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It's Not Always Your Fault.
Measuring The Impact Of Economic Factors On
Consumer Satisfaction And Pricing Perceptions
By
Joel Mincey
You've been there before. A steady drumbeat of negative news-gas prices are
going up, interest rates are higher and everyone needs to save for retirement
because Social Security won't be there-puts consumers in a foul mood. As a
store manager you've worked hard to keep your customers happy, and despite
inflation, you have managed to keep your prices low.
Then, a few weeks later you see the results from your customer tracking study
and your satisfaction scores are down and customers think your prices are no
longer competitive. Huh? Didn't you spend the last several weeks and months
working night and day to maintain customer satisfaction and keep your prices
low?
Well, take heart.it is not always your fault. As the following analysis will
show, external economic factors like consumer confidence, inflation, and
interest rates can (and do) impact how satisfied consumers are.
Consumer satisfaction and perceptions are complex, difficult metrics that store
managers are judged on constantly. How do you keep consumers satisfied and
positive in a marketplace filled with negative economic news?
While you can control many factors that influence consumer satisfaction and
perceptions (e.g., clean store, easy-to-find items, responsive staff members,
etc.), other factors are beyond the control of even the most attentive store
manager. In this time of rising prices and uncertainty, it is helpful to
understand what external market and economic factors (as well as what internal
factors) are impacting the attitudes and perceptions of consumers.
Economic Indicators
Economists have struggled and theorized what impact consumer expectations play
in the macroeconomic future of the markets. Since two-thirds of the United
States economy is based on consumer spending, this is an area of interest with
an enormous impact.
Now, you may be thinking that most consumers do not have the time or the
inclination to examine these macroeconomic factors in enough detail for their
results to impact their opinions and satisfaction about a brand (or brands)
they use. Well, they may not understand the minutiae of modern economic theory,
but they do talk with friends, family, and coworkers enough to understand what
direction the economy is moving.
Our research has shown that some macroeconomic measures, particularly those
that impact discretionary income, correlate very highly with consumer
satisfaction and perceptions. The indicators that have shown to correlate best
with consumer satisfaction and perceptions are the following: consumer
confidence, fuel prices, inflation, and interest rates. In short, these are the
measures that accurately reflect the amount of discretionary income a consumer
has to spend on a monthly basis.
Discretionary income is important because it represents what is left over after
all the bills and expenses have been paid. When this income is reduced because
other monthly costs have risen, the impact is felt immediately. Of late,
gasoline prices and interest rates have gone up significantly, placing even
more pressure on the monthly budget.
Just recently, former Federal Reserve Chairman Alan Greenspan warned that the
sustained high energy prices were having a negative impact on the economy. And,
as the Federal Reserve continues to raise interest rates in an attempt to slow
the rate of inflation, mortgage payments and credit card payments will continue
to increase. Higher fuel prices, coupled with increasing mortgage payments, are
reducing the amount of money consumers have to spend monthly.
Methodology
The data for our analysis comes from a tracking study of more than 800,000
retail customers over a twelve-month period. Each question concerning customer
satisfaction and price perceptions is measured on a five-point scale. The
customer satisfaction scale is from "very satisfied" to "very unsatisfied"; the
price perception scale is from "strongly agree" to "strongly disagree."
The economic indicators come from a variety of sources including Decision
Analyst's Economic Index, as well as the United States Census and Bureau of
Labor Statistics.
The Decision Analyst Economic Index is based on a set of nine-closed ended
questions asked of a representative sample of consumers from our online panel,
American Consumer Opinion®. This survey is conducted monthly and the data
from it are used to calculate the Index.
A series of statistical techniques are incorporated to analyze the data and
build the models used in the analysis, including correlation analysis and
multiple regression analysis.
Overall Consumer Satisfaction
Consumer satisfaction is influenced by a myriad of variables. In the broadest
sense, satisfaction is the result of expectation and fulfillment. Consumers
have an expectation when they interact with a brand/store, and if that
expectation is fulfilled or surpassed, satisfaction results. If that
expectation is not fulfilled, dissatisfaction is the result.
However, as we will see, external factors, beyond the control of the brand
manager do influence how a consumer views a brand. In the simplest terms, when
consumers are squeezed financially, their displeasure spills over into
sometimes unrelated areas. Currently the two areas where consumers are squeezed
are fuel prices and adjustable rate mortgages. These two items have increased
the amount of money consumers must spend every month, thereby decreasing the
amount of disposable income available.
In addition, consumer confidence and inflation are two broader measures that
also impact consumer satisfaction. Consumer confidence, an index score based on
survey questions asked of consumers, and the Consumer Price Index (a measure of
inflation) are closely related to how satisfied a consumer is.
Consumer confidence is, in turn, heavily influenced by the increase in prices.
Consumers feel less able to provide for their families when they see prices of
everyday goods (especially commodities like food and energy) rising constantly.
The lower consumer confidence falls, the more overall consumer satisfaction
falls with it.
As the following chart indicates, the customer satisfaction model shows just
how well the model tracks using the four external factors:
- Fuel prices
- Decision Analyst Economic Index
- Consumer Price Index
- Mortgage rates
The accuracy of the model is expressed in the r2 calculation of .801 and a
standard error of +/- .00828.
As it turns out the model is very accurate and does a good job at predicting
consumer satisfaction using the variables included. The model indicates that
when consumer confidence falls and fuel prices, interest rates, and inflation
rise, overall consumer satisfaction will fall.
An increase in the price of a good or service is immediately felt (in most
households) and must be accounted for in some manner: increase in spending,
decrease in saving, increase in debt, or a choice to not purchase that product
or service. Ironically a brand or retailer that is striving to improve or even
maintain consumer satisfaction could see its efforts undermined by
macroeconomic factors in the marketplace, over which it has very little, if
any, control.
Pricing Perceptions
Consumer price perceptions, like consumer satisfaction, are also influenced by
external economic factors; in particular, the short-term interest rates of an
adjustable rate mortgage and consumer confidence. As prices rise, as reflected
in a rise of the CPI, consumers' pricing perceptions about a brand, in
particular the perception that "prices are competitive," will decline.
This will occur even if the cost of that brand has remained the same. When
squeezed financially, consumers tend to generalize about prices and assign
negative perceptions across the board. In our analysis, consumers were asked
how much they agreed or disagreed with the following statement: (retailer)
prices are competitive with other retailers in the market. During the period of
the study, the retailer did not raise its prices significantly (i.e., its
prices remained in line with other retailers in the category).
As the chart indicates, the model tracks very well with the actual consumer
survey results. The model has an r2 of .654 and a standard error of +/-.0084.
Conclusions
So, what do you do with this information? It is a convenient scapegoat for when
consumer satisfaction drops (without any real explanation). But more
importantly, the analysis shows that looking at primary survey data is not
always enough. We have to look at the influence of external factors on consumer
perceptions and opinions.
By modeling the influence of economic factors on consumer survey measures, we
now have the potential to not only quantify the impact, but also to move toward
actually predicting the future outcome of these consumer survey measures.
As we have seen with the data and models presented, consumer satisfaction and
pricing perceptions can and are influenced significantly by economic factors.
By collecting and incorporating these data into your tracking database, you
can create the possibility that the next time consumer satisfaction and perceptions
fall unexpectedly, you have the opportunity of saying. "but hey, it's not always
my fault!"
Copyright © 2006 by Decision Analyst, Inc.
This article may not be copied, published, or used in any way without written
permission of Decision Analyst.
About the Author
Joel Mincey (jmincey@decisionanalyst.com)
is Senior Vice President at Dallas-Fort Worth based Decision Analyst. He may
be reached at 1-800-262-5974 or 1-817-640-6166.
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