CHAPTER 3

Consumer Behaviour

3.1 Meaning

Consumer behavior examines behaviors that consumer exhibit. It also studies the reasons
for those behaviors. Consumer behavior is the study of persons groups, or organizations
in the selecting, purchasing, using, and disposing of goods and services to satisfy needs
and desires. At large level marketers are interested in demographic shifts and also
society‘s values, beliefs and practices that affect consumer interaction. But at micro
level, it focuses on human behavior and the reasons of these behaviors. Consumer
behavior is a concept drawn from psychology and sociology. Hence, these concepts are
prominently reflected in the consumer behavior literature.

Large number of studies of consumer behavior focuses on consumer choice. Utility

theory in economics and attitude theory in social psychology have strong similarities.
They also constitute foundation for consumer decision and choice processes. Consumers
purchase goods and services for the benefits derived from their use. While the study of
economics focuses on outcomes, consumer behavior emphasizes the process. Consumer
behavior researchers explicitly recognize the impact of situational elements on behavior
and the variance among individuals.

3.2 Importance of Consumer Behaviour in Insurance Sector

Within the traditional structure and operation of the financial services industry,
consumers had little choice in terms of selecting financial instruments and delivery
channels. The rigid structure of the industry, combined with the operation of cartels,
meant that consumers had to accept the form and price of both financial instruments and
delivery channels. Switching between financial providers generated little, if any, long-
term benefit and forced the consumer to incur disruption and financial cost. Consumers
were, therefore, locked into buying patterns and had little incentive to change. However,
deregulation and the emergence of new forms of technology have created highly
competitive market conditions which have had a critical impact upon consumer
behaviour. Consumers are now more disposed to change their buying behaviour when
purchasing financial products. As a consequence, insurance providers are less certain that
their customers will continue the insurance with them or that they will be able to rely

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upon the traditional insurance customer relationship to cross-sell high value, so-called
ancillary products. In an era where customer retention and the ability to cross-sell
products to existing customers are critical in determining profitability, it is important that
insurances respond strategically to these changes. Insurance providers must, therefore,
attempt to better understand their customers in an attempt not only to anticipate, but also
to influence and determine consumers' buying behaviour.

To better understand consumer behaviour in the context of the financial services

industry, a matrix has been developed which is based on the work of Dwyer et al. (1987)
and Thibaut and Kelly (1959). The approach is based upon the ``ideal type'' methodology
outlined by Max Weber (1949). Weber sought to characterise phenomena into broad
groups or ideal types which represented the self-conscious and ``one-sided accentuation''
of the most significant features of social phenomena. Once classified into groups, the
constituent elements of the phenomena being observed can be analyzed. The rationale for
this approach is that complex social interactions rarely, if ever, operate to a set pattern
like elements in the physical sciences. Rather than postulate general theories that
describe behaviour in all contexts, ideal types describe forms of behaviour in certain
contexts which facilitate the construction of hypotheses about reality. The ideal type
expresses what Weber described as an ``objectively possible'' course of actions within a
relevant frame of reference (Parsons, 1951).

Behaviour is, therefore, dependent upon both the nature and the context in which it
occurs. An ideal type will therefore possess a number of distinguishing characteristics,
constructed by the researcher to describe the complexities of behaviour within a
particular frame of reference. Weber argued that the key to developing ideal types was to
identify characteristics that shaped both the form of the ideal type and the frames of
reference. It follows that in developing ideal types which characterize consumer buying,
it is necessary to identify the underlying constructs which determine consumer behaviour
within a particular environment or frame of reference. Ideal types, therefore, reflect
certain underlying constructs or imperatives, and individual buying behaviour is shaped
to accommodate them. This is consistent with the work of Fishbein (1967) which links
attitudes and outcomes, arguing that individuals' attitudes toward certain outcomes
motivate behaviour.

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From a review of the literature on consumer-buyer interactions, it is possible to identify
two principal factors that motivate and determine individual contracting choices, namely
involvement and uncertainty (McKechnie, 1992; Harrison, 1997). By placing these
factors on to a simple continuum running from high to low, it is possible to construct a
two-dimensional matrix of consumer behaviour which provides greater insights into the
possible range of interaction modes. This matrix describes the purchasing/contracting
alternatives available to consumers to structure their interactions when acquiring
products and services. Each quadrant represents a different combination of involvement
and uncertainty (referred to as consumer confidence in the matrix) and thus a different
mode of interaction to accommodate consumer needs when purchasing different financial
products and services.

It is postulated that consumer ``involvement'' in the buyer-seller interchange incorporates

a number of subsets: customer control (Bateson, 1989), customer participation and level
of contact (Chase, 1978). Similarly, it is assumed that uncertainty or ``confidence'' is
largely determined by perceptions of risk, which is determined by the complexity of the
product being purchased and the certainty of outcome associated with that product
(Shostack, 1977). In addition to these product specific considerations, the model
necessarily incorporates ``exogenous'' factors or ``institutional'' factors which influence
the consumer's disposition to purchase financial products. These factors relate to the
importance of trust and loyalty and to the degrees and modes of consumer participation
which, within the context of this study, are defined as relating to alternative delivery
channels. These considerations are important because the limitation of previous
consumer behaviour models (Nicosia, 1966) stems from the factors hypothesized to
explain consumer motivation and behaviour, particularly in the creation and maintenance
of relationships. Previous models have tended to focus on the extensive role of
information in shaping and directing rational choice. Nicosia (1966), for example,
identifies the search and evaluation of information; Howard and Sheth (1969) link the
amount of information held with the extent of learning and thus problem solving; Engel
et al. (1968) identify information input and processing as central elements in decision
making; Bettman (1979) recognises that individuals have limited capabilities for
processing information and this limitation affects their decision-making activities. Some
of these models have been discussed in later chapter. As an explanation of behaviour this

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form of linkage is not only predominant in the social sciences, but can also be clearly
identified in behavioural economics (Katona, 1960)

The advantage of the consumer behaviour matrix, as an approach to understanding

consumer buying and contracting behaviour, is that it draws on the economics (Simon,
1957), consumer behaviour (Bloch, 1982) and psychology (Thibaut and Kelly, 1959)
literature and combines it into a single framework. The rich diversity of literature in
these areas is brought together to create ideal types of behaviour which can be applied to
actual buying and contracting in financial services. In this way, the consumer behaviour
matrix places observed behaviour within an overall context. By identifying the
underlying factors influencing buying and contracting behaviour and linking these very
directly with consumer needs, the rationale for consumer interactions and relationships
can be more readily analysed.

Model of Consumer behavior, source: Dwyer et al. (1987) and Thibaut and Kelly
(1959).

(a) Repeat-Passive

In this quadrant consumers display low levels of involvement with the financial product
as they are fully aware of the product's salient features. Given the low levels of

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involvement and the limited perception of uncertainty, these consumers can be described
as ``passive'' in the sense that they will make repeated interactions without actively
seeking alternatives. This repeated pattern of purchase behaviour, which is described as
``behavioural loyalty'' in the literature, has been extensively researched. Brown (1952)
and Johnson (1973), for example, have identified markets and social factors which
encourage or coerce individuals into repeated behaviour patterns. Their work indicates
that considerations, such as the absence of a motivating event to encourage search for
alternatives and a lack of choice or a lack of an incentive to alter purchasing patterns,
encourage consumers to maintain existing purchasing patterns.
In maintaining their existing patterns of purchase, these consumers are adopting a
``bounded'' rational approach to their buying and contracting behaviour (Simon, 1957).
Accordingly, having selected a heuristic to guide their behaviour, such as a brand
example, this behaviour is repeated until a better alternative becomes available. Making
repeated purchases from a single source or type also reduces the cost of purchasing by
limiting uncertainty, whereas a more rational approach may expose the consumer to
uncertainties which could result in financial loss. This form of repeat purchase behaviour
is common in fast-moving consumer goods (FMCG) markets where consumers use
brands and brand identities to determine purchasing behaviour.

(b) Rational-Active

In this quadrant it is postulated that the consumer's involvement in terms of the process
dimensions of control, participation and contact is high and so too is their confidence in
terms of product complexity and certainty of outcome. It is these active consumers that
economic theory has viewed as the norm, possessing the ability and inclination to make
careful considered purchase decisions across all choice environments. In terms of ideal
types these consumers are rational or rationally inclined. Eztioni (1988) notes that
rationality can be defined in a number of forms and argues that individuals make
decisions in a more or less rational manner depending on the nature of the choice
environment and item purchased. Examples of individuals approximating rationality
would include purchases of commodity goods and services such as petrol, milk, orange
juice, flour and so forth. Within these purchase environments the consumer can articulate
requirements and uses short term contracts to structure the purchase. These contracts are
described by MacNeil (1978, 1980) as ``discrete'', because they have a clear beginning,
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are of a short duration and possess a definite end. No interactions are expected after the
transaction, there is a clear division of benefits and costs, disputes are settled through
reference back to the original contract and the switching costs between contracts are low.
Discrete contracting is a reflection of the characteristics of the product or service
transacted and the underlying rational behaviour of the decision-maker. Consumers will
tend towards discrete, rational contracting to structure their buying behaviour, whenever
possible, because it enables them to reduce transaction costs and to exert a high degree of
control over the purchase decision (Etzioni, 1988). To purchase in an ``instrumentally
rational'' manner, the individual consumer is assumed to possess sufficient ability and
information to enable them to make clear comparisons between competing products and
thus make an informed choice. If the information is not available or the consumer lacks
the ability to make choices, they have to move away from ``instrumental'' rationality as
discrete contracting is no longer an effective means of structuring the transactions.

(c) No purchase

This quadrant describes consumers who, because they have no involvement with the
financial product and do not possess the ability or the confidence to make transaction
decisions, make no purchase. Individuals who leave significant sums of money on
deposit rather than purchase financial services that could generate greater returns are an
example of this behaviour. This is not, strictly speaking, an interaction mode and is
hardly (if at all) discussed in the insurance customer relationship literature. However, a
significant amount of marketing activity is directed at individuals in this quadrant, in an
attempt to increase their awareness of alternative products and convince them of their
relative merits.

(d) Relational-Dependent

In this quadrant consumers are highly involved, but are not in control due to the
complexity of the product and uncertainty of eventual outcome and this reduces
consumer confidence. In order to make choices, the consumer will seek advice and help
from insurances or third parties and can, therefore, be described as ``dependent
consumers'' who form relationships to reduce uncertainty and structure their pattern of
purchases. Relational contracting does not fit easily into the concept of either an active or
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a passive interaction, but it is clearly an important aspect of the insuranceer-customer
relationship. It emerged from the work of MacNeil (1978) and Williamson (1975, 1985),
who recognised that in particular contexts rational-active and repeat-passive contracting
were not effective in structuring exchange. It is used in highly uncertain environments
where consumers lack the information to make rational decisions yet perceive that
differences in quality exist between competing products or services. In this instance they
will want to make informed choices and have to draw on the assistance of more informed
third parties. The relationship then effectively replaces the information search and
processing activities found in repeat-passive and rational-active contracting.

Consumers go through the process of searching, comparing, and examining different

information component to make purchases, and then they share information on the
purchased goods or services or its providers with people close to them or over the
Internet. This purchase behavior can be seen for general goods and services.

In the given section, we study that in the social economic and information environment
of the recent years, what kind of process are consumers going through to purchase life
insurance. In life insurance sale, the preferable amount of coverage differs depending on
the family structure, size, income, asset and with the requirements; therefore, it is highly
difficult for a general consumer to fully understand the products. It is also difficult to
make comparisons and select product they should purchase. Furthermore, not all
policyholders will receive insurance money or benefits, on actual purchase. Even if they
receive benefits, it may take a long time, perhaps some year before the money is actually
received. For the insurance company, the beneficiary may be different from the policy
holder, such as in the case of insurance against death; therefore, it seems difficult to
share the assessment.

3.3 Factors Influencing Consumer Behaviour

The consumer behavior is influenced by number of factors like psychological, personal,
social, cultural, political, legal etc. It is sufficient to have the deep understanding of the
factors influencing the decision.

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PSYCHOLOGICAL FACTORS
The human psychology is very important in determining or designing the consumer‘s
preferences and likes or dislikes for a particular product and services. Some of the
important psychological factors are:

Motivation
Perception
Attitudes and Beliefs
Learning

Motivation and Consumer Behaviour

The force that drives the buy and use of a good or service is called motivation. It
explains why people buy, what they do and what they are trying to accomplish. Needs
arises from the discrepancy between actual and desired states. It can be classified as
utilitarian or hedonic/experiential. Utilitarian needs lead related to objective product
attributes and hedonic needs are the subjective responses, pleasures, and aesthetic
considerations (Havlena and Holbrook, 1986; Holbrook and Hirschman, 1982).

It is common for utilitarian and hedonic needs to function together in a purchase

decision. As the discrepancy between the desired and actual state increases, a condition
of desire is activated. When the drive/desire becomes strong enough, the consumer try to
satisfy the perceived need (Srinivasan, 1987). Wants refer to specific products that
consumers believe will satisfy the need. Benefits are what consumers derive from
products and the reasons they want them (Foxall and Goldsmith, 1994).

Consumer Perception and attitude

Perception deals with recognizing, selecting, organizing, and interpreting stimuli to make
sense of the world around us. People receive stimuli from their external and internal
environment through the 5 senses. People are selective and infer stimuli that enhance
their existing beliefs and knowledge. Consumers tend to interpret in a similar pattern so
that it does not conflict with their basic attitudes, personality, motives, or aspirations.

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They pay attention to stimuli deemed relevant to existing needs, wants, beliefs, and
attitudes and disregard the rest. One perception important to the study of consumer
behavior is the level of perceived risk in a potential purchase. Types of risk consumers
face include functional/performance, financial, physical, psychological, social, and that
related to time (Ross, 1975). The amount of perceived risk is a function of the product,
characteristics of the consumer, and external forces (information available, options to
reduce the consequences of the choice).

An attitude is an overall evaluation. It a combination of cognitive beliefs, emotional

affect and behavioral intentions. Attitudes may vary along the dimensions of strength,
direction (positive or negative), and stability. Attitudes are not held with the same degree
of confidence (Berger, 1992). Attitudes based on direct experience with a product are
usually held with more confidence than those derived from indirect experience (Eagly
and Chaiken, 1993). Confidently held attitudes will usually be relied on more heavily to
guide behavior. If a consumer does not feel confident in an attitude, he or she is more
likely to search for additional information before making a decision.

The multi-attribute model provides insights into the causes behind consumers‘ choices.
Different consumers may place varying levels of importance on product attributes and,
therefore, evaluate the same product in a different way. Thus, one consumer may value
one thing more than other. Another consumer may prefer a fireplace, bookshelves, and
built-in stereo speakers. On the other hand, consumers may use similar attributes to
evaluate product choices, but have different beliefs about the products. However,
whether a positive attitude leads to an intention to purchase a product and, subsequently,
to its actual purchase depends on several factors. Attitudes and intentions are more likely
to be good predictors of behavior before situational influences and unexpected events can
have an impact (Cote, McCullough, and Reilly, 1985).

Learning

Learning is through action. The process happens because we gain some experience while
doing something. This process brings some permanent change in the behaviour of a
person. With learning happening in the process of doing something one acquires
information and experience. For e.g. If someone had a bad experience while using a
product one tend to build a negative thought regarding it and will not use it for his/her
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future use. Relatively, if someone had a good experience with the product, he/she will
buy it again next time. The learning theories can be used in marketing by brands.

PERSONAL FACTORS

The Personal Factors are the individual factors. These factors strongly affect the
customers while portraying their buying behaviors. These factors differ from person to
person, that result in various perceptions, attitudes and behavior towards certain goods
and services. These factors includes

Personality

Age

Occupation

Income

Lifestyle

Personality and Consumer Behaviour

Personality is the pattern of traits and behaviors that makes one individual different from
all others and it accounts for consistent patterns of behavior based on enduring
psychological characteristics (Kassarjian, 1971). It can be described using the
psychoanalytic, socio-psychological, or trait-factor theories. Psychoanalytic theory
measure the human personality system like id, ego, and superego (Wells and Beard,
1973). The id seeks immediate gratification for biological and instinctual needs. The
superego represents societal and personal norms on behavior. The ego mediates the
demands of the id and the exclusion of the superego. The dynamic interaction of these
components results in unconscious motivations.
Socio-psychological theory studies, social variables that are considered to be the most
important determinants in shaping personality. It states that the individual endeavor to
meet the needs of society while society assist the individual to attain goals (Hall and
Lindzey, 1970). Behavioral motivation is directed to meet those needs.

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Trait-factor theory explained that individual‘s personality is composed of distinct
predisposition attributes. These are called traits and these are relatively enduring ways in
which one person differs from another. These traits are common to many people, but
vary in amounts among individuals. Traits are expected to effects on behavior regardless
of the environmental situation (Buss and Poley, 1976).

The research also shows how different personality has different buying behaviour. Some
personality types are high risk taker while others are moderate or lower risk takers. Risk
takers tend to be thrill seekers with a need for stimulation and easily become bored. They
are likely to list success and competence as their goals in life in contrast to risk avoiders,
who list happiness as their first choice (Farley, 1986). Even the study reveals how
consumers make decisions about innovative products (Foxall and Bhate, 1993). Some
consumers are more self-monitoring, that is, they are less influenced by external forces
than others (Snyder, 1979).

Age and life-cycle

It has great impact on the consumer buying behaviour. With age people gain experience
and learn, so their buying behaviour change. It is clear that the consumers change the
purchase of goods and services with the course of time. Family life-cycle consists of
different stages such young singles, married couples, unmarried couples etc which help
marketers to develop appropriate products for each stage.

It has been studied that purchasing of life insurance products generally begins at the life
cycle of married couples.The buying behaviour is also affected by the occupation of the
individual. The people are inclined to buy those products and services that advocate their
job and position in the society. For example, the buying patterns of the teacher will be
different from the other groups of people such as doctor, businessman, etc.

Income and life style

Consumer economic situation has great impact on purchasing behaviour. If the income
and savings of a consumer is high then he will purchase more expensive products. On the
other hand, if income and savings is low then he/she will purchase less costly products.

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Lifestyle depicts the way a person lives in a society and is articulated by the things in
his/her surroundings. It is determined by customer opinions, interests, activities etc and
determines his whole pattern of interacting in the world.

SOCIAL FACTORS

Man is a social animal and the factors in the society are a key factor in deciding what to
buy. People try to imitate or are influenced by the behaviors that are socially acceptable.
The human beings live in a composite social environment in which they are enclosed by
several people who have different buying behaviors. Hence, the social factors influence
the buying behavior of an individual to a great extent. Some of the social factors are:

Family
Reference Groups
Roles and status

Family and Consumer Behaviour

Buyer behaviour is influenced by the member of a family to a great extent. Therefore

marketers are trying to find the roles and influence of the husband, wife and children
especially while buying a life insurance product or a service. For e.g., if the buying
decision of a particular product is influenced by wife then the companies try to target
women in their promotion. Here we should note that buying roles change with change in
consumer lifestyles.

Reference Groups

A reference group is a group with whom the person likes to get related to i.e. want to be
called as a member of that group. It is seen, that all the members of a common group
share similar buying behavior and have a great influence over each other. The marketers
must try to recognize the roles within the reference group that the person plays. Such
as Initiator (who initiates the buying decision), Influencer (whose opinion influences
the buying decision), Decision-Maker (who has the authority to take the purchase
decision) and Buyer (who ultimately buys the product).

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Roles and Status

The position of an individual within his family and the job, the country club and his/her
friends‘ group determines the roles and status in the society. For e.g. a finance manager
may play two different roles that of finance personnel and mother, so her decision will be
based on combining both the roles, a well thought of balanced portfolio for the kid.

CULTURAL FACTORS
Cultural trends or Bandwagon effect are defined as trends broadly followed by people
and that generally spreads by their popularity and conformity with social pressure. It
basically includes

Culture
Sub- Culture
Social Class

Culture

The culture refers to the beliefs, customs, rituals and practice that a particular group of
people follows. As a child grows, a particular belief or custom is inherited. He/She
inculcates the buying and decision-making patterns through his family and the important
institutions. The culture varies from region to region and even from country to country.

Sub-culture

Each culture contains different subcultures such as nationalities, religions, geographic

regions, racial groups etc. Marketers can use these groups by segmenting the market into
various small portions and then planning the strategies accordingly. For example
marketers can design products according to the needs of a particular geographic group.

Social Class

Generally, the member of a particular class are said to be sharing the similar interest,
value and the behavior. Every society includes some form of social class which is
important to the marketers because the buying behavior of people in a given social class
is similar. In this way marketing actions could be customized according to various social

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classes. Here, we should note that social class is not only determined by income but there
are various other factors as well, such as: wealth, education, occupation etc.

Governmental legal factors also influence a person‘s buying behaviour. Political and
legal factors affect at the macro level like IRDA (Insurance Regulatory and Development
Authority) has restricted the sale of Key Man Insurance policy through Term Plan only.

There are diverse factors that affect the consumer buying decision and also influence
consumer thoughts when they are preparing to invest in insurance scheme. It is not very
easy to understand a consumer‘s behaviour but companies must try to focus on few
important aspects while promoting their products.

Consumer behaviour in service industry

With the developing interest in services and services marketing it might be expected that
the consumer behaviour literature would include references to the evaluation and
consumption of intangibles. However there are very few examples of published work
which refer explicitly to the consumption characteristics of services. There would appear
to be an assumption, consistent with the interchangeability of terminology, that consumer
behaviour related to goods is the same as that related to products, i.e. the difference
between goods and services is insignificant. In the case of products where the "good"
element is dominant this may be a valid assumption, but for products where the dominant
characteristic is the service intangibility this assumption denies the significant impact
upon consumption behaviour of the characteristics identified above.

As a vehicle for examining likely differences in consumer behaviour and services, a

simple process model of consumer behaviour will be used, drawn from the dominant
information processing perspective. This view implies that consumers‘ first search for
information about possible alternatives and attributes, selected alternatives are then
compared on the basis of these attributes and once consumption has occurred the product
is re-evaluated.

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In terms of satisfaction, the way in which the consumer participates in the service, will
influence his evaluation of the service received. Customers may be required to
participate in the definition and production of the service and may therefore feel
personally involved in the success or failure of the outcome (Zeithaml 1981). If a
consumer cannot or does not clearly articulate or understand their own requirements, or
has formed unrealistic expectations of the service then they may feel that some
responsibility for the failure was their own. Therefore the process of evaluating services
in terms of satisfaction and dissatisfaction is a shared responsibility between provider
and consumer.

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