Sunday 31 May 2009

Rise in Promiscuity – How far will you stretch


So in this downturn we are all going to end up being much more promiscuous apparently.

Whilst we can’t blame this on the beer (consumption has gone down in the recession) and it is true in the narrowest sense of the word -with an estimated rise in adultery - I actually mean it in the broader sense in terms of the brands we are loyal to, not just partners.

A recent report from Experian suggests that consumers are now less loyal to brands, with an increasing number re-evaluating their choice of brand or company.

The report shows that on average, over 80% of consumers questioned indicated that they are increasingly aware of the price of goods and services and almost half of them stated they were less loyal to companies than previously. More worryingly, over 50% of people questioned stated that they had actually taken business away from companies in the past year due to bad customer service.

The report also shows a rise of almost 10% in consumers feeling that most companies are not fair to them – essentially an eroding of trust. This has been rising steadily over the last 2 decades, but has risen very quickly in the last year.

None of this is a surprise and indeed I discussed similar results from surveys by Forrester and Accenture back in February – what was interesting though is what they said about how customers are changing behaviour, stating:-

It is not just the cheapest items that are luring customers in the recession. We know that they are thinking twice about buying the cheapest item they can find (“Buy cheap, buy twice!”)

So this isn’t consumers necessarily trading down or cutting back, instead it’s a case of looking at overall value – price vs quality.

Looking at how consumers measure value and its increasing effect on customer attrition you could argue that there has been an increase in Value Elasticity.

Within economics, Price Elasticity of Demand relates to the relationship between price and demand – where the price rises and demand falls then this product/service is considered elastic – where the price rises but demand doesn’t fall then this is considered in-elastic.

Within customer retention we could use the same formula for Value. Where Value falls in the consumers mind (price rise/drop in product quality/bad service) and this results in customer churn then you could class the brand/company as Value Elastic. Where consumers suffer decreases in value but don’t defect, then this company/brand/sector could be consider Value In-Elastic.

As an example, I was talking to consumers a couple of weeks ago as part of some research and what was interesting was their reaction to different sectors. When discussing retail, there was no hesitation – if a brand fails then they will be cut loose – the consumer will walk away. However when discussing financial services, consumers seemed Value In-Elastic – not shedding their bank even when they had personally had a complaint or issue.

So whilst banks currently have some advantages with customers unwilling to move despite a drop in value, what seems to be changing for most industries – and this is in part due to the recession, but also due to increasing customer expectations and wider choice – is that consumers are becoming more Value Elastic – more willing to look around, more willing to give someone else a chance.

As their sensitivity to value (price vs quality) increases, so does their Value Elasticity and hence the re-evaluation of the companies they use.

We have been through the boom years where consumers were given ever increasing amounts of choice and options and as demand overall now falls, less and less companies have the luxury of Value Inelasticity – or customer inertia.

Consumers are looking to stretch their pounds and this means they will be stretching the value equation. The good news however is that Value does not not equal Price. It’s a more complex equation that includes product quality, availability, choice, customer service, brand affinity and benefits.

Price will always be important but you don’t need to have the lowest prices – you need to have the best Value.

If you’re in a Value Elastic sector (and this will be almost everyone), you need to make sure you’re not hit on the rebound when consumers flex their option of choice. Understanding what customers value and how they measure this will help make the right choices when a product or service is priced, positioned and promoted.

PS. Whilst banks may have Value In-Elasticity today, this does affect their ability to gain the consumers wider financial relationship – you really can’t have your cake and eat it.


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