated, and what type of store is patronized. Furthermore, it can even influence how the purchase is paid for (e.g., in India, the increase in spending on credit cards is many a times attributed to the change culture in the new generation).

d)   Social Class

A final factor to consider is the role of social class, which is normally the result of the interaction of education, occupation, and income. While some individuals may have high income without the benefit of education or occupational prestige, social class tends to be determined by these three. The result is a stratification of the population into different levels of class. Social class brings with it a number of expectations for what is considered appropriate behaviour and consumption. Usually, a person's birth class is a solid predictor of the class they will be a member of for a large part of their lives.

e) Family and Household Influences

The family unit is a very important consideration while examining consumer behaviour. Many products that are purchased are for consumption by some or all of the family. Furthermore, other members of the family may heavily influence the buying decision of one family member. Exactly how the family behaves as consumers depends in large part on the roles played by individuals within that family unit. The increase in trends towards nuclear households, the increase in the number of working women, and children becoming key influencers in any buying decision, need to be considered while understanding buying behaviour.

Retailers can provide information to the customers at various stages of the buying process. Regular advertisements in newspapers and other media can create awareness about a particular product and may also create a desire for the product. Friendly and knowledgeable sales staff can assist the customer in gathering information about the product. Services offered by the retailer like acceptance of credit cards, free home delivery, and a no questions asked returns policy affect the customer's buying decision.

The experience during and after the purchase leads to satisfaction or dissatisfaction with that particular store. The customer assimilates the experience that the customer has had while shopping, post purchase satisfaction or dissatisfaction. He is also influenced by opinions and the experiences that friends and family have had with the store. Over a period of time, all these factors lead to a customer patronizing a particular store. This is illustrated in following figure.

Researchers believe that when the consumers perceive a significant difference between products, but are uncertain about which product is best for their needs, search becomes more likely. Similarly, as the consequences become important and the perceived risk Retailers need to understand this process and tap into the buying process so that they can develop loyalty over a period of time. Liberalization and steady economic growth have been the main factors, which have driven change in India. In retail, new sectors have emerged due to the changing lifestyles in India. An example of this is the emerging market for various luxury products in India.

Retail Snapshot 2: The luxury consumer in India

The luxury market in India has evolved and, luxury brand retailers are today trying to serve a demanding, well-travelled and discerning Indian consumer. A CII and AT Kearney report, titled Luxury in India, segments consumers in this space in various categories such as the traditionally wealthy industrial families, high net-worth individuals, business executives earning Rs 1 crore and above a year, and small and medium enterprise owners. Then, there are also the aspiring luxury consumers with salaries of 10 lakh and above.

People in the first category are aware, in tune with global trends and know what they want. They also want to be pampered. The second category, or the aspiring luxury consumer, meanwhile, is growing at a faster clip, looking for prominent brands and products that are loud since they want to make a statement that they have arrived.

Interestingly, all consumers of luxury in India are known for their thrift. They are aware of prices in West Asia, Hong Kong, Singapore and also compare them with the prices in the US and the UK. Little surprise then that luxury brands, which are more expensive in India than they are abroad due to high excise and others duties, have, over the past year, reworked their pricing strategies.

The moneyed consumer has also evolved in the way she views expenditure. Those who have the money to afford luxury are overcoming feelings of guilt associated with “splurging on extravagances” and are slowly being wiped out with the growth of the “me-first” MTV and YouTube generation. People have begun to recognise and value brands much more over the past few years.

Despite the evolution of the luxury consumer and brands, the Indian luxury market is not picture perfect. A large part of the shopping is still need-based. The reasons for not shopping for luxury at leisure are easy to find. Luxury shopping in India is still not a pleasant experience, with its presence restricted to a few malls and a few 5-star hotels across the country.

Marketeers are upbeat about the luxury market which is pegged at $4.76 billion ( 21,420 crore) at the end of 2009 (at retail prices). It is estimated to grow at 21% to become almost three times its current size by 2015, says the CII-AT Kearney report. Thus, understanding the buying preferences and the shopping habits of the Indian luxury consumer would go a long way in influencing purchases.

Source: Luxury consumer in India comes of age, livemint.com, March 24, 2011.

In this age of rapid change, change which is not only technological, but also in how we live, and work, retailers have to take into account the implications that these changes may have for their business.

The first impact that changed lifestyles have on retailers is the demand for convenience formats that enable consumers to shop less often and offer them the ability to shop for various products under one roof. As living standards have risen and the variety of foods become more plentiful, so has healthy eating become more of an issue. The more discriminating consumer places new demands on the packaging of food to ensure delivery at the point of sale in fresh condition. Organic products are gaining an important niche alongside other products such as aids to weight reduction. Functionality has become more of a concern and provides opportunities for marketers. In the future, packages will need to be designed with the consumer's convenience in mind much more. Retailers are also discovering new segments which can be tapped due to a basic change in the customer’s lifestyle.