Interplay of External Factors on Consumer Decision-Making - Banking Industry - Coursework Example

Interplay of External Factors on Consumer Decision Making and Their Applicability to the Banking Industry Name: Student Number: Unit: Coordinator: Date: Word count: 3777 Executive summary The study of consumer behaviour has become advanced with researchers as well as marketers seeking to understand consumer motivations for product or service consumption. It has been argued that a consumer undergoes through a process of decision making before purchasing anything. This process is constructed of five steps, which do not necessarily occur in succession. However the most important factor is that consumers have to acquire information about a product/service so that they know it exists. This brings us to the concept of marketing by businesses in a bid to woo consumers over to their side. This paper focuses on the consumer decision making process in relation to financial institutions with a bias towards the banking industry. The process of decision making is often interrupted or enhanced depending on the context of the decision maker. Therefore the consumer decision making process is affected by factors that are categorized as internal and external, and we focus on the external factors. Consumer behaviour is an interesting subject because it is at the core of our daily life. We find that the basic units of society have a significant contribution to the choices made by consumers. The factors that have been seen to strongly influence the choice of banking services in this context are; the family, culture and sub-culture, innovations and social class. Table of Contents Introduction Consumer behaviour is a very significant subject in the world of business and as a result it has received a lot of attention from researchers (Constantinides, 2004). Businesses understand that they have to continuously revise their marketing strategies in order to influence consumers to purchase their products/services, since this is vital to the survival of the business (Goodwin, Nelson, Ackerman & Weisskopf, 2008). According to Schiffman & Kanuk (1997), consumer behaviour is best viewed in terms of how people spend their time, effort and money in relation to consumption of different products and services. In addition to this, it important to consider that consumer behaviour is also defined by the choices that people make in regard to selecting and buying products and services (Nickel & Woods, 1997). Consumer behaviour is largely influenced by the decisions a consumer makes before, during and after purchase and consumption. A lot of research on consumer’s decision making has identified it as a process through which a consumer is able to weigh their options throughout the consumption process (Constantinides, 2004). This process involves a series of five steps which are; need recognition, searching for information, evaluation of available information, purchase decision and finally post purchase behaviour (Constantinides, 2004; Goodwin et al 2008).The consumer’s decision making process is influence by a number of internal and external factors. This paper focuses on the impact of external factors on the consumer’s decision making process in relation to the products and services offered by the financial institutions, with a specific focus on banks. As a result we will first explore the banking industry and identify the products and services that they offer to their consumers. According to the American Banking Association (2012), banks are very significant to the society today since they are at the heart of the economy. They play a big role in availing credit and depository services to individuals all over the world. Apart from this they provide other services that have a significant influence on the economies in which they are based. The different products and services offered by banks facilitate the creation of relationships with their customers (American Banking Association. 2012). For instance; mortgage loans provide an avenue through which banks create relationships with their customers. The banking industry has undergone massive transformation and the major strength of this industry is that it quickly adapts to the needs of the consumers, which are constantly changing. This has enabled the creation of new products and services which are consumer driven such as credit and debit cards, ATMs, online banking and mobile banking thus providing consumers with easy access to the products and services (American Banking association, 2012). Competition in this industry is very stiff because banks offer products and services that are very similar locally and internationally (Woldemariam, 2011). Consumer decision making process As mentioned earlier on the consumer’s decision-making process is viewed as process that goes through five stages. In every stage there are factors that could result in changing ones decision and this is where marketers come in. According to Goodwin et al (2008), marketers use this understanding to develop and implement marketing strategies whose main aim is to influence the decision making process. Research into consumer decision making process is backed by models that explain why consumers behave the way they do. This paper lays focus on the emotional and passive models of consumer decision making. The cognitive decision making model is especially very significant to the information processing stage of the decision making process (Dobre, Dragomir & Preda, 2009). The consumer is viewed as having the ability to search for the information they require, from which they are able to identify the options that are open for them. This is very relevant in regards to accessing banking services and products, for instance if deciding to use the internet banking services. In light of this model, a consumer will actively seek information regarding this service as offered by different banks, and proceed to identify the options he/she considers suitable for consumption, before arriving at a particular brand. The emotional model lays views the consumer as possessing the ability to make decisions while under the influence of moods (a state of mind). This assumes that consumers are very likely to focus on how they feel about a particular brand or product, and as a result information is not sought (Dobre, Dragomir & Preda, 2009). This gives rise to impulse buying. Banking institutions in their understanding of this model come up with marketing tools that target the emotional aspect of the consumer, which are characterized by holding an emotional appeal. Drawing from these models and the consumer decision making process, we arrive at the concept of relationship marketing which is widely practiced by banking institutions in a bid to win and retain consumers. Relationship marketing is simply a strategy that helps organizations to achieve competitive advantage in the market (Arnold & Bianchi, 2001). In relation to the banking industry, the relationship between the consumer and the bank employee is very important in determining consumer satisfaction which may consequently lead to customer loyalty. External factors and their influence on consumer decision making process The external factors that influence the consumer’s decision making process are classified into social and situational factors (Grewal & Levy, 2011). The consumer’s decision making process is to a large extent influence by the social environment which is comprised of aspects such as the family, culture, reference groups and social class just to mention a few. Social scientists view consumer behaviour from a point of behaviour which is pretty much influenced by the social context in which the consumer exists (Goodwin et al (2008). To start off we focus on the impact of reference groups on consumer behaviour with focus on the banking industry. A group is comprised of two or more people with a common goal. Reference groups are best seen as the social circles that an individual belongs to or identifies with in society, and they are free from influences such as culture, race, and nationality (Serralvo, Sastre & Joao, 2010). On the other hand reference groups provide an avenue through which consumers can compare, evaluate and influence their values and beliefs concerning products/services (Grewal & Levy, 2011). The reference groups contribute positively or negatively to the decision making process by influencing consumer attitudes towards a product or service. This is because direct interpersonal relationships are involved. Primary or normative reference groups provide a reliable source of information for consumers since they are comprised of interpersonal relationships that have strong trust ties. Their membership is made up of players such as family and close friends and here values, attitudes and beliefs are shared (Serralvo, Sastre & Joao, 2010). Banking institutions take advantage of this group by segmenting their markets to provide specialized services for every group. For instance, banking clients who are corporate in nature have been taken care of by the industry with the introduction of corporate banking (Woldemariam, 2011). In such a case the corporate is a primary reference group for the corporate client. The interactions within the members of such a community will be very vital in determining whether these products will be consumed. On the other hand, if a member has had an exceptionally good experience with the service delivery from his bank, he is able to influence the attitudes of the other group members towards the bank. The second group is the aspiration or comparative reference group which is defined as a group which an individual does not actually belong to, but wishes that he/she belonged to it (Goodwin et al, 2008). This group has a very strong influence on consumer’s attitudes towards certain products and has the capacity to change consumer’s beliefs about a particular product/service or brand. The best example is identifying with a group of celebrities or leaders in the society. Marketers in banking institutions understand the power of reference groups and use them to give credibility to their products and services. The marketers have tapped into the potential of the reference group to design marketing strategies such advertising, whereby the product in question is portrayed as holding a certain appeal which the consumer identifies with (Bearden & Etzel, 1982). The advertisements come with social as well as emotional appeals that are attached with the various reference groups. Reference groups provide a strong entry point for marketers since some studies have revealed that not are there verbal communications, the direction of consumption decision made by an individual is largely influenced by this reference group (Yang, He & Lee (2007). It is from this point that banks have drawn the need to segment markets in order to satisfy the needs of the different reference groups. According to (Woldemariam,2011), banks in the local and international front have designed and implemented strategies that create market niches and segments, driven by their understanding of the various references groups in existence. Such segments include; business banking, microfinance, SME financing, internet and mobile banking services. Culture is an essential part of the society today defined by different values, beliefs and practices, which set apart one group from another. According to Soares, Farhangmehr & Shoham (2006), culture has the largest influence on many aspects of behaviour in human beings. Culture influences the type of consumption decisions people make because in a way, it directs the type of information one will search for prior to making a decision to purchase (Reid, 2011). In understanding the aspect of cultural influences towards consumption behaviour, marketers go to the pains of packaging their products to carry aspects of the target cultural group. As a result banks have resulted to diversifying their products to match the needs of cultures, even though these products do not have much of a difference. Much as culture is deeply imbedded in our society, it is learned, and this means people within a culture can quickly and easily adapt to a different culture (Arnould & Bianchi, 2001). For instance, the technological growth in the world today has contributed to changing and adaptation of cultures. Consequently, these changes also define the marketing strategies applied by banking institutions. For example, the increased use of mobile phones and the internet has facilitated cultural changes in regard to consumer behaviour. Therefore the introduction of banking services such as mobile banking, mobile banking and the introduction of credit and debit cards, is all a reflection of how a banks take advantage of the cultural trends. This therefore creates more channels through which customers can interact with the bank, thus enhancing the business to customer relationship (Adapa, 2011). In addition, banking institutions today have understood the importance of communicating to consumers in the language they understand best. As a result, the modern bank has designed superior marketing strategies and opened up other effective channels of communication such as the internet, in order to allow the consumer to reach them easily. The most important factor is that consumers have demanded this through the changing cultures especially in relation to consumption habits. This has given the banking institutions an avenue for attaining competitive advantage (Kerem et al, 2003). Subculture is an important external factor in influencing the consumer decision making process. A sub culture is a component of a larger culture only that it is characterized by homogeneity. This means that people belonging to a subculture have common needs and goals, unlike in the larger culture where people have diverse gaols. Subcultures may be separated by geographical demarcations or just by beliefs, values and practices. The best type of a sub culture is religion, which is widespread across the world, yet there are numerous types of religions existing within a larger cultural group. For instance Islam, Christianity, Hinduism, Buddhism and Mormon are some of the religion practiced in the world today. For the marketer, it is important to identify the sub cultures and understand their needs such that products and services are tailor made to fit satisfy these needs. A good example is Sharia Banking that is a preference for Muslims world over, which does not allow interest on banking products (Saini, Bick & Abdulla, 2011). As a result of understanding their sub cultural beliefs which are grounded by the values of conformity to the religion, Islam banking institutions are on the rise today. In response to this, international banks like Citibank have opened their doors to the Muslim community by providing products and services tailored to meet their needs, especially in business financing (Saini, Bick & Abdulla, 2011). Other sub cultures are such as sexual orientation groups, Social class refers to how society is divided into different levels which are predetermined by factors such as economic well being and levels of power. In simple terms a social class grouping is made up of people who share educational, social and economic status (Yakup & Jablonsk, 2012). Social class brings about social status whereby members are ether in the high level (usually identified as affluent) or low level class usually identified as non-affluent. Social status is holds a powerful force in determining consumer behaviour. Marketing strategies developed by banking institutions clearly understand the issue of class divisions and this is reflected in market segmentation. Different banking services are targeted towards the different social class divisions within society. Banks identify market niches, and offer different banking products to them, for instance the affluent business people may have a special banking section which may be referred to as a business club, which charges higher account maintenance fees than regular accounts. In retrospect such a group can be categorized under the membership groups described earlier. The family is at the core of the society and is best defined as a social unit of the community. Families vary in size, ranging from large to small in regard to their member composition. Every member of the family- right from the children to the parents- plays an important role towards influencing consumption decisions (Davis, 1976). On the other hand the family largely contributes to the values, beliefs and attitudes its members hold. We focus on two types of families in this text which are; two parent families and single parent families. Two parent families is made up of a husband, wife and children while the single parent family is made up of one parent, who may be the father or the mother and the children. The family is an important unit to the marketer, since it forms the backbone through which attitudes and values are learned. It is also a group which has a strong influence on its member’s consumption behaviour. In retail and business banking, the family strongly determines the choice of a banking facility for its members. On the other hand, the family also plays the role of providing a source for money. Whether it is a couple or a single parent household, there are one or two members who provides for the monetary needs of the family. The understanding of these roles has influence the development of products by banks, which target the monetary, provides. They involve products such as mortgages, educational loans, pay day loans and salary loans just to mention a few. According to Grewal & Levy (2011), the family is important because when consumption decisions are made, the needs of all members are put into consideration. On the other hand, family members play different roles in influencing behaviour. This brings us to the socialization process within the family, which is viewed as the process through which family values, attitudes and beliefs are passed on from one generation to another. Children are able to pick up consumption habits for their elders and this largely affects their consumption decisions on a day to day basis. The family is also characterized by a life cycle that also has a considerable influence on consumption decisions. The traditional lifecycle is defined in terms of how roles progress with age, moving from singleness, through marriage and nurturing a family to being empty nesters, and the cycle continues with the younger generations. Therefore in the light of choosing banking services and products, members along the different stages of the lifecycle may opt for different products. For instance the young single as well as married generations may easily opt for internet banking services unlike the empty nesters. Banks have also identified a market segment in children, thus the development of the savings account targeting them. Diffusion of innovation is a concept that looks into how market innovations are adopted by people/consumers. The banking industry has introduced innovative products with the most prominent one being the internet banking (Lichtenstein & Williamson, 2006). The performance of a new product/service in the market largely depends on the marketing strategies and the way the message about the product is passed across to the consumers (Dobre, Dragomir & Preda, 2009). In addition to this, the communication channel that is used in diffusing an innovation is very crucial in defining how the speed at which the innovation is adopted by the end user (Rogers 1995). According to Dobre, Dragomir & Preda, (2009), researchers on diffusion of innovation have identified five factors that influence how quickly an innovation is adopted in the market. The first is relative advantage, which happens when the innovation is positively perceived by the groups it was targeted as. It is accepted as fulfilling their needs. A good example for this is internet banking which is more that a relief for Australians today. It has been widely accepted as satisfying the needs of its users, by sparing them from tedious banking processes like queuing. According to a study by (Lichtenstein & Williamson, 2006), about 25% of Australians used internet banking services in the year 2002. The second quality focuses on how compatible the innovation is with the values and practices of the intended users. High compatibility result to widespread use of the innovation. The third quality focuses on the ease of applicability of the innovation. When banking products like ATMs and credit cards were introduced in the market, they were easy to use and their ability to make life easier contributed to their success in adoption. The fourth quality is the triability of the innovation, which refers to how flexible the innovation is to allow for experimentation. Last but not least is the ability of the innovation to produce results that are easily observed. Davis (1989) came up with a different model known as the technology acceptance model which is very relevant to the banking industry today. This model identifies two main factors that influence adoption of innovations which are the perceived usefulness of an innovation and perceived ease of use. In retrospect, these two factors combined with the use of reference groups can be held responsible for the innovations by banks to take up marketing mix strategies, in their drive to segment the market. Innovativeness is a concept that views the consumer as continually seeking new and exciting experiences. In a study by Dobre, Dragomir & Preda (2009), innovators have distinct profiles which are identifiable in the way they adopt to new products and services. This study further argues that innovators are consumers who are open to experience and learning, and most importantly their consumption behaviour is driven by their personal standards. This explains the fact that they are not easily influence by information from their surroundings. Innovators have a significant contribution to make towards influencing the consumer decision making process. They are opinion leaders in their reference groups and they display a characteristic of resilience (Dobre, Dragomir & Preda, 2009). Opinion leaders are used by marketers to popularize a new innovation. In regard to the banking industry, innovators are the consumers who quickly adapted to using internet and mobile banking services despite the possible risks attached to the two services. On the part of the banking institutions, innovators become market leaders and are always ahead of their competitors. Conclusion Consumer behaviour is a vibrant area of interest to researchers who are curious to unravel the consumer’s patterns. It is quite clear that the consumer decision making process does not occur in quick succession given the dynamic nature of consumer’s choices. The external factors that influence this decision making process are also very dynamic and are enmeshed ate the core of every individual. The family, culture, reference groups, social class are all factors that we cannot do away with in our society and we have actually created them into systems. Consumers are very important aspects of the marketing drives that organizations employ. The banking industry is very competitive especially given the fact that the different banking institutions offer products that are very similar. The beauty of the banking sector is that there are several market leaders who have taken upon themselves the responsibility of leading change. As a result, banks today offer a variety of diverse products and every consumer regardless of their reference group, culture, family of origin, social class and so forth has a product that conveniently meets their needs. 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