Customer Psycho-Economics In An Economic Crisis

John Todor
Posted: 04/28/2009

Stress, confusion, uncertainty and even fear—these emotions are surging in the customer because of the economic crisis. Customers feel they have less control over their financial well-being. To cope, they turn to one of two mutually exclusive psycho-economic mindsets. One is a hoarding, "ride out the storm" mentality characterized by reduced spending and a heightened focus on price. The other seeks relationships with companies that engage them in a process of regaining a sense of control. The customer experience, real or perceived, determines which mindset comes into play.

Which one is your business courting?

Companies competing on price and convenience must be the most cost efficient to eke out a profit. The battle is between competitors that in essence bid against each other to win over the customer. Profitability using this approach, difficult under normal circumstances, is especially tenuous in an economic downturn when some competitors feel their survival is on the line. The customer defers non-essential purchases and brand equity is replaced by cost driven indifference. If this remotely sounds like your situation, start looking for ways to de-commoditize your value proposition.

Focus on Winning Customer Mindshare

An effective way to induce de-commoditization is to focus on winning mindshare. This is a process of creating differentiation that enhances value from the customer’s perspective. The key to winning mindshare is getting the customer to shift value perspective from price to a broader experiential view. In stressful times, a powerful strategy is to use customer emotional and psychological engagement to reduce anxiety and stress generated by uncertainty. This engagement has two desirable outcomes. One, it enables the customer to address challenges more successfully and achieve a better experiential outcome. Second, the process restores a sense of control over external events. These emotionally rewarding outcomes contribute to desire, creating demand and commitment to vendors facilitating the process. It also takes the focus off of price.

Engagement requires more than telling or showing something to the customer. Trust in a product does not translate into trust in a relationship. This trust is earned from interactions and consequences and does not come from offers or discounts. To achieve customer relationship trust, companies must deliberately shift the focus of the customer relationship from selling things, to the issues and challenges confronting the customer. The customer has to become emotionally and psychologically engaged. And, in so doing, the customer must discover new ways to extract value that is meaningful to him or her. This represents a psychological growth in the customer where conditions leading to uncertainty or complexity are now seen as meaningful and under the control of the customer. A company can facilitate this growth but must avoid events, actions and clues engendering the perception of a one-sided agenda associated with a transactional framework or they will trigger an indifferent, price focused mindset.

Product-Centric Versus Customer Equity

These psycho-economics factors are the distinguishing features between product-centric, transaction-oriented companies and companies that deliberately use the customer experience to win customer mindshare and build relationship value, the cornerstones of customer equity. In an economic crisis the importance of the customer experience becomes more acute as deteriorating economic conditions ratchet up anxiety, stress and uncertainty. Add the personal impact of a crisis and what were once benign emotional experiences can become the triggers for an increasingly competitive buyer-seller relationship—a formula for even lower sales volumes and margins. In contrast, companies that strive to reduce customer stress and help them regain a sense of control become highly valued.

Customer Focus at Apple

Apple stores are a good example of a business that courts the engaged buying mindset and fosters the type of relationship the customer values. This is one of the key reasons Apple stores reached $1billion in sales faster than any retailer in history. The minute a customer enters an Apple store the focus is on their experience. The customer is greeted by an Apple concierge who introduces them to an Apple staff member who can help the customer make an informed decision. All the products in the store are up and running and the customer is encouraged to experience the Apple products. A classroom where the customer can listen to free classes occupies expensive real estate in the Apple showroom.

The agenda is clear—help the customer get more value out of Apple products.

A Genius Bar is located along one wall. The "Geniuses" who staff it help the customer figure out why the technology doesn’t do what it is supposed to do. Whether it is a lack of "know-how" on the part of the customer or an Apple product that requires repair, diagnosis of the problem is free. Sure, the customer pays for actual repairs not covered by a warranty, but the diagnosis is from a trusted source, reducing anxiety or confusion for the customer. The logic is simple, help the customer get the greatest experiential value from the company’s products and the customer will be committed, enthusiastic advocates.

Research Shows Customer Engagement Impacts Customer Loyalty

Contrast the Apple store experience with the big-box electronics store experience where signage prominently promotes discounts and incentives. While clerks, if you find them, might know about products, they seldom know how to help the customer. Post purchase service costs money. Their agenda is clear: sell you something, period. Is it any wonder the customer pursues a win-lose, buyer-seller relationship?

These psycho-economic dynamics are in play across industries. Research by IBM (Why Advocacy Matters to Retailers) clearly shows that, in the retail industry, companies with the greatest level of customer engagement are the most profitable and have the highest levels of customer loyalty and advocacy. As the economy worsens, these engagement leaders are not focusing on sales and incentives. They are focusing on helping the customer gain greater control. They are stepping up in-store demos, educational digital displays and social media to help their customers adapt to reduced buying power. Their customer doesn’t expect lower prices; the customer does expect help in gaining greater experiential or consumptive value from tighter budgets.

When the customer extracts more experiential value, an interesting form of resource allocation takes place; they will scrimp elsewhere to be able to splurge at their favorite stores and businesses.

First published in the Customer Focus series.

John Todor
Posted: 04/28/2009

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