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Chapter 1 INTRODUCTION TO CONSUMER BEHAVIOR AND MARKETING STRATEGY AUTHORS' OVERVIEW OF THE CHAPTER The introductory material in this first chapter is simple, but important. A key goal is to define consumer behavior and stimulate students' interest in learning about consumer behavior. Another goal is to help students appreciate the immense financial significance of consumer behavior. A third goal is to show how a thorough understanding of consumers (getting close to customers) is important in a company's success. A fourth goal is to define marketing strategy and begin to show how the study of consumer behavior is used to develop and implement successful marketing strategies. In the chapter, we discuss the above points and provide relevant examples. In class, instructors may wish to supplement the textual material with favorite examples and "cases" drawn from their own personal experience or reports in the current business press (e.g., Ad Age, Business Week, Forbes, Fortune, The Wall Street Journal). In addition, we offer several examples below that can be related to the class. KEY CONCEPTS AND ISSUES Many consumer markets in the U.S. are very large Marketing strategies that may have rather small effects on consumer behavior can have a very large potential financial payoff Understanding various dimensions of consumer behavior is critical for developing successful marketing strategies Marketing strategy has several key dimensions Various constituencies are interested in consumer behavior and their perspectives differ OUTLINE OF CHAPTER TOPICS Chapter 1. INTRODUCTION TO CONSUMER BEHAVIOR AND MARKETING STRATEGY A. Cybershoppers: A Growing Group in the New Millennium B. What is consumer behavior? 1. Consumer behavior is dynamic 2. Consumer behavior involves interactions 3. Consumer behavior involves exchanges C. Approaches to Consumer Behavior Research D. Uses of Consumer Behavior Research E. Consumer Behavior’s Role in Marketing Strategy F. Back to … Cybershoppers: A Growing Group in the New Millennium TEACHING OBJECTIVES After reading this chapter, students should: understand the central importance of consumers to the marketing function, and indeed, the entire business. appreciate that many markets are very large and consumers' aggregate purchasing behavior can have great monetary significance. understand how marketing strategies, even those that have "small" effects on consumers, can have a very significant financial impact. appreciate the potential for marketing strategies to influence consumers as well as society as a whole. know the "dimensions" of marketing strategy--product, price, promotion and distribution. understand the importance of developing a consumer orientation in a business. understand that consumer behavior can be studied from many different perspectives and by different constituencies. TEACHING IDEAS AND SUGGESTIONS This chapter can be "taught" on the first day that you introduce yourself, describe the course, pass out the syllabus and explain the grading system. This is an opportunity to excite students about consumer behavior and motivate them for the term ahead. This material can be covered in as little as half a class period. Or, if you want to treat this material in a more complete and elaborate fashion, you can easily fill an entire class period. Below are some possible topics that you might cover in class along with suggestions for treating each one. Possible Mini-Lecture: Size of Markets and Potential Impacts of Marketing Strategies. Many American students do not have a good sense of the immense size of the U.S./Canadian economy or of the potentially large financial impacts that successful marketing strategies can have. There are many good examples of big markets in a large economy like the United States. For instance, the pizza market in the U.S. is huge--about $9 billion per year. That's a lot of pizza. How much? Each day (back in 1988) Americans ate 74 acres of pizza, equivalent to 56 football fields--including the end zones! Some students do not appreciate that many (perhaps most) marketing strategies are likely to have only relatively small impacts on the market share of a brand--perhaps causing as little as a 1 percent change in market share or even less. When they learn this, students may be disappointed that marketing strategies often have only modest effects on consumers. Our point, of course, is that if the overall size of the market is large, even seemingly small changes can be quite significant in terms of sales dollars. You could take 10 or so minutes in class to emphasize these points. Present some current examples of how marketing strategies have affected brand market share--both increases and decreases. Advertising Age is a good source of such examples. Challenge students to estimate the magnitude of this effect in units and dollars. Then tell them of the size of the total market so students can translate market share changes into dollar amounts of sales. Such examples are impressive and interesting for students. Here are two examples. 1. In 1999, General Mills became the market share leader in the ready-to-eat breakfast cereal market with 32.5% share, compared to Kellogg’s 31.2% share. The breakfast cereal market is huge--in 1999, the total market was $7 billion. Thus, a market share shift of only 1% was worth about $70 million! Kellogg’s has implemented changes to try to reverse their course, including introducing more premium-style products, such as the very successful Special K Red Berries which has helped revitalize the Special K brand by appealing to a broader market. (Joann Muller, "Honey, I Shrank the Box," Forbes, November 10, 2003, p. 82) 2. From 1984 to 1989, General Foods' Maxwell House brand lost 3 market share points in the ground coffee market, dropping to a share of 26.4 percent and losing its number one status. This represented an estimated $106 million in lost sales to General Foods, at wholesale prices. What happened? General Foods was "P&G'ed" by heavy marketing competition from Folgers, the number 1 brand in 1989. GF responded in all the wrong ways, including cutting their ad budget by 27 percent and cutting costs by increasing the proportion to cheaper, more bitter beans in its blend. In 1989, they mounted a comeback campaign called the "Maxwell House Recovery Plan," that included a package redesign and a reevaluation of its advertising. Besides the obvious difficulties of trying to attract lost customers to Maxwell House, GF was bucking a national trend away from coffee drinking. In 1962, about 75 percent of Americans drank coffee, but only about 50 percent did in 1989. (Joshua Levine, "Drip, Drip, Drip...Drip," Forbes, April 17, 1989, pp. 196 & 198) The Importance of Consumer Behavior in Marketing. A key goal in this general discussion is to impress upon students that a rather deep understanding of consumers is extremely useful for developing effective marketing strategies. You could begin the first day of class by discussing Ted Levitt's famous statement, "The purpose of a business is to create and keep a customer." Show a transparency of this quote and discuss how an understanding of consumers is critical to all business decisions, not just marketing strategies. Point out that clever marketers CREATE markets. This does not necessarily mean that marketers create the fundamental needs, which their products can then satisfy. Creating a customer means to “consummate the market exchange.” This occurs when marketers meet a variety of consumer needs (for the right product, at the right time, in the right place, at the right price). Creating a customer means “transforming” an ordinary person into a customer of your company’s products or services. This transformation occurs when the person makes a purchase. Good examples of how marketers have created customers (markets) for new products include Federal Express or Starbucks.. The books by Tom Peters and his co-authors, In Search for Excellence and A Passion for Excellence, are good sources of such examples. Consider Federal Express, a company that created the market for overnight delivery services. The management of FedEx had the courage to create the elaborate system of pickup and delivery trucks, planes, and package sorting that made overnight deliveries possible. Before FedEx developed their system, the US mails, UPS, or private courier were the only ways of sending letters and small packages. In a very real sense, Federal Express created the now huge business and still dominates it, moving 1.9 million domestic packages daily, compared to 1.1 million by UPS.. (Chris Isidore, “Showdown: FedEx vs. UPS,” CNNMoney, downloaded January 5, 2004 from http://money.cnn.com/pf/features/fedex_ups/. As another example, consider the oil companies who, in search for increased profits and growth, revamped their service stations by putting in convenience stores. They created a huge market of customers who spent additional money on simple groceries and miscellaneous snack and staple products during the 5 or 10 minutes it took to fill their cars with gasoline. This strategy created an entire market in small convenience stores that rapidly spread across the country. Many companies such as Disney, IBM, and Frito-Lay have traditionally had a strong customer orientation and tend to be well organized for KEEPING their customers. Disney World employees are taught, for example, that the people who come to the park are "guests," not customers, and are to be treated as such. Brief discussions of the consumer-oriented approaches taken by such companies are quite interesting to students. It's a good way to start off the course by building student interest in consumers and consumer behavior. Superb customer service gives companies a strong competitive edge. One of the best at it is American Express. Its basic credit card is the same as many others, but customers are willing to pay a premium over, say, Visa. The reason? AMEX's service is by far the best in the industry. The card operations are regularly measured on their performance--new card applications are to be processed in 15 days, lost or stolen cards are replaced in one day, bills are to be completely accurate (no mistakes), and over 100 other factors. AMEX has spent heavily to develop the most efficient card checking system in the industry. Usually only a few seconds are required to check the validity and balance of an AMEX card. Finally, consider what it takes for McDonald's to keep their many millions of customers (and create new ones). Unyielding attention to detail is critical to McDonald's long-term success. Among other things, McDonald's employs some 300 "field consultants," whose job is to keep tabs on how well franchisees run their stores. These field consultants visit several McDonald's stores each day, usually unannounced. Everything is checked, from the cleanliness of the store and restrooms, to the size and position of the burgers on the buns, to the color and texture of the french fries. Expiration dates on the hamburger bun packages and milkshake mixes are checked. The neatness of the storage area is checked. A stained ceiling tile is noted. Problems are supposed to be fixed immediately. Finding that the breakfast biscuits are too small or misshapen may require the biscuit maker to review the videotape on how to prepare this item. A McDonald's store that is not up to snuff on cleanliness and courtesy can have its franchise yanked and the process usually starts with the field consultants. So, does all this attention to detail pay off? The average McDonald's grew by about 15 percent in 1986 and 1987, while the average Burger King grew by less than 1 percent. What do you think accounted for this difference? Ask students to identify a local retailer that is consumer-oriented and discuss why this business is successful at creating and keeping customers. Discussions of business failures (a retailer who isn't very customer oriented) can be enlightening, too. Have the class identify and criticize the specific strategies followed by these companies that contributed to their success (or failure) to create and keep customers. Of course, you should point out that a thorough understanding of consumer behavior is not the only factor that influences the financial success of the company, although in the long run we believe it is the most important factor. A variety of environmental factors such as competitors' actions, the general economy, political and legislative actions, etc. also influence the success of marketing strategies and must be considered. Examples of Customer Orientation. Examples of "good" and "bad" companies can be found in business magazines such as Fortune and Forbes, in the Wall Street Journal, and in popular books such as In Search of Excellence or Passion for Excellence. For example, see excellent articles on this topic by Patricia Sellers, "Getting Customers To Love You," Fortune, March 13, 1989, pp. 38-49; Bro Uttal, "Companies That Serve You Best," Fortune, December 7, 1987, pp. 98-116; and Carol J. Loomis, "Stars of the Service 500," Fortune, June 5, 1989, pp. 54-62; Patricia Sellers, "What Customers Really Want," Fortune, June 4, 1990, pp. 58-68; Susan Caminiti, "Finding New Ways to Sell More," Fortune, July 12, 1992, pp. 100-103. If you start to collect such articles, you will have good examples to bring to class next semester. In the meantime, here are a few you can use now. Many industrial companies have adopted a strong customer orientation. Monsanto developed a program called "Adopt a Customer for Quality" to improve its customer service. It works in this way. Monsanto identified its top ten customers and assigned a key Monsanto employee to each one. Say a customer calls the Monsanto nylon fiber plant in Pensacola, Florida with a problem--yarn keeps breaking in a spinning machine. The key Monsanto employee activates a team which goes all out to solve the problem using all the resources the company can muster. The idea is to give top priority to the customer's problem, not in three days, but immediately after the call. Many critics believed that the decline of the large department store in America in the early and middle 1980s was due partly to a decrease in service quality. Under heavy competition from discount stores in the 1970s, many department stores had cut their prices and reduced their service to lower costs. As a result, many customers became dissatisfied with these large stores. Some customers switched to smaller, boutique-type stores that gave customers more personalized service. By the late 1980s, however, the trend was partially reversing. Some stores such as Nordstroms and Macy's had increased their level of customer service to better appeal to the upscale market (of course, prices went up too). Customers increasingly seem to want service, service, and service. Even fast food companies like Burger King now list courtesy ahead of speed, once ranked first. Delivering high quality PERSONAL service is a real challenge to managers especially with a shrinking labor pool of educated workers (only 71 percent of high schoolers make it to graduation, much less in some communities such as New York City--about 40 percent). Super Valu food stores in Denver, for instance, finds it must train workers in the simple acts of acting courteously, how to smile and walk erectly, how to dress for work (with shoes tied and shirt ironed). Perhaps the key ingredient in providing courteous, prompt service to the customer is a happy, satisfied employee. The two factors influence each other--it is much more pleasant serving happy customers, which in turn increases the satisfaction experienced by the employee leading to enhanced service to the customer, and so on. (from Patricia Sellers, "What Customers Really Want," Fortune, June 4, 1990, pp. 58-68.) Video Idea. Check to see if your business school or university video library has copies of the series of TV programs from the mid-1980s, hosted by Tom Peters and Tom Waterman. They include "In Search of Excellence-Part 1 and Part 2," "Passion for Excellence," and "Passion for Customers." Although these tapes are now old, they are still good examples that can generate good discussions. Several companies featured in these tapes provide vivid examples of firms that are organized to have a strong customer orientation--e.g. see Stew Leonard’s Dairy or Walt Disney on "In Search of ExcellencePart 1." Showing one or two of these examples in class can stimulate a nice discussion of the importance of consumers and why it is important to study consumer behavior. Example of Consumer Orientation: Organized Religion. Here is an example of how a strong marketing orientation can be relevant for nonprofit organizations. Religion is a big "business" in America; there are more clergy than Ford and Chrysler have employees. Total church revenues are about $50 billion, church property is worth many billions, and church-related volunteer labor is estimated at $75 billion a year. With about 40 percent of American adults attending a church or synagogue each week, the overall market for religion hasn't shrunk. However, market share has shifted drastically. Mainline Protestant denominations have lost about 25 percent of their members over the past 20 years, while interdenominational churches have gained about 25 percent, Catholicism has grown slowly, and Islam is booming. In the face of these environmental changes, some churches are instituting business management practices and are developing a stronger consumer orientation. The Willow Creek Community Church in South Barrington, Illinois is a classic example. About 15 years ago, a young pastor named Bill Hybels conducted an extensive door-to-door survey in the community. For 8 hours a day, 6 days a week he asked people, "Do you actively attend a local church?" If the answer was yes, he moved to the next house. If the answer was no, he asked, "Why not?" Among the common answers: churches are always asking for money and church services are boring, predictable, routine and irrelevant. Hybels now knew a lot about what people wanted, and he had a list of people who might be interested in an alternative. The first Willow Creek service drew 125 of these possible customers. There was no collection, but interesting discussions about Christianity were held. In 1989, the three weekend services were drawing 13,500 souls and church members directed traffic coordinated by walkie talkies. Newcomers still heard that the church does not want their money until they want the church. The minute Hybels finishes each sermon, tape-duplicating machines reproduce 3,000 copies that were offered for sale at $2 after the service. The Marketing Strategy Perspective and Other Constituencies Interested in Consumer Behavior. Our text takes a managerial perspective, but what this means is not always clear to students. The following short exercise is helpful in illustrating the "flavor" of this text and also in getting students to speak out in class. After briefly mentioning the managerial approach of the text, ask, "Just what do you think it means to examine consumer behavior from a managerial point-of-view?" Students may flounder a bit, but encourage them to offer some tentative possibilities. judgmental and jot down all offered comments on the chalkboard. Be non- During a lull, ask, "Are there any other perspectives to consumer behavior? What other entities or organizations are interested in consumer behavior?" Sure to be mentioned will be governmental regulatory agencies, consumer advocates, consumer protection organizations, and consumer educators, as well as consumers themselves. Others that have come up in our classes are economists, lawyers (in product liability suits, for example), and research consulting firms. Then ask, "How do the goals and interests of these groups/constituencies differ, and therefore, how are their approaches to consumer behavior likely to differ?" Because each constituent has different goals, they will focus on different aspects of consumers and will use their understanding of consumers for different purposes. Encourage students to identify and discuss some of these differences. Ask, "What types of questions would each constituent want to have answered? What things would they want to know about consumers?" Perhaps a student will recognize that all (most?) of these constituents are concerned with influencing (or manipulating) consumers' behaviors. If not, raise the issue yourself, "Which of these constituencies are interested in manipulating or influencing consumers' behaviors?" It is obvious that the goal of most (all?) marketing strategies is to influence consumers' behaviors. Our text does not downplay the fact that marketing managers, like the other constituencies, are trying to influence/manipulate consumers' behaviors. Even though this focus on controlling behavior may be a bit uncomfortable for some instructors and students, we believe it is appropriate to explicitly recognize this basic objective of marketing strategies. In fact, many (most?) human interactions involve attempts to "manipulate" the behaviors of other people. An examination of many social interactions (parent/child, teacher/student) will reveal influence attempts. Encourage the class to consider the particular "behavioral manipulations" of interest to the other constituencies. What particular behaviors are they trying to influence? For example, governmental agencies (such as the FDA) are interested in getting consumers to read and consider food and drug warning labels and change their consumption behavior. This is a good time to bring up issues of ethical responsibility that are inherent in this perspective on manipulation. One way to initiate a discussion of ethical considerations is to ask, "Are there any consumer behaviors that you, as a marketer, would personally feel uncomfortable in trying to influence? Why? What could/should you do in such a circumstance?" This can lead to interesting discussions of ethical considerations in marketing various types of products, including cigarettes, alcohol products, food products using strong health claims, etc. Societal Effects of Marketing Strategies. The focus in this chapter is on the importance of consumer behavior for marketing strategy. We have emphasized the monetary payoff of successful strategies. But consumer behavior also has powerful effects on society as a whole. The combined consumption behavior of millions of consumers can and does change our society and culture. Initiate a brief discussion of this point by asking students to think of examples of marketing strategies that seem to have had large effects on the U.S. culture. Automobiles are a classic example of a product that has had wide-ranging influences on many aspects of American society, including courtship and sexual patterns, living areas (suburbs), mobility, etc. Other, more recent examples include the possible societal impacts of the marketing of personal computers, movies containing graphic depiction of violence, or the proliferation of fast-food restaurants. A 1989 survey asked consumers which of 19 major consumer products "made life a lot better." Fully 3/4 of the respondents said the microwave oven, then owned by about 80 percent of U.S. households. About 40 percent mentioned the VCR. The third most popular invention was the telephone answering machine, especially for people between 18 and 29 years old. Each of these products have changed people's lives, many feel for the better. In so doing, these products have also changes society and modern culture. (See David Wessel, "Little Wishes Form the Big Dream," Wall Street Journal, September 19, 1989, pp. B1 & B4.) Encourage students to consider more deeply the other influences of these products, some of which may be subtle and not obvious. The microwave, for instance, has made fast food restaurants not seem so fast anymore. Mealtimes at home have speeded up, and blur when food preparation takes only a few minutes, thus fast food restaurants might actually seem a bit slow. Eating has become more casual and food may be becoming less important to many people. The microwave oven continues to influence the cultural meaning of food, eating, and mealtimes. Similar examples can be developed for other products such as the VCR. (See Alix M. Freedman, "The Microwave Cooks Up a New Way of Life," Wall Street Journal, September 19, 1989, p. B1.) A timely example concerns the effects American consumers' consumption (and disposal) behaviors are having on the environment. The environmental impact of the "throw-away" culture with its heavy emphasis on convenience is well documented. Many companies have catered to consumers' convenience needs by developing products and packaging that offers small increments in convenience. Developing effective solutions to the solid waste problem, such as recycling, will necessarily involve changing the behaviors of millions of consumers. These changes in turn will have major effects on the marketing strategies of American companies. PROJECT -- Marketing Strategies for a Consumer Orientation The first class may seem too early to assign a project. But if you want to use one, here is a simple possibility that can generate a lively class discussion. Ask students to identify a company (either a local business or a national firm) that they think has a strong customer orientation. They should briefly describe why they think so. Students should try to identify specific marketing strategies used by the company that seem to contribute to its success. Alternatively, ask students to identify a company that has a poor customer orientation (perhaps a local firm with which they have had experience) and describe what marketing strategies contribute to that state. What are the consequences of this? Corporations do not always perform poorly because of a poor customer orientation. Other reasons, e.g., lack of competition or a monopolistic market, can keep the corporation growing, but point out that this is ultimately a shortsighted strategy. Offer the example of the US passenger car market in the 1970s and 1980s and the decline of the Big 3 US carmakers. To stimulate a general discussion, ask some students to present their examples in class. Discussions of "good and bad" companies can become quite lively. Such conversations offer many opportunities for you to emphasize the central importance of consumers and the need to understand consumer behavior in order to develop successful marketing strategies. NOTES AND ANSWERS TO REVIEW AND DISCUSSION QUESTIONS 1. Why is consumer behavior an important course in business education? This broad review question is discussed in the introduction to Chapter 1. In the aggregate, the behaviors of thousands, even millions of consumers combine to generate the markets for big businesses. Good relationships with consumers are critical to successful corporate operations. Developing successful strategies that are effective for specific market segments depends on understanding those consumers. Finally, high levels of competition tend to focus marketers' attention on consumers' needs. All of these factors make consumer behavior a very important course in the business curriculum. Nonmarketing business majors (accounting, finance) also need to understand why the focus of the organization is on the consumer. Their specialties also contribute to the firm's ability to satisfy the customer. 2. Do you think marketing is a powerful force in society? Why or Why not? This review question should generate an interesting, possibly heated, class discussion. Encourage students to develop both pro and con answers since marketing has positive and negative influences on society. For the most part, the text presents the favorable perspective. Students should also recognize that marketing forces have their limits in influencing consumers' behaviors. You can discuss the difficulties marketers have in generating desired market responses from consumers. For instance, advertising doesn't always generate desired sales; public service promotions sometimes fail; new retail stores often go out of business; there are many new product failures. Some part of these problems is probably due to the limited effectiveness of marketing strategies. 3. What is the role of consumer analysis in developing marketing strategies? The course work taken by students prior to the consumer behavior course will influence the depth of responses to this question. A basic answer should include the following points. Consumer analysis aids in identifying and selecting target markets, developing organizational and strategy objectives, guiding market research activities, resolving marketing mix issues, and evaluating the success of marketing strategies. 4. Offer three examples of situations in which a marketing strategy influenced your purchase behavior. Why did each succeed over competitive strategies? Student's responses to this applications question will be personal and idiosyncratic. Good answers should be fairly explicit about how the marketing strategy differs from competitive strategies and how those differences influenced the student's behaviors. Examples of marketing strategies that attempt to induce consumers to try new products are ubiquitous-receiving a free sample, trial sizes, an invitation to an open house, or a free home trial. Price promotions-coupons, discounts, rebates, and sales--are found everywhere. Communication strategies in advertising are likely to be discussed. A class discussion is likely to reveal substantial differences in student's preferences even in very simple product categories (colas, writing paper, fast-food restaurants). You can use this to point out the importance of market segmentation and responding to the needs of identifiable submarkets. Some students may mention nonprofit marketing examples that attempt to influence such behaviors as donations of time, money, or blood. Examples from the entertainment industry may also be brought up, such as movie previews, free vacation accommodations, or discount promotions for large groups. Students should begin to recognize that changing consumers' behavior is harder when brand or store loyalty is already established, since these consumers are less interested in a competitor's offering. You might focus the discussion on examples of behaviors that are resistant to change due to marketing efforts. 5. Using Exhibit 1.3 as a take-off point, discuss other questions and decisions in marketing strategy that could be affected by your study of consumer behavior. This broad question encourages students to begin to actively consider application issues, which are developed in greater detail later in the text and think about how marketing managers can use the information gained in consumer analysis. Students should be able to draw on their knowledge of the marketing strategy elements covered in the introductory marketing course and add to the rudimentary list of consumer issues offered in Exhibit 1.3 (page 13). For example, more specific issues concerning the product could include appropriate packaging, extra services, warranty, and brand name. 6. Select a market segment of which you are not a member and, with other students in the class, discuss the kinds of information you would need to develop a strategy aimed at that segment. The purpose of this application question is to force students to consider the types of consumer information marketing managers need when they cannot rely on their personal knowledge. Students might select a segment like "the elderly," a different ethnic group, consumers in foreign cultures, or "low income consumers." The list of needed information should include each component of the Wheel of Consumer Analysis--affect and cognition, behavior, and the environment. The specific elements in these categories, of course, will be appropriate for the particular product. For instance, different behaviors, environments, and affect/cognitions are involved in buying cars, suits, and soft drinks. 7. Using a campus organization of interest (i.e., student government, professional fraternity, political interest group) discuss how a better understanding of the consumer behavior of students could help the organization improve their influence strategies. Often, there are big differences between strategies based on objectives of the organization (or its leaders) and strategies based on the needs of the target consumers (potential members of the fraternity or the student constituency of the governmental body). The issue of normative versus objective approaches is critical here, since students often do not behave as the directors of these campus organizations think they do or should. For instance, students may be apathetic to many of the issues that concern "the management." An objective analysis of students' behaviors and affective and cognitive responses should lead to a better understanding of the constituency and more effective influence strategies. Although diversity is commonly discussed on college campuses, students may need help in recognizing some dimensions of heterogeneity within the student population. Often students think they are quite alike in attitudes, values, behaviors, and even environments. In reality, students are quite variable on these dimensions and are likely to respond differently to marketing strategies.