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Studies Question Value of Mass Customisation, Find Consumers Work Hard for Loyalty Programmes

2004-08-23 - Stanford, CA, USA: A research paper has questioned the usefulness of one-to-one marketing and mass customization. The study, entitled "Determinants of Customers' Responses to Customized Offers: Conceptual Framework and Research Propositions", (Stanford GSB Research Paper #1794) Professor Itamar Simonson, who is Sebastian S. Kresge Professor of Marketing at Stanford, finds that efforts to learn about individual consumer preferences, and target these preferences, can be ineffective as a marketing strategy. Supporters of one-to-one marketing and mass customisation take the view that learning what customers want and giving them exactly what they want will create customer loyalty and an insurmountable barrier to competition.

In an example taken to the extreme in the 2002 movie Minority Report, Tom Cruise's character Anderton runs through a shopping mall past talking billboards that recognize him by name and urge him to buy products he has expressed interest in such as jeans and Ray-Bans -- the ultimate in personalized advertising. But Simonson has this to say: "The fact that consumer preferences are often fuzzy, unstable, and manipulatable is unlikely to change. So, the effectiveness of methods to give customers exactly what they (say they) want has been grossly exaggerated." His take on the long-held assumption that individual marketing will supplant targeted marketing is "not so fast." That's because consumers are very difficult to figure out, science fiction and technology notwithstanding. "Furthermore, even when customers have well-defined preferences and receive offers that fit those preferences, it is far from certain that the response to such offers will consistently be more favorable than those directed at larger market segments."

Simonson's view is that it's all psychology. Consumers with well-defined preferences may be skeptical that a marketer could match expectations. Those who don't know what they want may not ever see the fit with what the seller wants them to buy. So, individualized offers depend on customers' preferences - how the offer was extended - and on trust. "Effective individual marketing requires not only an understanding of individual preferences and matching offers to those preferences, but also a thorough familiarity with the various factors that impact customers' responses," he writes.

This is a tall order, one that some companies have been able to fill at least to some extent. For example, Amazon keeps track of customers' purchases and suggests other books they might like. Dell builds computers from mass-made parts to customers' specifications. But Simonson argues some companies can take the concept too far, like the Custom Foot chain of shoe stores that took detailed measurements and specifications from each customer to design one-of-a-kind shoes. Simonson argues that Custom Foot didn't take into account that some customers were put off by the individualized attention and felt obligated to buy the shoes because the store went to so much trouble. They often didn't come back. Custom Foot is no longer in operation.

A second study by Ran Kivetz, associate professor of marketing at Columbia University's Graduate School of Business, and Prof. Simonson, has used an unusual technique to investigate the behaviour of participants in loyalty programmes.

In this study, titled "The Role of Effort Advantage in Consumer Response to Loyalty Programs: The Idiosyncratic Fit Heuristic" (GSB Research Paper #1738R), and published in the Journal of Marketing Research, participants were offered a "frequent diner" program that would reward them for their patronage at various university dining locations and given a card that would track their purchases. They were randomly assigned to one of two groups - those in the "low" requirement group were told they would have to purchase 12 sandwiches to get two free movie tickets, whereas those in the "high" requirement group were told they would have to purchase 12 sandwiches and 12 orders of sushi to get two free movie tickets. So, the second group had to do much more to receive the same reward. Kivetz and Simonson also asked participants how much they liked sushi relative to the typical student.

The result? Students who liked sushi were much more likely to join the "frequent diner" program that required them to purchase both 12 sandwiches and 12 orders of sushi. "It shows a common mistake that consumers make - if they see an offer that seems to fit them better than other consumers, for example, a program that requires sushi-lovers to eat sushi, that fit completely colors their assessment of how attractive the offer is," Simonson says. "As a result, by creating what appears like personal fit, marketers can attract consumers to frequency programs and many other promotional offers." Kivetz and Simonson replicated these findings regarding influences on participation in frequency, or loyalty, programs in studies with travelers interviewed at domestic airports.

The theme that pervades Simonson's work is that customers may not know what they want and second-guessing them can be expensive. In his words, "The benefits and costs of fitting individual customer preference are more complex and less deterministic than has been assumed." That's because, Simonson says, "customer preferences are often ill-defined and susceptible to various influences, and in many cases, customers have poor insight into their preferences."

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