Buyer Decision Process

The stages of the Buyer Decision Process

The buyer decision process represents a number of stages that the purchaser will go through before actually making the final purchase decision. The consumer buyer decision process and the business/organisational buyer decision process are similar to each other. Obviously core to this process is the fact that the purchase is generally of value in monetary terms and that the consumer/business will take time to actually assess alternatives. For FMCG (Fast Moving Consumer Goods) the purchase decision process tends to be shorter/quicker, and for habitual purchase behaviour or repeat purchases the decision process is short-circuited.

he stages of the buyer decision process are the recognition of the problem, the search for information, an evaluation of all available alternatives, the selection of the final product and its supplier (of course services are included) and then ultimately the post-purchase evaluation. Lets have a look at each stage and offer a quick explanation of what it's all about, and then let's apply it to an organisation to help us work out what it's all about.

Stage One
Stage one is the recognition of the particular problem or need and here the buyer has a need to satisfy or a problem that needs solving, and this is the beginning of the buyer decision process.

Stage Two
Stage two is where we begin to search for information about the product or service. Buyers here begin to look around to find out what's out there in terms of choice and they start to work out what might be the best product or service for solving the problem or satisfying any need.

Stage Three
Stage three sees the evaluation of the available alternatives whereby the buyer decides upon a set of criteria by which to assess each alternative.

Stage Four
We buy or select a product/service/supplier at stage four. Individuals or teams of buyers make the final choice of what to buy and from whom to buy it.

Stage Five
Interestingly the process does not stop at the point of purchase because there is a stage five called the post-purchase evaluation. The process continues even when the product or service is being consumed by the individual or business. So if it doesn't meet your needs or solve your

problem you can take action to improve the product or service. Your actions at this point might inform other potential buyers who would be keen to hear about your experiences good or bad. Let's look at an example based upon buying a new smart cellphone. The first stage is likely to be that you have a need for communication or access to the Internet, or problem because you cannot interact with friends using social media. The value added by products such as Android, iPhone or Windows phone and others should satisfy your need or solve your problem. So the second stage is where you speak to your friends and surf the Internet looking at alternatives, which represent stage two - or your information search. As a buyer you might visit a local cellphone store and speak to the sales staff to help you complete stage three, i.e. your evaluation of alternatives. Stage four is the selection of product and you go and make your final decision and buy your smartphone from a local store or using an e-commerce website. Stage five involves your postpurchase evaluation whereby you use the phone and have a positive, negative or mediocre experience of the product. If it doesn't satisfy your needs you take action and more importantly you'll tell others of your problems. If you're pleased with the product, you will tell your friends and this will influence stage two (their information search) when they decide to buy a cellphone. Remember that organisations and businesses also go through this process and that teams of individuals contribute to the decision-making process. This is called a Decision-Making Unit (DMU).

Fast Moving Consumer Goods (FMCG) The fmcg industry includes food and non-food everyday consumer products. They are usually purchased as an outcome of small-scale consumer decision so they are heavily supported (advertising, promotion) by the manufacturers. Typical purchasing of these goods occurs at grocery stores, supermarkets, hypermarkets etc. The manufacturers are always exploring new outlets and sales locations while the traditional retailers have introduced private label brands to capture additional profit. Every one of us uses fast moving consumer products every day. This business is based on building powerful brands and achieving a high level of distribution. Global power brands are the choice of multinational companies. Local brands can compliment these. Achieving superior distribution thorough a powerful supply chain and making sure the products are available wherever someone might want or need it. The fmcg Supply Chain is the interrelated collection of processes and associated resources It includes suppliers, manufacturers, logistics service providers, warehouses, distributors, wholesalers and all other entities that lead up to delivery to the final customer. Followed in the market through sales force activity it can help gain a high level of distribution. Market Research, consumer research, segmentation and product positioning is the compulsory homework of any company in this industry. Advertising and promotions, POS activities drive brand

awareness, trial, purchase and is a core activity. While TV advertising is most common new solutions are also used including internet advertisements. High budgets, creativity and detailed planning are needed.

FMCG (Fast Moving Consumer Goods) Sector Analyst: Ms. Binal R. Vora Indian FMCG sector is the fourth largest sector in the economy characterized by strong MNC presence, well established distribution network, intense competition between the organised and unorganised players and low operational cost. Easy availability of important raw materials, cheaper labor costs and presence across the entire value chain gives India a competitive advantage. Penetration level and per capita consumption in many product categories is very low compared to world average standards representing the unexploited market potential. Mushrooming Indian population, particularly the middle class and the rural

segments, presents the huge untapped opportunity to FMCG players. he Indian FMCG sector is the fourth largest sector in the economy with an estimated size of Rs.1,300 billion. The sector has shown an average annual growth of about 11% per annum over the last decade. Unlike the developed markets, which are prominently dominated by few large players, Indias FMCG market is highly fragmented and a considerable part of the market comprises of unorganized players selling unbranded and unpackaged products. There are approximately 12-13 million retail stores in India, out of which 9 million are FMCG kirana stores. India FMCG sectors significant characteristics can be listed as strong MNC presence, well established distribution network, intense competition between the organised and unorganised players and low operational cost. Easy availability of important raw materials, cheaper labor costs and presence across the entire value chain gives India a competitive advantage. Products which have a swift turnover and relatively low cost are known as Fast Moving Consumer Goods (FMCG). FMCG items are those which generally get replaced within a year. Examples of FMCG commonly include a wide range of repeatedly purchased consumer products such as toiletries, soap, cosmetics, oral care products, shaving products and detergents, as well as other non-durables such as glassware, bulbs, batteries, paper products, and plastic goods. FMCG may also include pharmaceuticals, consumer electronics, packaged food products etc. Penetration level and per capita consumption in many product categories is very low compared to world average standards representing the unexploited market potential. Mushrooming Indian population, particularly the middle class and the rural segments, presents the huge untapped opportunity to FMCG players. Growth is also likely to come from consumer 'upgrading' in the matured product categories like

processed and packaged food, mouth wash etc. A distinct feature of the FMCG industry is the presence of international players through their subsidiaries (HLL, P&G, Nestle), which ensures innovative product launches in the market from their parent's portfolio. Our country has a varied agro-climatic condition which enables to offer extended raw material base suitable for many FMCG sub sections like food processing industries etc. India is the one of the major producer of livestock, milk, sugarcane, coconut, spices and cashew and is the second largest producer of rice, wheat and fruits & vegetables. Similarly, India has an abundant supply of caustic soda and soda ash, the chief raw materials required in the production of soaps and detergents, which enables the household section of the industry to excel and grow. The accessibility of these raw materials gives India the locational advantage. TSource: IMF World economic Outlook Database, Oct 2010 As can be seen from the above diagram, labor cost in India is amongst the lowest in emerging Asian countries. Easy raw material availability and low labor costs have resulted in a lower cost of production. Many multi-nationals have set up large low cost production bases in India to outsource for domestic as well as export markets. MAJOR SEGMENTS OF THE FMCG INDUSTRY: Household Care The detergents segment is growing at an annual growth rate of 10 to 11 per cent during the past five years. The local and unorganized players account for a major share of the total volume of the detergent market. The preference is given to detergents in urban area compared to bars. Household care segment is featured by intense competition and high level of penetration. With rapid urbanization, emergence of small pack size and sachets, the demand for the household care products is booming.

In washing powder segment, HUL is the leader with ~38 per cent of market share. Other major players are Nirma, Henkel and Proctor & Gamble. Personal Care Personal care segment includes personal wash products, hair care products, oral care products, cosmetics etc. The Indian skin care and cosmetics market is valued at $274 million and is dominated by HUL, Colgate Palmolive, Gillette India and Godrej. The coconut oil market accounts for 72 per cent share in the hair oil market. The hair care market can be segmented into hair oils, shampoos, hair colorants & conditioners, and hair gels. In the branded coconut hair oil market, Marico (with Parachute) and Dabur are the leading players. Sachet makes up to 40 per cent of the total shampoo sale. Again the market is dominated by HUL with around ~47 per cent market share; P&G occupies second position with market share of around ~23 per cent. Personal wash can be further segregated into three segments namely Premium, Economy and Popular. Here also, HUL is the leader with market share of ~53 per cent; Godrej occupies second position with market share of ~10 per cent. Swelling disposable incomes of the Indian consumers, growth in rural demand and upgrading to the premium products are the key drivers for future demand growth in major FMCG categories. 5824 2250 1889 1619 1052 943 Malasiya China Nepal Srilanka Pakistan India Labor Cost (in US $ p.a.) Labor cost in India is

amongst the lowest in emerging Asian countriesThe skin care market is at a primary stage in India. With the change in life styles, increase in disposable incomes, greater product choice and availability, people are becoming more alert about personal grooming. The major players in this segment are Hindustan Unilever with a market share of ~54 per cent, followed by CavinKare with a market share of ~12 per cent and Godrej with a market share of ~3 per cent. The oral care market can be segmented into toothpaste - 60 per cent; toothpowder - 23 per cent; toothbrushes - 17 per cent. This segment is dominated by Colgate-Palmolive with market share of ~49 per cent, while HUL occupies second position with market share of ~30 per cent. In toothpowders market, Colgate and Dabur are the major players. Food and Beverages This segment comprises of the food processing industry, health beverage industry, bread and biscuits, chocolates & confectionery, Mineral Water and ice creams. The three largest consumed categories of packaged foods are packed tea, biscuits and soft drinks. Indian hot beverage market is a tea dominant market. The major share of tea market is dominated by unorganized players. Leading branded tea players are HUL and Tata Tea. Mjaor players in food segment are HUL, ITC, Godrej, Nestle and Amul. INDIAN CONSUMERS SPENDING PATTERN INDIA OCCUPIES 17% OF THE WORLDS POPULATION THAT HALF OF THESE PEOPLE ARE BELOW THE AGE OF 25 Grocery 40% Personal care 8%

Home Textiles 2% Saving and Investments 4% Clothing 7% Consumer Durables 7% Vacation 4% Eating Out 10% Footwear 2% Music & Theatre 5% Entertainment 2% Accessories 1% Books and Music 8% China 19% India 17% United States

5% Indonesia 4% Mexico 2% Pakistan 3% Bangladesh 2% Nigeria 2% Russia 2% Japan 2% Philippines 2% Ethiopia 1% Vietnam 1% Egypt 1% Germany 1% Turkey 1% Iran

1% Congo 1% Thailand 1% France 1% Others 31%SWOT ANALYSIS: Strengths: Low operational costs Presence of established distribution networks in both urban and rural areas Presence of well-known brands in FMCG sector Favorable governmental Policy: o Indian Government has passed the policies aimed at attaining international competitiveness through lifting of the quantitative restrictions, reducing excise duties, 100 per cent export oriented units can be set up by government approval and use of foreign brand names etc. Foreign Direct Investment (FDI): Automatic investment approval up to 100 per cent foreign equity or 100 per cent for NRI and Overseas Corporate Bodies investment is allowed for most of the food processing sector except malted food, alcoholic beverages and those reserved for small scale industries (SSI). Weaknesses:

 Lower scope of investing in technology and achieving economies of scale, especially in small sectors Low exports levels Opportunities: Untapped rural market, changing life style Rising income levels, i.e. increase in purchasing power of consumers Large domestic market with more population of median age 25 High consumer goods spending India is the largest milk producer in the world, yet only around 15 per cent of the milk is processed. The organized liquid milk business is in its infancy and also has large long-term growth potential. Even investment opportunities exist in value-added products like desserts, puddings etc. Only about 10-12 per cent of output is processed and consumed in packaged form, thus highlighting the huge potential. India is under penetrated in many FMCG categories as shown in below diagram. With rise in per capita incomes and awareness, the growth potential is huge. Lower price and smaller packs are also likely to drive potential up trading for major FMCG products Rural demand etc. Threats: Removal of import restrictions resulting in replacing of domestic brands

 Tax and regulatory structure Rural demand is cyclical in nature and also depends upon monsoon.THE TOP 10 COMPANIES IN FMCG SECTOR 1. Hindustan Unilever Ltd. 6. Asian Paints (India) 2. ITC (Indian Tobacco Company) 7. Cadbury India 3. Nestl India 8. Britannia Industries 4. GCMMF (AMUL) 9. Procter & Gamble Hygiene and Health Care 5. Dabur India 10. Marico Industries LOW PER CAPITA CONSUMPTION IN INDIA COMPARED TO WORLDS OTHER COUNTRIES :: HUGE UNTAPPED OPPRTUNITY (Data for the year 2001)Source: AC Nielsen OUTLOOK: India has 17% of the world's population and that half of these people are below the age of 25. With a median age of 25 years, increasing numbers are joining the Indian workforce. India's share in world consumer spending is set to enlarge from 1.9% in 2005 to 3.1% in 2020. (Source: Technopak) Income in the hands of younger consumers with a higher propensity to spend, is providing optimism to the economy while opening up new categories in the FMCG space. India is under changing phase as more women are joining India's workforce, FMCG players are finding opportunities to introduce products in the convenience and health foods segments. While spending on women's personal care products is also becoming far more acceptable.

Distribution of smaller pack sizes, innovations like single use sachets to reach out to the rural and lower section of the economy is gaining demand. Innovative products to cater to regional or local tastes and the needs of niche consumers is also benefiting in growth of the industry. Key growth drivers to the Industry are as follows: Robust growth in Indias GDP Growing urbanization Evolving consumer life style Increased income in rural areas Spending Pattern Changing Profile and Mind Set of ConsumerGrowth of modern retail The FMCG sector has a great opportunity for growth in the country, with the growing population, the rising disposable incomes, education, urbanization, the advent of modern retail, and a consumption-driven society. There is a potential for all the FMCG companies as the per capita consumption of almost all products in the country is very low compared to world standards, thee exists there huge untapped opportunities. Research Team Mr. Amit Gupta amitg@iseindia.com Ms. Binal Vora binalv@iseindia.com Ms. Sandhya Tungatkar Sandhyat@iseindia.com DISCLAIMER: This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of companies referred to in this document. The intent of this document is not in recommendary nature. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to

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UNDERSTANDING CONSUMER BEHAVIOUR

hat Is Consumer Behaviour? Consumer behaviour is the study of how individuals, groups, and organizations select, buy, use, and dispose of goods, services, ideas, or experiences to satisfy their needs and wants. Successful marketing requires that companies fully connect with their customers. Adapting a holistic marketing orientation means understanding customers, gaining a 360-degree view of both their daily lives and the changes that occur during their lifetime so that the right products are marketed to the right customers in the right way. Studying consumers provides clues for improving or introducing products or services, setting prices, devising channels, creating messages and developing other marketing activities. To implement marketing strategy, marketers examine-what, where, when and how consumers buy Consumer Markets Consumer markets are the markets for products and services bought by individuals for their own or family use. Goods bought in the consumer market can be categorized in several ways such as: Fast-Moving Consumer Goods (FMCGs) these are high volume, low unit value but with fast purchase e.g. ready meals, newspapers, soap, and cooking oil Consumer Durables these have low volume but high unit value e.g. cars, fridges/freezers, cookers, television sets, washing machines, computers etc. Soft Goods these are similar to consumer durables except that they wear out more quickly and therefore have shorter replacement cycle e.g. clothes, shoes etc. Consumer Marketing Consumer Marketing refers to the marketing of the above goods and services for personal consumption. However, there could be exceptions whereby Cars are bought for both personal and organizational use. Business/Organizational Marketing This involves marketing products or services to other companies, government bodies, institutions (such as schools, hospitals and churches) and other organizations. McDonald's and Burger King buy products such as salt, and services to use in the production of their products. The business market consists of all the organizations that acquire goods and services used in the production of other products or services that are sold, rented, or supplied to others. Characteristics Affecting Consumer Behaviour 1. Cultural Factor

Culture Culture is the fundamental determinant of a persons wants and behaviour. The growing child acquires a set of values, perceptions, preferences and the behaviour through his or her family and other key institutions. A child grown in USA is exposed to the following values:

achievements and success, efficiency and practicality, progress, material comfort, individualism, freedom and youthfulness. What about a child grown in Ghana? Subculture Each culture consists of smaller group (subculture) of people with shared value systems based on common life experiences and situations. These subcultures can be ethnic, religious, racial or regional groups as well as those that form around music groups. Nestle Gh Ltd (MaggieHomowoCooking contest) Guinness & MTN have been exploiting our festivals to promote and build their brands and Corporate Image. Social Class Virtually all human societies exhibit social stratification. It is a relatively homogeneous and enduring division in a society, which is hierarchically ordered and whose members share similar values, interests, and behaviours. Social classes reflect not only income but also other indicators such as occupation, area of residence, education, and wealth. Social classes show distinct product and brand preferences in many areas, including clothing, home furnishing, leisure activities, automobiles, and media consumption 2. Social Factors

Group Membership: Anyone who has ever gone along with the crowd" knows that people act differently in groups than they do on their own. Since many of the things we buy are consumed in the presence of others, group behaviours are important to marketers Primary Groups: A person has continuous /informal interaction including family members, friends, neighbours, and co-workers with these groups. Reference Group: These are groups that have direct/face-to-face or indirect influence on a persons attitudes and behaviours. A set of people a consumer wants to please or imitate. Consumers refer to these groups in evaluating their behaviour i.e. what they wear, where they go and what brands they buy Secondary Group: A person has formal relations and less continuous interaction including religious organizations, professional associations, and trade unions with these groups. Opinion Leader: Is a person who influences others' attitudes or behaviour because others perceive him/ her as possessing expertise about the product. Opinion leaders are often among the first to buy new products, so they absorb much of the risk, reducing uncertainty for others who are not as courageous. Marketers try to reach opinion leaders by identifying demographic and psychographic characteristics associated with them and coaxing them especially the celebrities to use their products sometimes before they are launched. The Family: This is probably the most important consumer buying organization in society. Family members constitute the most influential primary reference group. Marketers are interested in the roles and relative influence of the husband, wife, and children in the purchase of a large variety of products and services. 3. Psychological Factors Psychology helps marketers understand the why and how of consumer behaviour. In the psychological situation, consumer buying behaviour is influenced by four factors including: Motivation, Perception, Learning, and Beliefs & Attitudes. a. Motivation

Motivation is an inner state that energizes, activates, moves or channels behaviour towards certain goals (Assael). Motivation arises from perceived needs. These can be grouped into biogenic and psychogenic needs: Biogenic needs: arise from physiological state of tension e.g. thirst, hunger, discomfort Psychogenic needs: arise from psychological state of tension such as esteem, belongingness. Maslows theory of motivation states that needs are satisfied based on importance. He argues that a consumer will satisfy the most important need first Maslows Hierarchy of Needs

Physiological Needs (water, sleep, food) Safety Needs (security, shelter, protection) Social Needs (love, friendship, acceptance by others, belongingness) Ego Needs (Self-esteem, prestige, status, recognition, accomplishment) Self- Actualization (self-fulfilment, realization, and enriching experience) The theory helps marketers understand how various products fit into the plans, goals, and lives of consumers. b. Perception

A motivated person is ready to act. How the motivated person actually acts is influenced by his or her perception of the situation. Perception is the process by which an individual selects, organizes, and interprets information inputs to create a meaningful image of a situation. Selective Attention- Listeners select part of the message that interests them. Sexual attraction are used to attract attention Selection distortion- here receivers distort the information they receive if the information does not agree with their existing beliefs, opinions Amplification- the receiver adds things to the message that are not there. Different people in the same motivated and objective situation may act quite differently because each perceives the situation differently. For example, one person might perceive a fast talking sales person as aggressive and insincere, another as intelligent and helpful. People can emerge with different perceptions of the same object because of three perceptual processes: selective distortion, selective attention, and selective retention. In marketing, people's perception are important than the reality. c. Learning

Learning involves changes in an individuals behaviour arising from experience. Most human behaviour is learned. Learning theorists believe that learning is produced through: Drive: Strong internal stimulus that compels a person to act in a particular way (motive) e.g. thirst, hunger, discomfort etc Response: Action taken as a result of the cue, e.g. purchase of beer, soft drink or air-conditioner

Reinforcement: If experience (from using the beer, soft drink, or air-conditioner) is rewarding /satisfying, the person will continue to take same action anytime he feels thirsty/uncomfortable. Habit is then formed which may result in brand loyalty. d. Beliefs & Attitudes

Through doing and learning, people acquire beliefs and attitudes and these in turn influence buying behaviour. A persons belief is the descriptive thought that he/she holds about something. His attitude is his/her enduring favourable or unfavourable evaluation, emotional feeling and action tendencies toward some object (product/service) or idea, e.g. attitudes towards religion, politics, music which may be positive or negative. Marketers need to decide which part of an attitude is the most important driver of consumer preferences e.g. ( Diet coke/Pepsi in blind/branded test) Lifestyle: Is a pattern of living that determines how people choose to spend their time, money, and energy and that reflects their values, tastes, and preferences Consumers often choose goods, services and activities that are associated with a certain lifestyle. Analysis of consumer lifestyles (i.e. psychographics) is important in producing insights into consumer behaviour. For instance, lifestyle analysis is useful in segmenting and targeting consumer markets Personality: Each person has personality characteristics that influence his or her buying behaviour, By personality, we mean a set of distinguishing human psychological traits that lead to relatively consistent and enduring responses to environmental stimuli. Personality is often described in terms of such traits as self-confidence, dominance, autonomy, deference, sociability, defensiveness, aggression, and compliance. Personality can be a useful variable in analyzing consumer brand choices. The idea is that brands also have personalities, and that consumers are likely to choose brands whose personality matches their own. We define Brand Personality as the specific mix of human traits that may be attributed to a particular brand. Self-Concept: Is an individuals self-image that is composed of a mixture of beliefs, observations, and feelings about personal attributes. Self-image is how a person thinks of himself or he thinks others think of him. 4. Situational Factors Some important situational cues are; The Physical Environment: Marketers are aware that factors such as decor, smells, lighting, music, crowding, and even temperature can significantly influence many purchases. Many retailers are focusing on adequate packing, cyber-hangout and in-store display to influence the consumer decision-making process. Time: Marketers know that the time of day, the season of the year, and how much time one has to make a purchase affect decision-making. Time is one of consumers' most limited resources. The sense of time poverty makes consumers responsive to marketing innovation that allow them to save time including such services as drive-through lanes at fast food restaurants and ordering products on the web. . Social Surrounding: Including the other people present when the purchase decision is made, may affect what is actually purchased. Thus, a playboy who went to a pharmacy to buy condoms

late in the night ended up buying a bottle of tricilicate when he came face to face with an elderly man he had woken up from sleep. Purchase Task: Is the reason underlying the consumers decision to buy which may be as a gift or for the buyers own consumption or consumption by the members of the household The Consumer Decision Process-How They Buy; Need identification/Problem awareness Information gathering Evaluation of alternative solutions (products) Selection of an appropriate solution (product) Post-purchase evaluation of decision