Marketing
Marketing is the process of performing market research, selling products and/or services to customers and promoting them via advertising to further enhance sales.[1] It generates the strategy that underlies sales techniques, business communication, and business developments.[2] It is an integrated process through which companies build strong customer relationships and creates value for their customers and for themselves.[2]
Marketing is used to identify the customer, to satisfy the customer, and to keep the customer. With the customer as the focus of its activities, it can be concluded that marketing management is one of the major components of business management. Marketing evolved to meet the stasis in developing new markets caused by mature markets and overcapacities in the last 2-3 centuries.[citation needed] The adoption of marketing strategies requires businesses to shift their focus from production to the perceived needs and wants of their customers as the means of staying profitable.[citation needed]
The term marketing concept holds that achieving organizational goals depends on knowing the needs and wants of target markets and delivering the desired satisfactions.[3] It proposes that in order to satisfy its organizational objectives, an organization should anticipate the needs and wants of consumers and satisfy these more effectively than competitors.[3]
Further definitions
Marketing is defined by the American Marketing Association (AMA) as "the activity, set of institutions, and processes for creating, communicating, delivering, and exchanging offerings that have value for customers, clients, partners, and society at large."[4] The term developed from the original meaning which referred literally to going to a market to buy or sell goods or services. Seen from a systems point of view, sales process engineering views marketing as "a set of processes that are interconnected and interdependent with other functions,[5] whose methods can be improved using a variety of relatively new approaches."
The Chartered Institute of Marketing defines marketing as "the management process responsible for identifying, anticipating and satisfying customer requirements profitably."[6] A different concept is the value-based marketing which states the role of marketing to contribute to increasing shareholder value.[7] In this context, marketing is defined as "the management process that seeks to maximise returns to shareholders by developing relationships with valued customers and creating a competitive advantage."[7]
Marketing practice tended to be seen as a creative industry in the past, which included advertising, distribution and selling. However, because the academic study of marketing makes extensive use of social sciences, psychology, sociology, mathematics, economics, anthropology and neuroscience, the profession is now widely recognized as a science, allowing numerous universities to offer Master-of-Science (MSc) programmes. The overall process starts with marketing research and goes through market segmentation, business planning and execution, ending with pre and post-sales promotional activities. It is also related to many of the creative arts. The marketing literature is also adept at re-inventing itself and its vocabulary according to the times and the culture.
Evolution of marketing
An orientation, in the marketing context, related to a perception or attitude a firm holds towards its product or service, essentially concerning consumers and end-users. Throughout history marketing has changed considerably as consumer tastes are changing faster.[8]
Earlier approaches
The marketing orientation evolved from earlier orientations namely the production orientation, the product orientation and the selling orientation.[8][9]
Contemporary approaches
Recent approaches in marketing is the relationship marketing with focus on the customer, the business marketing or industrial marketing with focus on an organization or institution and the social marketing with focus on benefits to the society.[10] New forms of marketing also use the internet and are therefore called internet marketing or more generally e-marketing, online marketing, search engine marketing, desktop advertising or affiliate marketing. It tries to perfect the segmentation strategy used in traditional marketing. It targets its audience more precisely, and is sometimes called personalized marketing or one-to-one marketing. Internet marketing is sometimes considered to be broad in scope, because it not only refers to marketing on the Internet, but also includes marketing done via e-mail and wireless media.
Customer orientation
A firm in the market economy survives by producing goods that persons are willing and able to buy. Consequently, ascertaining consumer demand is vital for a firm's future viability and even existence as a going concern. Many companies today have a customer focus (or market orientation). This implies that the company focuses its activities and products on consumer demands. Generally there are three ways of doing this: the customer-driven approach, the sense of identifying market changes and the product innovation approach.
In the consumer-driven approach, consumer wants are the drivers of all strategic marketing decisions. No strategy is pursued until it passes the test of consumer research. Every aspect of a market offering, including the nature of the product itself, is driven by the needs of potential consumers. The starting point is always the consumer. The rationale for this approach is that there is no point spending R&D funds developing products that people will not buy. History attests to many products that were commercial failures in spite of being technological breakthroughs.[11]
A formal approach to this customer-focused marketing is known as SIVA[12] (Solution, Information, Value, Access). This system is basically the four Ps renamed and reworded to provide a customer focus. The SIVA Model provides a demand/customer centric version alternative to the well-known 4Ps supply side model (product, price, placement, promotion) of marketing management.
If any of the 4Ps had a problem or were not there in the marketing factor of the business, the business could be in trouble and so other companies may appear in the surroundings of the company, so the consumer demand on its products will become less.
Organizational orientation
In this sense, a firm's marketing department is often seen as of prime importance within the functional level of an organization. Information from an organization's marketing department would be used to guide the actions of other departments within the firm. As an example, a marketing department could ascertain (via marketing research) that consumers desired a new type of product, or a new usage for an existing product. With this in mind, the marketing department would inform the R&D department to create a prototype of a product/service based on consumers' new desires.
The production department would then start to manufacture the product, while the marketing department would focus on the promotion, distribution, pricing, etc. of the product. Additionally, a firm's finance department would be consulted, with respect to securing appropriate funding for the development, production and promotion of the product. Inter-departmental conflicts may occur, should a firm adhere to the marketing orientation. Production may oppose the installation, support and servicing of new capital stock, which may be needed to manufacture a new product. Finance may oppose the required capital expenditure, since it could undermine a healthy cash flow for the organization.
Herd behavior
Herd behavior in marketing is used to explain the dependencies of customers' mutual behavior. The Economist reported a recent conference in Rome on the subject of the simulation of adaptive human behavior.[13] It shared mechanisms to increase impulse buying and get people "to buy more by playing on the herd instinct." The basic idea is that people will buy more of products that are seen to be popular, and several feedback mechanisms to get product popularity information to consumers are mentioned, including smart card technology and the use of Radio Frequency Identification Tag technology. A "swarm-moves" model was introduced by a Florida Institute of Technology researcher, which is appealing to supermarkets because it can "increase sales without the need to give people discounts."Other recent studies on the "power of social influence" include an "artificial music market in which some 19,000 people downloaded previously unknown songs" (Columbia University, New York); a Japanese chain of convenience stores which orders its products based on "sales data from department stores and research companies;" a Massachusetts company exploiting knowledge of social networking to improve sales; and online retailers who are increasingly informing consumers about "which products are popular with like-minded consumers" (e.g., Amazon, eBay).
Further orientations
▪ An emerging area of study and practice concerns internal marketing, or how employees are trained and managed to deliver the brand in a way that positively impacts the acquisition and retention of customers, see also employer branding.
▪ Diffusion of innovations research explores how and why people adopt new products, services and ideas.
▪ With consumers' eroding attention span and willingness to give time to advertising messages, marketers are turning to forms of permission marketing such as branded content, custom media and reality marketing.
Marketing research
Marketing research involves conducting research to support marketing activities, and the statistical interpretation of data into information. This information is then used by managers to plan marketing activities, gauge the nature of a firm's marketing environment and attain information from suppliers. Marketing researchers use statistical methods such as quantitative research, qualitative research, hypothesis tests, Chi-squared tests, linear regression, correlations, frequency distributions, poisson distributions, binomial distributions, etc. to interpret their findings and convert data into information. The marketing research process spans a number of stages including the definition of a problem, development of a research plan, collecting and interpretation of data and disseminating information formally in form of a report. The task of marketing research is to provide management with relevant, accurate, reliable, valid, and current information.
A distinction should be made between marketing research and market research. Market research pertains to research in a given market. As an example, a firm may conduct research in a target market, after selecting a suitable market segment. In contrast, marketing research relates to all research conducted within marketing. Thus, market research is a subset of marketing research.
Market segmentation
Market segmentation pertains to the division of a market of consumers into persons with similar needs and wants. As an example, if using Kellogg's cereals in this instance, Frosties are marketed to children. Crunchy Nut Cornflakes are marketed to adults. Both goods aforementioned denote two products which are marketed to two distinct groups of persons, both with like needs, traits, and wants.
The purpose for market segmentation is conducted for two main issues. First, a segmentation allows a better allocation of a firm's finite resources. A firm only possesses a certain amount of resources. Accordingly, it must make choices (and appreciate the related costs) in servicing specific groups of consumers. Furthermore the diversified tastes of the contemporary Western consumers can be served better. With more diversity in the tastes of modern consumers, firms are taking note of the benefit of servicing a multiplicity of new markets.
Market segmentation can be defined in terms of the STP acronym, meaning Segment, Target and Position.
Types of marketing research
Marketing research, as a sub-set aspect of marketing activities, can be divided into the following parts:
▪ Primary research (also known as field research), which involves the conduction and compilation of research for the purpose it was intended.
▪ Secondary research (also referred to as desk research), is initially conducted for one purpose, but often used to support another purpose or end goal.
By these definitions, an example of primary research would be market research conducted into health foods, which is used solely to ascertain the needs/wants of the target market for health foods. Secondary research, again according to the above definition, would be research pertaining to health foods, but used by a firm wishing to develop an unrelated product.
Primary research is often expensive to prepare, collect and interpret from data to information. Nonetheless, while secondary research is relatively inexpensive, it often can become outdated and outmoded, given it is used for a purpose other than for which is was intended. Primary research can also be broken down into quantitative research and qualitative research, which as the labels suggest, pertain to numerical and non-numerical research methods, techniques. The appropriateness of each mode of research depends on whether data can be quantified (quantitative research), or whether subjective, non-numeric or abstract concepts are required to be studied (qualitative research).
There also exists additional modes of marketing research, which are:
▪ Exploratory research, pertaining to research that investigates an assumption.
▪ Descriptive research, which as the label suggests, describes "what is".
▪ Predictive research, meaning research conducted to predict a future occurrence.
▪ Conclusive research, for the purpose of deriving a conclusion via a research process.
Marketing planning
The area of marketing planning involves forging a plan for a firm's marketing activities. A marketing plan can also pertain to a specific product, as well as to an organization's overall marketing strategy. Generally speaking, an organization's marketing planning process is derived from its overall business strategy. Thus, when top management are devising the firm's strategic direction or mission, the intended marketing activities are incorporated into this plan. There are several levels of marketing objectives within an organization. The senior management of a firm would formulate a general business strategy for a firm. However, this general business strategy would be interpreted and implemented in different contexts throughout the firm.
Marketing strategy
The field of marketing strategy encompasses the strategy involved in the management of a given product.
A given firm may hold numerous products in the marketplace, spanning numerous and sometimes wholly unrelated industries. Accordingly, a plan is required in order to manage effectively such products. Evidently, a company needs to weigh up and ascertain how to utilize effectively its finite resources. As an example, a start-up car manufacturing firm would face little success, should it attempt to rival immediately Toyota, Ford, Nissan, Chevrolet, or any other large global car maker. Moreover, a product may be reaching the end of its life-cycle. Thus, the issue of divest, or a ceasing of production may be made. With regard to the aforesaid questions, each scenario requires a unique marketing strategy to be employed. Below are listed some prominent marketing strategy models, which seek to propose means to answer the preceding questions.
Marketing specializations
With the rapidly emerging force of globalization, the distinction between marketing within a firm's home country and marketing within external markets is disappearing very quickly. With this occurrence in mind, firms need to reorient their marketing strategies to meet the challenges of the global marketplace, in addition to sustaining their competitiveness within home markets.[14]
Buying behaviour
A marketing firm must ascertain the nature of the customers buying behaviour, if it is to market its product properly. In order to entice and persuade a consumer to buy a product, marketers try to determine the behavioural process of how a given product is purchased. Buying behaviour is usually split in two prime strands, whether selling to the consumer, known as business-to-consumer (B2C) or another business, similarly known as business-to-business (B2B).
B2C buying behaviour
This mode of behaviour concerns consumers, in the purchase of a given product. As an example, if one pictures a pair of sneakers, the desire for a pair of sneakers would be followed by an information search on available types/brands. This may include perusing media outlets, but most commonly consists of information gathered from family and friends.If the information search is insufficient, the consumer may search for alternative means to satisfy the need/want. In this case, this may be buying leather shoes, sandals, etc. The purchase decision is then made, in which the consumer actually buys the product. Following this stage, a post-purchase evaluation is often conducted, comprising an appraisal of the value/utility brought by the purchase of the sneakers. If the value/utility is high, then a repeat purchase may be bought. This could then develop into consumer loyalty, for the firm producing the pair of sneakers.
B2B buying behaviour
Relates to organizational/industrial buying behavior.[15] The term "B2B" stands for Business to Business. B2B marketing in its most simple definition is when one business markets a product or service to another business. B2C and B2B behavior are not exact, as similarities and differences exist, Some of the key differences are listed below:
In a straight re-buy, the fourth, fifth and sixth stages are omitted. In a modified re-buy scenario, the fifth and sixth stages are precluded. In a new buy, all aforementioned stages are conducted.
Use of technologies
Marketing management can also note the importance of technology, within the scope of its marketing efforts. Computer-based information systems can be employed, aiding in a better processing and storage of data. Marketing researchers can use such systems to devise better methods of converting data into information, and for the creation of enhanced data gathering methods. Information technology can aid in improving an MKIS' software and hardware components, to improve a company's marketing decision-making process.
In recent years, the netbook personal computer has gained significant market share among laptops, largely due to its more user-friendly size and portability. Information technology typically progress at a fast rate, leading to marketing managers being cognizant of the latest technological developments. Moreover, the launch of smartphones into the cellphone market is commonly derived from a demand among consumers for more technologically advanced products. A firm can lose out to competitors, should it refrain from noting the latest technological occurrences in its industry.
Technological advancements can facilitate lesser barriers between countries and regions. Via using the World Wide Web, firms can quickly dispatch information from one country to another, without much restriction. Prior to the mass usage of the Internet, such transfers of information would have taken longer to send, especially if via snail mail, telex, etc.
Services marketing
Services marketing relates to the marketing of services, as opposed to tangible products. A typical definition of a service (as opposed to a good) is thus:
▪ The use of it is inseparable from its purchase (i.e. a service is used and consumed simultaneously)
▪ It does not possess material form, and thus cannot be smelt, heard, tasted, or felt.
▪ The use of a service is inherently subjective, in that due to the human condition, all persons experiencing a service would experience it uniquely.
As examples of the above points, a train ride can be deemed as a service. If one buys a train ticket, the use of the train is typically experienced concurrently with the purchase of the ticket. Although the train is a physical object, one is not paying for the permanent ownership of the tangible components of the train.
Services (by comparison with goods) can also be viewed as a spectrum. Not all products are pure goods, nor are all pure services. An intermediary example may be a restaurant, where the waiter service is intangible, but the food is tangible.
QUANTATIVE OR QUALITATIVE?
MICRO THEORIES
▪ American Customer Satisfaction Index
▪ Kano model
Appropriation
▪ Conversion
MACRO THEORIES
OTHER
Advertising regulation
Product advertising
Consumer behaviour
Consumer behaviour is the study of when, why, how, and where people do or do not buy a product. It blends elements from psychology, sociology, social anthropology and economics. It attempts to understand the buyer decision making process, both individually and in groups. It studies characteristics of individual consumers such as demographics and behavioural variables in an attempt to understand people's wants. It also tries to assess influences on the consumer from groups such as family, friends, reference groups, and society in general.
Customer behaviour study is based on consumer buying behaviour, with the customer playing the three distinct roles of user, payer and buyer. Relationship marketing is an influential asset for customer behaviour analysis as it has a keen interest in the re-discovery of the true meaning of marketing through the re-affirmation of the importance of the customer or buyer. A greater importance is also placed on consumer retention, customer relationship management, personalisation, customisation and one-to-one marketing. Social functions can be categorized into social choice and welfare functions.
Each method for vote counting is assumed as social function but if Arrow’s possibility theorem is used for a social function, social welfare function is achieved. Some specifications of the social functions are decisiveness, neutrality, anonymity, monotonicity, unanimity, homogeneity and weak and strong Pareto optimality. No social choice function meets these requirements in an ordinal scale simultaneously. The most important characteristic of a social function is identification of the interactive effect of alternatives and creating a logical relation with the ranks. Marketing provides services in order to satisfy customers. With that in mind, the productive system is considered from its beginning at the production level, to the end of the cycle, the consumer (Kioumarsi et al., 2009).
| ENVIRONMENTAL FACTORS | BUYER'S BLACK BOX | BUYER'S RESPONSE | ||
| Marketing Stimuli | Environmental Stimuli | Buyer Characteristics | Decision Process | |
| Product Price Place Promotion | Economic Technological Political Cultural Demographic Natural | Attitudes Motivation Perceptions Personality Lifestyle Knowledge | Problem recognition Information search Alternative evaluation Purchase decision Post-purchase behaviour | Product choice Brand choice Dealer choice Purchase timing Purchase amount |
Black box model
The black box model shows the interaction of stimuli, consumer characteristics, decision process and consumer responses.[1] It can be distinguished between interpersonal stimuli (between people) or intrapersonal stimuli (within people).[2] The black box model is related to the black box theory of behaviourism, where the focus is not set on the processes inside a consumer, but the relation between the stimuli and the response of the consumer. The marketing stimuli are planned and processed by the companies, whereas the environmental stimulus are given by social factors, based on the economical, political and cultural circumstances of a society. The buyers black box contains the buyer characteristics and the decision process, which determines the buyers response.
The black box model considers the buyers response as a result of a conscious, rational decision process, in which it is assumed that the buyer has recognized the problem. However, in reality many decisions are not made in awareness of a determined problem by the consumer.
Information search
Once the consumer has recognised a problem, they search for information on products and services that can solve that problem. Belch and Belch (2007) explain that consumers undertake both an internal (memory) and an external search.
Sources of information include:
▪ Personal sources
▪ Commercial sources
▪ Public sources
▪ Personal experience
The relevant internal psychological process that is associated with information search is perception. Perception is defined as "the process by which an individual receives, selects, organises, and interprets information to create a meaningful picture of the world".
The selective perception process
Stage Description
▪ Selective exposure consumers select which promotional messages they will expose themselves to.
▪ Selective attention consumers select which promotional messages they will pay attention to.
▪ Selective comprehension consumer interpret messages in line with their beliefs, attitudes, motives and experiences.
▪ Selective retention consumers remember messages that are more meaningful or important to them.
The implications of this process help develop an effective promotional strategy, and select which sources of information are more effective for the brand.
Information evaluation
At this time the consumer compares the brands and products that are in their evoked set. How can the marketing organization increase the likelihood that their brand is part of the consumer's evoked (consideration) set? Consumers evaluate alternatives in terms of the functional and psychological benefits that they offer. The marketing organization needs to understand what benefits consumers are seeking and therefore which attributes are most important in terms of making a decision.
Purchase decision
Once the alternatives have been evaluated, the consumer is ready to make a purchase decision. Sometimes purchase intention does not result in an actual purchase. The marketing organization must facilitate the consumer to act on their purchase intention. The organisation can use variety of techniques to achieve this. The provision of credit or payment terms may encourage purchase, or a sales promotion such as the opportunity to receive a premium or enter a competition may provide an incentive to buy now. The relevant internal psychological process that is associated with purchase decision is integration.Once the integration is achieved, the organisation can influence the purchase decisions much more easily.
Postpurchase evaluation
The EKB model was further developed by Rice (1993) which suggested there should be a feedback loop, Foxall (2005) further suggests the importance of the post purchase evaluation and that the post purchase evaluation is key due to its influences on future purchase patterns.
Internal influences
Consumer behaviour is influenced by: demographics, psychographics (lifestyle), personality, motivation, knowledge, attitudes, beliefs, and feelings. Consumer behaviour concern with consumer need consumer actions in the direction of satisfying needs leads to his behaviour of every individuals depend on thinking
External influences
Consumer behaviour is influenced by: culture, sub-culture, locality, royalty, ethnicity, family, social class, past experience reference groups, lifestyle, market mix factors.
Relationship marketing
Relationship Marketing was first defined as a form of marketing developed from direct response marketing campaigns which emphasizes customer retention and satisfaction, rather than a dominant focus on sales transactions.
As a practice, Relationship Marketing differs from other forms of marketing in that it recognizes the long term value of customer relationships and extends communication beyond intrusive advertising and sales promotional messages.
With the growth of the internet and mobile platforms, Relationship Marketing has continued to evolve and move forward as technology opens more collaborative and social communication channels. This includes tools for managing relationships with customers that goes beyond simple demographic and customer service data. Relationship Marketing extends to include Inbound Marketing efforts (a combination of search optimization and Strategic Content), PR, Social Media and Application Development.
Just like Customer relationship management (CRM), Relationship Marketing is a broadly recognized, widely-implemented strategy for managing and nurturing a company’s interactions with clients and sales prospects. It also involves using technology to, organize, synchronize business processes (principally sales and marketing activities) and most importantly, automate those marketing and communication activities on concrete marketing sequences that could run in autopilot (also known as marketing sequences). The overall goals are to find, attract, and win new clients, nurture and retain those the company already has, entice former clients back into the fold, and reduce the costs of marketing and client service. [1] Once simply a label for a category of software tools, today, it generally denotes a company-wide business strategy embracing all client-facing departments and even beyond. When an implementation is effective, people, processes, and technology work in synergy to increase profitability, and reduce operational costs.
Development
Relationship Marketing refers to a long-term and mutually beneficial arrangement where both the buyer and seller have an interest in providing a more satisfying exchange. This approach attempts to transcend the simple purchase-exchange process with a customer to make more meaningful and richer contact by providing a more holistic, personalized purchase, and uses the experience to create stronger ties.
According to Liam Alvey [1], relationship marketing can be applied when there are competitive product alternatives for customers to choose from; and when there is an ongoing and periodic desire for the product or service.
Fornell and Wernerfelt[2] used the term "defensive marketing" to describe attempts to reduce customer turnover and increase customer loyalty. This customer-retention approach was contrasted with "offensive marketing" which involved obtaining new customers and increasing customers' purchase frequency. Defensive marketing focused on reducing or managing the dissatisfaction of your customers, while offensive marketing focused on "liberating" dissatisfied customers from your competition and generating new customers. There are two components to defensive marketing: increasing customer satisfaction and increasing switching barriers.
Modern consumer marketing originated in the 1950s and 1960s as companies found it more profitable to sell relatively low-value products to masses of customers. Over the decades, attempts have been made to broaden the scope of marketing, relationship marketing being one of these attempts. Arguably, customer value has been greatly enriched by these contributions.
The practice of relationship marketing has been facilitated by several generations of customer relationship management software that allow tracking and analyzing of each customer's preferences, activities, tastes, likes, dislikes, and complaints. For example, an automobile manufacturer maintaining a database of when and how repeat customers buy their products, the options they choose, the way they finance the purchase etc., is in a powerful position to develop one-to-one marketing offers and product benefits.
In web applications, the consumer shopping profile can be built as the person shops on the website. This information is then used to compute what can be his or her likely preferences in other categories. These predicted offerings can then be shown to the customer through cross-sell, email recommendation and other channels.
Relationship marketing has also migrated back into direct mail, allowing marketers to take advantage of the technological capabilities of digital, toner-based printing presses to produce unique, personalized pieces for each recipient. Marketers can personalize documents by any information contained in their databases, including name, address, demographics, purchase history, and dozens (or even hundreds) of other variables. The result is a printed piece that (ideally) reflects the individual needs and preferences of each recipient, increasing the relevance of the piece and increasing the response rate.
Scope
Relationship marketing has also been strongly influenced by reengineering. According to (process) reengineering theory, organizations should be structured according to complete tasks and processes rather than functions. That is, cross-functional teams should be responsible for a whole process, from beginning to end, rather than having the work go from one functional department to another. Traditional marketing is said to use the functional (or 'silo') department approach. The legacy of this can still be seen in the traditional four P's of the marketing mix. Pricing, product management, promotion, and placement. According to Gordon (1999), the marketing mix approach is too limited to provide a usable framework for assessing and developing customer relationships in many industries and should be replaced by the relationship marketing alternative model where the focus is on customers, relationships and interaction over time, rather than markets and products.
In contrast, relationship marketing is cross-functional marketing. It is organized around processes that involve all aspects of the organization. In fact, some commentators prefer to call relationship marketing "relationship management" in recognition of the fact that it involves much more than that which is normally included in marketing.
Martin Christopher, Adrian Payne, and David Ballantyne[3] at the Cranfield School of Management claim that relationship marketing has the potential to forge a new synthesis between quality management, customer service management, and marketing. They see marketing and customer service as inseparable.
Relationship marketing involves the application of the marketing philosophy to all parts of the organization. Every employee is said to be a "part-time marketer". The way Regis McKenna (1991) puts it:
"Marketing is not a function, it is a way of doing business . . . marketing has to be all pervasive, part of everyone's job description, from the receptionist to the board of directors.
Approaches
Satisfaction
Relationship marketing relies upon the communication and acquisition of consumer requirements solely from existing customers in a mutually beneficial exchange usually involving permission for contact by the customer through an "opt-in" system.[4] With particular relevance to customer satisfaction the relative price and quality of goods and services produced or sold through a company alongside customer service generally determine the amount of sales relative to that of competing companies. Although groups targeted through relationship marketing may be large, accuracy of communication and overall relevancy to the customer remains higher than that of direct marketing, but has less potential for generating new leads than direct marketing and is limited to Viral marketing for the acquisition of further customers.
Retention
A key principle of relationship marketing is the retention of customers through varying means and practices to ensure repeated trade from preexisting customers by satisfying requirements above those of competing companies through a mutually beneficial relationship[4][5] This technique is now used as a means of counterbalancing new customers and opportunities with current and existing customers as a means of maximizing profit and counteracting the "leaky bucket theory of business" in which new customers gained in older direct marketing oriented businesses were at the expense of or coincided with the loss of older customers.[6][7] This process of "churning" is less economically viable than retaining all or the majority of customers using both direct and relationship management as lead generation via new customers requires more investment.[8]
Many companies in competing markets will redirect or allocate large amounts of resources or attention towards customer retention as in markets with increasing competition it may cost 5 times more to attract new customers than it would to retain current customers, as direct or "offensive" marketing requires much more extensive resources to cause defection from competitors.[8] However, it is suggested that because of the extensive classic marketing theories center on means of attracting customers and creating transactions rather than maintaining them, the majority usage of direct marketing used in the past is now gradually being used more alongside relationship marketing as its importance becomes more recognizable.[8].
It is claimed by Reichheld and Sasser [9] that a 5% improvement in customer retention can cause an increase in profitability of between 25 and 85 percent (in terms of net present value) depending on the industry. However Carrol, P. and Reichheld, F.[10] dispute these calculations, claiming they result from faulty cross-sectional analysis. Research by John Fleming and Jim Asplund indicates that engaged customers generate 1.7 times more revenue than normal customers, while having engaged employees and engaged customers returns a revenue gain of 3.4 times the norm.
According to Buchanan and Gilles [11], the increased profitability associated with customer retention efforts occurs because of several factors that occur once a relationship has been established with a customer.
▪ The cost of acquisition occurs only at the beginning of a relationship, so the longer the relationship, the lower the amortized cost.
▪ Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
▪ Long-term customers tend to be less inclined to switch, and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.
▪ Long-term customers may initiate free word of mouth promotions and referrals.
▪ Long-term customers are more likely to purchase ancillary products and high margin supplemental products.
▪ Customers that stay with you tend to be satisfied with the relationship and are less likely to switch to competitors, making it difficult for competitors to enter the market or gain market share.
▪ Regular customers tend to be less expensive to service because they are familiar with the process, require less "education", and are consistent in their order placement.
▪ Increased customer retention and loyalty makes the employees' jobs easier and more satisfying. In turn, happy employees feed back into better customer satisfaction in a virtuous circle.
Relationship marketers speak of the "relationship ladder of customer loyalty". It groups types of customers according to their level of loyalty. The ladder's first rung consists of "prospects", that is, people that have not purchased yet but are likely to in the future. This is followed by the successive rungs of "customer", "client", "supporter", "advocate", and "partner". The relationship marketer's objective is to "help" customers get as high up the ladder as possible. This usually involves providing more personalized service and providing service quality that exceeds expectations at each step.
Customer retention efforts involve considerations such as the following:
▪ Customer valuation - Gordon (1999) describes how to value customers and categorize them according to their financial and strategic value so that companies can decide where to invest for deeper relationships and which relationships need to be served differently or even terminated.
▪ Customer retention measurement - Dawkins and Reichheld (1990) calculated a company's "customer retention rate". This is simply the percentage of customers at the beginning of the year that are still customers by the end of the year. In accordance with this statistic, an increase in retention rate from 80% to 90% is associated with a doubling of the average life of a customer relationship from 5 to 10 years. This ratio can be used to make comparisons between products, between market segments, and over time.
▪ Determine reasons for defection - Look for the root causes, not mere symptoms. This involves probing for details when talking to former customers. Other techniques include the analysis of customers' complaints and competitive benchmarking (see competitor analysis).
▪ Develop and implement a corrective plan - This could involve actions to improve employee practices, using benchmarking to determine best corrective practices, visible endorsement of top management, adjustments to the company's reward and recognition systems, and the use of "recovery teams" to eliminate the causes of defections.
A technique to calculate the value to a firm of a sustained customer relationship has been developed. This calculation is typically called customer lifecycle value.
Retention strategies also build barriers to customer switching. This can be done by product bundling (combining several products or services into one "package" and offering them at a single price), cross selling (selling related products to current customers), cross promotions (giving discounts or other promotional incentives to purchasers of related products), loyalty programs (giving incentives for frequent purchases), increasing switching costs (adding termination costs, such as mortgage termination fees), and integrating computer systems of multiple organizations (primarily in industrial marketing).
Many relationship marketers use a team-based approach. The rationale is that the more points of contact between the organization and customer, the stronger will be the bond, and the more secure the relationship.
Application
Relationship marketing and traditional (or transactional) marketing are not mutually exclusive and there is no need for a conflict between them. A relationship oriented marketer still has choices at the level of practice, according to the situation variables. Most firms blend the two approaches to match their portfolio of products and services. Virtually all products have a service component to them and this service component has been getting larger in recent decades.
(See service economy and experience economy.) Many big brands are involved with Experiential Marketing and some of the best 'big-brand' marketing campaigns are conducted by specialist Relationship Marketing or Experiential Marketing Agencies. Some of the most well known brands and marketing campaigns include:
Internal marketing
Relationship marketing also stresses what it calls internal marketing. This refers to using a marketing orientation within the organization itself. It is claimed that many of the relationship marketing attributes like collaboration, loyalty and trust determine what "internal customers" say and do. According to this theory, every employee, team, or department in the company is simultaneously a supplier and a customer of services and products. An employee obtains a service at a point in the value chain and then provides a service to another employee further along the value chain. If internal marketing is effective, every employee will both provide and receive exceptional service from and to other employees. It also helps employees understand the significance of their roles and how their roles relate to others'. If implemented well, it can also encourage every employee to see the process in terms of the customer's perception of value added, and the organization's strategic mission. Further it is claimed that an effective internal marketing program is a prerequisite for effective external marketing efforts. (George, W. 1990)
The six markets model
Christopher, Payne and Ballantyne (1991) from Cranfield University goes further. They identify six markets which they claim are central to relationship marketing. They are: internal markets, supplier markets, recruitment markets, referral markets, influence markets, and customer markets.
Referral marketing is developing and implementing a marketing plan to stimulate referrals. Although it may take months before you see the effect of referral marketing, this is often the most effective part of an overall marketing plan and the best use of resources.
Marketing to suppliers is aimed at ensuring a long-term conflict-free relationship in which all parties understand each others' needs and exceed each others' expectations. Such a strategy can reduce costs and improve quality.
Influence markets involve a wide range of sub-markets including: government regulators, standards bodies, lobbyists, stockholders, bankers, venture capitalists, financial analysts, stockbrokers, consumer associations, environmental associations, and labor associations. These activities are typically carried out by the public relations department, but relationship marketers feel that marketing to all six markets is the responsibility of everyone in the organization. Each market may require its own explicit strategies and a separate marketing mix for each.
Buyer decision processes
Buyer decision processes are the decision making processes undertaken by consumers in regard to a potential market transaction before, during, and after the purchase of a product or service.
More generally, decision making is the cognitive process of selecting a course of action from among multiple alternatives. Common examples include shopping and deciding what to eat. Decision making is said to be a psychological construct. This means that although we can never "see" a decision, we can infer from observable behaviour that a decision has been made. Therefore we conclude that a psychological event that we call "decision making" has occurred. It is a construction that imputes commitment to action. That is, based on observable actions, we assume that people have made a commitment to effect the action.
In general there are three ways of analysing consumer buying decisions. They are:
Economic models - These models are largely quantitative and are based on the assumptions of rationality and near perfect knowledge. The consumer is seen to maximize their utility. See consumer theory. Game theory can also be used in some circumstances.
Psychological models - These models concentrate on psychological and cognitive processes such as motivation and need recognition. They are qualitative rather than quantitative and build on sociological factors like cultural influences and family influences.
Consumer behaviour models - These are practical models used by marketers. They typically blend both economic and psychological models.
Nobel laureate Herbert Simon sees economic decision making as a vain attempt to be rational. He claims (in 1947 and 1957) that if a complete analysis is to be done, a decision will be immensely complex. He also says that peoples' information processing ability is very limited. The assumption of a perfectly rational economic actor is unrealistic. Often we are influenced by emotional and non-rational considerations. When we try to be rational we are at best only partially successful.
Models of buyer decision making
In an early study of the buyer decision process literature, Frank Nicosia (Nicosia, F. 1966; pp 9-21) identified three types of buyer decision making models. They are the univariate model (He called it the "simple scheme".) in which only one behavioural determinant was allowed in a stimulus-response type of relationship; the multi-variate model (He called it a "reduced form scheme".) in which numerous independent variables were assumed to determine buyer behaviour; and finally the "system of equations" model (He called it a "structural scheme" or "process scheme".) in which numerous functional relations (either univariate or multi-variate) interact in a complex system of equations. He concluded that only this third type of model is capable of expressing the complexity of buyer decision processes. In chapter 7, Nicosia builds a comprehensive model involving five modules. The encoding module includes determinants like "attributes of the brand", "environmental factors", "consumer's attributes", "attributes of the organization", and "attributes of the message". Other modules in the system include, consumer decoding, search and evaluation, decision, and consumption.
General model
A general model of the buyer decision process consists of the following steps:
▪ Problem recognition;
▪ Information Search
▪ Evaluation of Alternative
▪ Purchase decision
▪ Purchase Behaviour
There are a range of alternative models, but that of AIUAPR, which most directly links to the steps in the marketing/promotional process is often seen as the most generally useful[1];
▪ AWARENESS - before anything else can happen the potential customers must become aware that the product or service exists. Thus, the first task must be to gain the attention of the target audience. All the different models are, predictably, agreed on this first step. If the audience never hears the message, they will not act on it, no matter how powerful it is
▪ INTEREST - but it is not sufficient to grab their attention. The message must interest them and persuade them that the product or service is relevant to their needs. The content of the message(s) must therefore be meaningful and clearly relevant to that target audience's needs, and this is where marketing research can come into its own.
▪ UNDERSTANDING - once an interest is established, the prospective customer must be able to appreciate how well the offering may meet his or her needs, again as revealed by the marketing research. This may be no small achievement where the advertiser has just a few words, or ten seconds, to convey their message.
▪ ATTITUDES - but the message must go even further; to persuade the reader to adopt a sufficiently positive attitude towards the product or service that he or she will purchase it, albeit as a trial. There is no adequate way of describing how this may be achieved. It is simply down to the magic of the advertiser's art, or based on the strength of the product or service itself.
▪ PURCHASE - all the above stages might happen in a few minutes while the reader is considering the advertisement; in the comfort of his or her favorite armchair. The final buying decision, on the other hand, may take place some time later; perhaps weeks later, when the prospective buyer actually tries to find a shop which stocks the product.
▪ REPEAT PURCHASE - but in most cases this first purchase is best viewed as just a trial purchase. Only if the experience is a success for the customer will it be turned into repeat purchases. These repeats, not the single purchase which is the focus of most models, are where the vendors focus should be, for these are where the profits are generated. The earlier stages are merely a very necessary prerequisite for this!
This is a very simple model, and as such does apply quite generally. Its lessons are that you cannot obtain repeat purchasing without going through the stages of building awareness and then obtaining trial use; which has to be successful. It is a pattern which applies to all repeat purchase products and services; industrial goods just as much as baked beans. This simple theory is rarely taken any further - to look at the series of transactions which such repeat purchasing implies. The consumer's growing experience over a number of such transactions is often the determining factor in the later - and future - purchases. All the succeeding transactions are, thus, interdependent - and the overall decision-making process may accordingly be much more complex than most models allow for.[2]
Cognitive and personal biases in decision making
It is generally agreed that biases can creep into our decision making processes, calling into question the correctness of a decision. Below is a list of some of the more common cognitive biases.
▪ Selective search for evidence - We tend to be willing to gather facts that support certain conclusions but disregard other facts that support different conclusions.
▪ Premature termination of search for evidence - We tend to accept the first alternative that looks like it might work.
▪ Conservatism and inertia - Unwillingness to change thought patterns that we have used in the past in the face of new circumstances.
▪ Experiential limitations - Unwillingness or inability to look beyond the scope of our past experiences; rejection of the unfamiliar.
▪ Selective perception - We actively screen-out information that we do not think is salient.
▪ Wishful thinking or optimism - We tend to want to see things in a positive light and this can distort our perception and thinking.
▪ Recency - We tend to place more attention on more recent information and either ignore or forget more distant information.
▪ Repetition bias - A willingness to believe what we have been told most often and by the greatest number of different of sources.
▪ Anchoring - Decisions are unduly influenced by initial information that shapes our view of subsequent information.
▪ Source credibility bias - We reject something if we have a bias against the person, organization, or group to which the person belongs: We are inclined to accept a statement by someone we like.
▪ Incremental decision making and escalating commitment - We look at a decision as a small step in a process and this tends to perpetuate a series of similar decisions. This can be contrasted with zero-based decision making.
▪ Inconsistency - The unwillingness to apply the same decision criteria in similar situations..
▪ Attribution asymmetry - We tend to attribute our success to our abilities and talents, but we attribute our failures to bad luck and external factors. We attribute other's success to good luck, and their failures to their mistakes.
▪ Role fulfillment - We conform to the decision making expectations that others have of someone in our position.
▪ Underestimating uncertainty and the illusion of control - We tend to underestimate future uncertainty because we tend to believe we have more control over events than we really do.
▪ Faulty generalizations - In order to simplify an extremely complex world, we tend to group things and people. These simplifying generalizations can bias decision making processes.
Ascription of causality - We tend to ascribe causation even when the evidence only suggests correlation. Just because birds fly to the equatorial regions when the trees lose their leaves, does not mean that the birds migrate because the trees lose their leaves.
Maslow's hierarchy of needs
An interpretation of Maslow's hierarchy of needs, represented as a pyramid with the more basic needs at the bottom.[1]
Maslow's hierarchy of needs is a theory in psychology, proposed by Abraham Maslow in his 1943 paper A Theory of Human Motivation.[2] Maslow subsequently extended the idea to include his observations of humans' innate curiosity. His theories parallel many other theories of human developmental psychology, all of which focus on describing the stages of growth in humans.
Maslow studied what he called exemplary people such as Albert Einstein, Jane Addams, Eleanor Roosevelt, and Frederick Douglass rather than mentally ill or neurotic people, writing that "the study of crippled, stunted, immature, and unhealthy specimens can yield only a cripple psychology and a cripple philosophy."[3] Maslow studied the healthiest 1% of the college student population.[4]
Maslow's theory was fully expressed in his 1954 book Motivation and Personality.[5]
Hierarchy
Maslow's hierarchy of needs is often portrayed in the shape of a pyramid, with the largest and most fundamental levels of needs at the bottom, and the need for self-actualization at the top.[1][6]
The most fundamental and basic four layers of the pyramid contain what Maslow called "deficiency needs" or "d-needs": esteem , friendship and love, security, and physical needs. With the exception of the most fundamental (physiological) needs, if these "deficiency needs" are not met, the body gives no physical indication but the individual feels anxious and tense. Maslow's theory suggests that the most basic level of needs must be met before the individual will strongly desire (or focus motivation upon) the secondary or higher level needs. Maslow also coined the term Metamotivation to describe the motivation of people who go beyond the scope of the basic needs and strive for constant betterment.[7] Metamotivated people are driven by B-needs (Being Needs), instead of deficiency needs (D-Needs).
1. Self-actualization
“What a man can be, he must be.”[8] This forms the basis of the perceived need for self-actualization. This level of need pertains to what a person's full potential is and realizing that potential. Maslow describes this desire as the desire to become more and more what one is, to become everything that one is capable of becoming.[9] This is a broad definition of the need for self-actualization, but when applied to individuals the need is specific. For example one individual may have the strong desire to become an ideal parent, in another it may be expressed athletically, and in another it may be expressed in painting, pictures, or inventions.[10] As mentioned before, in order to reach a clear understanding of this level of need one must first not only achieve the previous needs, physiological, safety, love, and esteem, but master these needs. Below are Maslow’s descriptions of a self-actualized person’s different needs and personality traits.
Maslow also states that even though these are examples of how the quest for knowledge is separate from basic needs he warns that these “two hierarchies are interrelated rather than sharply separated” (Maslow 97). This means that this level of need, as well as the next and highest level, are not strict, separate levels but closely related to others, and this is possibly the reason that these two levels of need are left out of most textbooks.
2. Esteem
All humans have a need to be respected and to have self-esteem and self-respect. Also known as the belonging need, esteem presents the normal human desire to be accepted and valued by others. People need to engage themselves to gain recognition and have an activity or activities that give the person a sense of contribution, to feel accepted and self-valued, be it in a profession or hobby. Imbalances at this level can result in low self-esteem or an inferiority complex. People with low self-esteem need respect from others. They may seek fame or glory, which again depends on others. Note, however, that many people with low self-esteem will not be able to improve their view of themselves simply by receiving fame, respect, and glory externally, but must first accept themselves internally. Psychological imbalances such as depression can also prevent one from obtaining self-esteem on both levels.
Most people have a need for a stable self-respect and self-esteem. Maslow noted two versions of esteem needs, a lower one and a higher one. The lower one is the need for the respect of others, the need for status, recognition, fame, prestige, and attention. The higher one is the need for self-respect, the need for strength, competence, mastery, self-confidence, independence and freedom. The latter one ranks higher because it rests more on inner competence won through experience. Deprivation of these needs can lead to an inferiority complex, weakness and helplessness.
3. Love and belonging
After physiological and safety needs are fulfilled, the third layer of human needs are social and involve feelings of belongingness. This aspect of Maslow's hierarchy involves emotionally based relationships in general, such as:
▪ Friendship
▪ Intimacy
▪ Family
Humans need to feel a sense of belonging and acceptance, whether it comes from a large social group, such as clubs, office culture, religious groups, professional organizations, sports teams, gangs, or small social connections (family members, intimate partners, mentors, close colleagues, confidants). They need to love and be loved (sexually and non-sexually) by others. In the absence of these elements, many people become susceptible to loneliness, social anxiety, and clinical depression. This need for belonging can often overcome the physiological and security needs, depending on the strength of the peer pressure; an anorexic, for example, may ignore the need to eat and the security of health for a feeling of control and belonging.[citation needed]
4. Safety needs
With their physical needs relatively satisfied, the individual's safety needs take precedence and dominate behavior. These needs have to do with people's yearning for a predictable orderly world in which perceived unfairness and inconsistency are under control, the familiar frequent and the unfamiliar rare. In the world of work, these safety needs manifest themselves in such things as a preference for job security, grievance procedures for protecting the individual from unilateral authority, savings accounts, insurance policies, reasonable disability accommodations, and the like.
Safety and Security needs include:
▪ Personal security
▪ Financial security
▪ Health and well-being
▪ Safety net against accidents/illness and their adverse impacts
5. Physiological needs
For the most part, physiological needs are obvious — they are the literal requirements for human survival. If these requirements are not met, the human body simply cannot continue to function.
Physiological needs include:[1]
Air, water, and food are metabolic requirements for survival in all animals, including humans. Clothing and shelter provide necessary protection from the elements. The intensity of the human sexual instinct is shaped more by sexual competition than maintaining a birth rate adequate to survival of the species.
Criticisms
In their extensive review of research based on Maslow's theory, Wahba and Bridgewell found little evidence for the ranking of needs Maslow described, or even for the existence of a definite hierarchy at all.[11] Chilean economist and philosopher Manfred Max-Neef has also argued fundamental human needs are non-hierarchical, and are ontologically universal and invariant in nature—part of the condition of being human; poverty, he argues, may result from any one of these needs being frustrated, denied or unfulfilled.[citation needed]
The order in which the hierarchy is arranged (with self-actualization as the highest order need) has been criticised as being ethnocentric by Geert Hofstede.[12] Hofstede's criticism of Maslow's pyramid as ethnocentric may stem from the fact that Maslow’s hierarchy of needs neglects to illustrate and expand upon the difference between the social and intellectual needs of those raised in individualistic societies and those raised in collectivist societies. Maslow created his hierarchy of needs from an individualistic perspective, being that he was from the United States, a highly individualistic nation. The needs and drives of those in individualistic societies tend to be more self centered than those in collectivist societies, focusing on improvement of the self, with self actualization being the apex of self improvement. Since the hierarchy was written from the perspective of an individualist, the order of needs in the hierarchy with self actualization at the top is not representative of the needs of those in collectivist cultures. In collectivist societies, the needs of acceptance and community will outweigh the needs for freedom and individuality. [13]
Maslow’s hierarchy has also been criticized as being individualistic because of the position and value of sex on the pyramid. Maslow’s pyramid puts sex on the bottom rung of physiological needs, along with breathing and food. It views sex from an individualistic and not collectivist perspective: i.e., as an individualistic physiological need that must be satisfied before one moves on to higher pursuits. This view of sex neglects the emotional, familial and evolutionary implications of sex within the community.[14][15]
Business
Marketing
Courses in marketing teach Maslow's hierarchy as one of the first theories as a basis for understanding consumers' motives for action. Marketers have historically looked towards consumers' needs to define their actions in the market. If producers design products meeting consumer needs, consumers will more often choose those products over those of competitors. Whichever product better fills the void created by the need will be chosen more frequently, thus increasing sales. This makes the model relevant to transpersonal business studies.
International Business
Understanding the strengths and weakness of Maslow’s hierarchy of needs is important in the field of international business. Evaluating the different needs, values, drives and priorities of people from different countries - individualistic or collectivist - is incredibly valuable in cross-cultural communications, and especially within the workplace. It also illustrates how differences in values can greatly affect work atmosphere and work ethic between cultures: “ For example, societal cultures in many individualistic countries, such as the United States, may lead to an advantage in technological research and development. Many collectivistic societal cultures, such as that in Japan, may result in an advantage in workforce organization, quality control of products and service, and establishment of good relationships among contractees, suppliers and customers”. [16]
Herd behavior
Herd behavior describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events, religious gatherings, episodes of mob violence and even everyday decision making, judgment and opinion forming.
Recently an integrated approach to herding has been proposed, describing two key issues, the mechanisms of transmission of thoughts or behaviour between individuals and the patterns of connections between them. It has been suggested that bringing together diverse theoretical approaches of herding behaviour illuminates the applicability of the concept to many domains,[1] ranging from cognitive neuroscience[2] to economics.
Herd behavior in animals
A group of animals fleeing a predator shows the nature of herd behavior. In 1971, in the oft cited article "Geometry For The Selfish Herd," evolutionary biologist W. D. Hamilton asserted that each individual group member reduces the danger to itself by moving as close as possible to the center of the fleeing group. Thus the herd appears as a unit in moving together, but its function emerges from the uncoordinated behavior of self-serving individuals.[3]
Symmetry breaking in herding behavior
Asymmetric aggregation of animals under panic conditions has been observed in many species, including humans, mice, and ants. Theoretical models have demonstrated symmetry breaking similar to observations in scientific studies. For example when panicked individuals are confined to a room with two equal and equidistant exits, a majority will favor one exit while the minority will favor the other.
Possible mechanisms
▪ Byproduct of communication skill of social animal or runaway positive feedback.
▪ Neighbor copying.
Escape panic characteristics
▪ Individuals attempt to move faster than normal.
▪ Interactions between individuals become physical.
▪ Exits become arched and clogged.
▪ Escape is slowed by fallen individuals serving as obstacles.
▪ Individuals display a tendency towards mass or copied behavior.
▪ Alternative or less used exits are overlooked.[3]
Herd behavior in human societies
The German philosopher Friedrich Nietzsche was the first to critique what he referred to as "herd morality" and the "herd instinct" in human society. Modern psychological and economic research has identified herd behavior in humans to explain the phenomena of large numbers of people acting in the same way at the same time. The British surgeon Wilfred Trotter popularized the "herd behavior" phrase in his book, Instincts of the Herd in Peace and War (1914). In The Theory of the Leisure Class, Thorstein Veblen explained economic behavior in terms of social influences such as "emulation," where some members of a group mimic other members of higher status. In "The Metropolis and Mental Life" (1903), early sociologist George Simmel referred to the "impulse to sociability in man", and sought to describe "the forms of association by which a mere sum of separate individuals are made into a 'society' ". Other social scientists explored behaviors related to herding, such as Freud (crowd psychology), Carl Jung (collective unconscious), and Gustave Le Bon (the popular mind). Swarm theory observed in non-human societies is a related concept and is being explored as it occurs in human society.
Stock market bubbles
Large stock market trends often begin and end with periods of frenzied buying (bubbles) or selling (crashes). Many observers cite these episodes as clear examples of herding behavior that is irrational and driven by emotion—greed in the bubbles, fear in the crashes. Individual investors join the crowd of others in a rush to get in or out of the market.[4]
Some followers of the technical analysis school of investing see the herding behavior of investors as an example of extreme market sentiment.[5] The academic study of behavioral finance has identified herding in the collective irrationality of investors, particularly the work of Robert Shiller,[6] and Nobel laureates Vernon Smith, Amos Tversky, and Daniel Kahneman.
Hey and Morone (2004) analysed a model of herd behavior in a market context. Their work is related to at least two important strands of literature. The first of these strands is that on herd behavior in a non-market context. The seminal references are Banerjee (1992) and Bikhchandani, Hirshleifer and Welch (1992), both of which showed that herd behavior may result from private information not publicly shared. More specifically, both of these papers showed that individuals, acting sequentially on the basis of private information and public knowledge about the behavior of others, may end up choosing the socially undesirable option. The second of the strands of literature motivating this paper is that of information aggregation in market contexts. A very early reference is the classic paper by Grossman and Stiglitz (1976) that showed that uninformed traders in a market context can become informed through the price in such a way that private information is aggregated correctly and efficiently. A summary of the progress of this strand of literature can be found in the paper by Plott (2000). Hey and Morone (2004) showed that it is possible to observe herd-type behavior in a market context. Their result is even more interesting since it refers to a market with a well-defined fundamental value. Even if herd behavior might only be observed rarely, this has important consequences for a whole range of real markets – most particularly foreign exchange markets.
One such herdish incident was the price volatility that surrounded the 2007 Uranium bubble, which started with flooding of the Cigar Lake Mine in Saskatchewan, during the year 2006.[7][8][9]
Behavior in crowds
Main article: Crowd psychology
Crowds that gather on behalf of a grievance can involve herding behavior that turns violent, particularly when confronted by an opposing ethnic or racial group. The Los Angeles riots of 1992, New York Draft Riots and Tulsa Race Riot are notorious in U.S. history, but those episodes are dwarfed by the scale of violence and death during the Partition of India. Population exchanges between India and Pakistan brought millions of migrating Hindus and Muslims into proximity; the ensuing violence produced an estimated death toll of between 200,000 and one million. The idea of a "group mind" or "mob behavior" was put forward by the French social psychologists Gabriel Tarde and Gustave Le Bon.
Sporting events can also produce violent episodes of herd behavior. The most violent single riot in history may be the sixth-century Nika riots in Constantinople, precipitated by partisan factions attending the chariot races.[citation needed] The football hooliganism of the 1980s was a well-publicized, latter-day example of sports violence.
Everyday decision-making
Benign herding behaviors may be frequent in everyday decisions based on learning from the information of others, as when a person on the street decides which of two restaurants to dine in. Suppose that both look appealing, but both are empty because it is early evening; so at random, this person chooses restaurant A. Soon a couple walks down the same street in search of a place to eat. They see that restaurant A has customers while B is empty, and choose A on the assumption that having customers makes it the better choice. And so on with other passersby into the evening, with restaurant A doing more business that night than B. This phenomenon is also referred as an information cascade.[10][11]
See also
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