How To Tackle Package Size Dilemma During Recession AN ANALYSIS OF HOW INDIVIDUAL FINANCIAL RISK-TAKING PROPENSITY AND NATIONAL CULTURE MODERATE THE EFFECT OF ECONOMIC DOWNTURN ON CONSUMER PACKAGE SIZE PREFERENCES
University of Groningen Faculty of Economics and Business
MSc Marketing Intelligence July, 2013
By Filiz Aygar 2185229 Supervisor:
Assistant Professor of Marketing Dr. Ir. M.J. Gijsenberg
Master Thesis
MSc Marketing: Marketing Intelligence
Faculty of Economics and Business, University of Groningen Date of completion: 08/07/2013
E-mail: filizaygar@gmail.com
First supervisor: Dr. Ir. Maarten J. Gijsenberg Second supervisor: Niels Holtrop
EXECUTIVE SUMMARY
The aim of this study is to examine the impact of economic crisis on consumer package size choice. Managing crisis periods is important for firms and consumers. Finding the right balance between company profitability and meeting customer expectations with limited budgets gain more importance in leaner economic situations. Few large-scale companies had used an alternative approach of launching smaller size packages in previous crisis periods. Despite the higher unit price, this marketing strategy had profitable outcomes and firms started to implement it again in the current economic crisis. Therefore, firms may either offer maxi package deals or concentrate on mini packages, or include both of them in their package size range. It is also worth studying a marketing strategy in countries that have different levels of uncertainty avoidance in their cultural domains. Besides a cultural analysis, individual level analysis is considered to add value to this analysis depending on the financial risk-taking propensity of consumers. Thus, both cultural uncertainty avoidance and financial risk-taking propensity utilized as moderators to figure out the influence of economic crisis on consumers’ package size choice.
An experimental method of choice-based conjoint analysis is executed with individual
level Hierarchical Bayesian estimation. Further analysis is done to figure out the
consumer choice differences between two cultures and consumer financial risk-taking
levels. The main focus of the research was a stockpilable product category. The findings
revealed that, consumers still go for the best deal in town. There is a higher preference
for larger packages with cheaper unit prices during recession. Turkish consumers are
more likely to choose larger packages, which may also be due to household size
dissimilarities between these countries. Consumers who are risk-averse prefer smaller
packages compared to less risk-averse consumers in recession. These findings may shed
light to the firms operating in consumer goods market.
ACKNOWLEDGEMENT
This dissertation is the final step in achievement of Master of Science in Marketing Intelligence degree at the University of Groningen after two years of study. It was a great experience after 5 years of professional work life in Turkey. During this process, studying and living in a foreign country has been enrichment in my life.
I would like to thank my thesis supervisor Associate Professor Dr. Ir. Maarten J.
Gijsenberg for his valuable feedback and suggestions. During the process, he has been of constant help and contribution. I also want to thank Department of Marketing professors for their significant input. I am also particularly grateful to my family and friends for all their support.
TABLE OF CONTENTS
EXECUTIVE SUMMARY ... III
ACKNOWLEDGEMENT ... IV
LIST OF TABLES ... VI
1. INTRODUCTION ... 1
1.1PROBLEM STATEMENT ... 4
2. THEORETICAL FRAMEWORK ... 7
2.1STATE-OF-THE-ECONOMY (ECONOMIC DOWNTURNS) ... 7
2.1.1 Economic Downturns and Consumer Purchase Decision ... 8
2.1.2 Firm Response to Economic Crisis ... 10
2.2PACKAGE SIZE ... 11
2.2.1 Consumer Purchase Decision in General ... 11
2.2.2 Package Size Decisions by Consumers ... 12
2.2.3 Package Size Decisions by Firms ... 13
2.2.4 Package Size Choice During Economic Crisis ... 15
2.3THE MODERATING ROLE OF CULTURAL AND PERSONAL FACTORS ON CONSUMER PURCHASE DECISION DURING ECONOMIC CRISIS ... 16
2.3.1 National Culture / Country Specific Effect ... 16
2.3.2 Consumer Financial Risk-Taking Propensity ... 20
3. CONCEPTUAL FRAMEWORK ... 23
4. METHODOLOGY ... 25
4.1RESEARCH DESIGN ... 25
4.2DATA COLLECTION ... 27
4.3MEASURES ... 27
4.3.1 Package Size Choices (Dependent Variable) ... 27
4.3.2 State of the Economy (Independent Variable) ... 28
4.3.3 National Culture (Moderator) ... 29
4.3.4 Consumer Risk-taking Propensity (Moderator) ... 29
4.4MANIPULATION CHECK ... 29
4.5DATA ANALYSIS ... 30
5. RESULTS ... 31
5.1DESCRIPTIVE STATISTICS ... 31
5.2RELIABILITY ... 33
5.3PACKAGE SIZE CHOICE ANALYSIS ... 34
5.3.1 CBC/HB Analysis ... 34
5.3.2 T-test Results ... 34
5.3.3 Two-way ANOVA Results ... 36
5.3.4 Robustness Check ... 38
6. DISCUSSION AND CONCLUSION ... 39
7. MANAGERIAL IMPLICATIONS ... 41
8. RESEARCH LIMITATIONS AND FURTHER RESEARCH ... 42
REFERENCES ... 44
APPENDICES ... 52
LIST OF TABLES
Table 1. Attributes and Attribute Levels 28
Table 2. Demographic Variable Frequencies 32
Table 3. Average Risk-taking Propensity per Economic State 33 Table 4. Average Risk-taking Propensity per Country of Origin 33 Table 5. Cronbach’ s Alpha for Risk-taking Propensity Scale 33
Table 6. T-test Results 35
Table 7. Two-way ANOVA Test Results for Economy and Risk-taking 37 Table 8. Two-way ANOVA Test Results for Economy Country of Origin 37
1. INTRODUCTION
‘ When the facts change, I change my mind.’
J.M. Keynes
Business cycles, more specifically recessions can have severe effect on the performance of individual firms, industries and entire economic sectors (Domowitz et al., 1988). Srinivasan et al. (2005) stated that not only the performance of a company is confronted with the changes in market conditions, but also their survival. While some companies go bankrupt, some downsize due to budget limitations or take similar precaution(s), others manage the challenge well and gain superior results. Some firms thrive, as they perceive recessions as opportunities, which strengthen their business practices. Instead of waiting the recession to pass, they even invest aggressively and outpace the competitors (Srinivasan et al., 2005). In a shrinking market, competition becomes more intense (Ang, 2001). Van Heerde et al.
(2012) indicated that during economic downturns, management teams reconsider their marketing budgets, which puts marketing department under pressure. Companies prefer to limit their advertising and R&D expenditure, because it is easier to increase short-term cash flow and liquidity (Srinivasan et al., 2011).
Nevertheless, besides economic actors, consumers encounter the adversity of economic downturns as well. Understanding consumer behavior is especially important during recession periods (Kotler and Caslione, 2009). They feel the impact in their budgets and reflect it to their spending and consumption behavior (Dutt and Padmanabhan, 2011).
Uncertainty in the external market environment causes consumers to be more cautious and adapt their buying behaviors (Quelch and Jocz, 2009). Economic crises are inevitable, therefore, the influences on the consumer behavior is of interest to companies and researched from several perspectives in the literature (Dutt and Padmanabhan, 2011;
Gajewski, 1992). Consumers’ disposable income gets lower and consumers feel the
pressure in their budgets. Hence, consumers become more price conscious, which leads
them to search for lower prices (Estelami et al., 2001) and switch to private label products
due to their reasonable prices (Lamey et al. 2007).
Financial crisis period can be country specific or has a long duration and drastic worldwide impact, such as the Asian crisis in 1998 and global financial crisis originating from U.S.
mortgage crisis in 2007 and still has shrinkage effect on world economy. The 2007–2009 global financial crisis is a large-scale example. U.S. banks initiated first shock domestically. However, afterwards U.S. subprime mortgage problems, particularly by Lehman Brothers’ collapse in September 2008, triggered a global liquidity crunch (Liang et al., 2010).
Companies try to maintain their sustainability through applying various marketing strategies during crisis period. Understanding the requirements of consumers from different perspectives is a key element. Especially the ‘’Lessons Learned’’ from past experiences can be used when necessary. ‘According to the news of Financial Times Deutschland in August 2012, Jan Zijderveld, Unilever' s top manager in Europe stated that, "Poverty is returning to Europe"’ (Global Retail Magazine, 2013). As a result, the company has begun offering smaller and less expensive packages so as not to put too great a strain on increasingly limited budgets (Global Retail Magazine, 2013). It is a strategy that Unilever implemented to the developing countries of Asia. In Indonesia, Unilever sells small packages of shampoo that has a price between two to three cents and they still earn decent money. In European crisis, they recall this strategy and decided to apply it. The picture in France is similar.
‘Bruno Witvoet, President of Unilever France, said: “The value of the average shopping basket tends to decrease while the frequency of purchases tends to increase. So we need to have certain product categories on offer to achieve a more affordable entry price, which means either to increase promotions or to develop more small packages.”’ (Global Retail Magazine, 2013).
Adjusting the package size of a product is a significant strategy towards meeting the new
requirements of consumers. Danone had tried it during Asian crisis in 1998 and reported
the sales increase of smaller packages in Indonesia (Ang et al., 2000). Nestlé offers popular
priced products in mini portions, such as single spice cubes, one-cup instant coffee or
single-bag soups for low-income households (Global Retail Magazine, 2013). Also,
Unilever increased the small package availability for certain number of its existing brands
and experienced good results at the same time in Asia. They applied the same strategy
again in Europe after a decade. The company sales increased by 1.1 % in Europe, in the
first half of 2012, after years of stagnation since US financial crisis of 2007. The primary aim is to provide consumers an affordable package size option that allows them to allocate their limited budget to multiple necessary product purchases (Unilever, The Economist Unit). Hence, it is a strategy that companies apply to prepare for leaner times.
Global Retail Magazine (January 2013) reported “the strategy change makes sense to Unilever and also other FMCG firms. According to the ‘Employment and Social Situation Review’ from the European Commission, there has been a sharp rise in the numbers of households experiencing financial distress across the EU during early 2012. These households struggle to meet their everyday living requirements and are either running into debt or drawing on savings. Such extreme constraint might mean a single incident, such as a broken-down car, could have dire consequences. The pressure on the consumer budget might not come as such a surprise given the austerity measures implemented in Greece, Portugal, Spain and Italy, as well as their persistently high unemployment rates. As a result, manufacturers and retailers need to revise their strategies to meet demand and achieve growth.”
With the rise of globalization, competition and alternative distribution channels in business life, it is possible to reach the same brands and products in different countries. These multinational brands do need to understand the needs and requirements of consumers from dissimilar cultures. Cross-cultural frameworks guide international marketing, which requires substantial comprehension to adapt for different markets (Cleveland and Laroche, 2007). Also, many researchers shed light to numerous business studies of questioning whether or not culture affects and shapes consumer behavior (e.g., Steenkamp et al., 1999;
Tse et al. 1988).
Economic downturns that have a widespread impact may require having a cross-cultural
evaluation. Hofstede (1980), as a leading representative of intercultural studies, developed
an empirical model of comparative national culture dimensions. It is emphasized that
culture is general and relative, as not everyone is programmed. However, it enlightens the
common patterns of behavior in a society as culture affects individuals’ cognition because
every nation develops its own common and shared values (Gary and Munch, 1996). There
are mainly six dimensions in his framework concerning culture. Uncertainty avoidance (the
degree of avoiding the situations where people feel uncertainty), Power distance (the
results of unequal authority relations), Long-term orientation (dealing with the future
oriented rewards), Masculinity-Femininity (in masculine countries major priorities are achievement and success while, in feminine countries caring for others and quality of life is essential), Individualism-Collectivism (In individualistic societies, individuals look after themselves and close family whereas in collectivist societies, group members act with solidarity), Indulgence-Restraint (Indulgence is enjoying and having fun without being limited by the society perceptions, where restraint stands for a society that suppresses gratification of needs and regulates it by creating strict limitations in line with social norms).
This paper will compare the purchase decisions of Turkish and Dutch consumers in contracting economic states. Hence, related to the hard and unpredictable economic periods, ‘uncertainty avoidance’ becomes the core dimension of culture to discuss the results of purchase decisions while comparing two different cultures.
Controversially, Triandis (1989) asserted that personality of an individual affects the purchase decision, not the culture. Personality is a feature, which creates uniqueness to the person, although is shaped by culture in a society. Thus, self is activated when deciding for a product purchase. An increase in the degree of risk makes consumers less inclined to expose their resources to the possibility of loss (Shoham and Malul, 2012). During economic downturns, risk-averse consumers experience greater impacts and make adjustments to their consumption habits (Ang, 2001). Therefore, risk-taking propensity of a person is also a very essential element on how consumers’ structure their choices. Besides personal traits, demographics, occupation and household size co-determines consumer purchase intentions.
1.1 Problem Statement
Consumer decision-making process is affected by several internal and external factors.
State-of-the-economy is a significant external factor that determines the consumers’
choices. When economy is booming, consumers have tendency to react differently than
they would do in an economic crisis. During crisis periods, consumers are more prone to
change their purchase intentions as their purchasing power and future certainty declines
(Pandelica and Pandelica, 2011). Also, firms need to adapt their marketing strategies to the
business cycles accordingly. Therefore, firms should understand these consumer behavioral changes in order to benefit from the downturns and create strategic opportunities.
Package size is an element that consumers consider while deciding for a purchase. In general, consumers search for best offers in terms of larger packages, especially for fast- consuming goods (Wansink, 1996). However, spending money at one time for larger quantities, which have longer consumption time, may limit consumers’ budget. Instead, consumers may prefer to purchase smaller size packages to allocate their budget, since they have other necessities that need to be satisfied. While, there are different types of consumers with different expectations, firms should better define their focus on small or large package offerings or both. Additionally, cultural and personal factors play role in risk perception of consumers during economic crisis. The main purpose of this study is to figure out these suitable marketing operations, which may be applied to different consumer types.
Therefore, the main question is generated for the purpose of this research is:
“ What is the influence of economic state on consumers’ package size choice subject to cultural and personal factors?”
The sub-research questions related to the main questions are as follows:
1) To what extent consumers purchase mini-package, maxi package or both deals during economic downturns?
2) What is the role of culture (uncertainty avoidance) in this relationship during economic downturns?
3) What is the role of individual financial risk-taking in this relationship during economic downturns?
This study contributes to the current literature in following ways. The present literature includes the considerations from the firm side. Limited research has been conducted concerning the consumers’ package size decisions especially during economic downturns.
Package size choice was not analyzed with respect to uncertainty avoidance among
cultures. Offering smaller size packages results in lucrative financial outcomes during
previous crisis periods. Hence, it is worth to investigate this marketing strategy as part of a
solution to the strategic problems encountered. From a practical perspective, the findings
may shed light to the FMCG companies that is utilizing or planning to implement this managerial strategy in focus. Additionally, to provide individual level insight, the research will also focus on the individual financial risk-taking factors. This aspect of the research is considered to highlight a more consumer-focused approach.
The remainder of this dissertation is organized in the following way. The theoretical framework begins with the discussion of the related concepts and their relationship in the literature. Then, the conceptual model illustrating these relationships will be presented.
Afterwards, the research methodology will be described, which contains the sample and
conducted empirical research. Following to that, he empirical results and key findings
pertaining to the impact of economic crisis on consumer utilities will be reported. In the last
section, the dissertation will be concluded with discussion, managerial implications and
limitations of the study.
“The Chinese symbol for crisis combines two simpler symbols, the symbol for danger and the one for opportunity. Crises are times of danger, but they are also times of opportunity.”
(Starbuck, Greve, and Hedberg, 1978)
2. THEORETICAL FRAMEWORK
This chapter of the thesis investigates the impact of economic downturns on consumer package size choices. The burden on the consumer budget results in more critical and cautious purchase decisions. To get better knowledge, previous research will be analyzed concerning the relation of economic crises and package size decisions from consumer and firm side. Following to this review, the importance of country specific commonalities and differences of a national culture will be explained. Finally, individual financial risk-taking propensity affecting package size decisions will be defined. These relations will be illustrated in the conceptual framework.
2.1 State-of-the-Economy (Economic Downturns)
Economic state in a country or in the world does not always have a steady growth, but
instead take turns of cycles, generally recessions. NBER (2001) defines recessions as ‘a
significant decline in activity spread across the economy, lasting more than few months,
visible in industrial production, employment, real income, and wholesale-retail trade’. In
broader terms, it is called an economic crisis. Economic crisis may be classified as banking
and/or currency crisis (Dutt and Patmanabhan, 2011). In banking crisis, a country’s
financial system is in severe trouble by losing most of its banking system capital, which are
mostly caused by decrease in bank’s assets value and/or balance sheet position (Amri and
Kocher, 2012). Whereas, a currency crisis is the depreciation of exchange rates in the
country, that requires sharp adjustments (Dutt and Patmanabhan, 2011). Kaminsky and
Reinhart (1999) hypothesized that some crises are classified as ‘twin crises’. ‘Typically,
banking crises accompany currency crises. Here, the causes are initial surges in capital
inflows, leading to currency mismatches between the asset and liability sides of banks’
balance sheets, and over-valuation of the exchange rate. The Asian Crisis of 1997 is the poster child for this type of crisis.’ (Amri and Kocher, 2012).
Economic crises are researched extensively in the literature, as they are inevitable.
According to Dutt and Padmanabhan’s (2011) study, there were 435 currency crises episodes across 195 countries over the period 1960 to 2006. Amri and Kocher (2012) analyzed that from 1970 to 2007, the world witnessed 124 episodes of banking crises, with an average output loss totaling 30% of gross domestic product (GDP). Claessens et al.
(2009) investigated 21 countries in the same period and concluded a total number of 122 recessions. Allen and Gale (2007) explained the outcomes of a financial crisis as, job uncertainty and unemployment, decreased disposable income and saving rates, fewer credit financing opportunities, greater consumption risk, increased product and service prices.
O’Malley et al. (2011) suggested that all recessions have similar characteristics; decline in overall economic activity and investments, increased unemployment and decreased consumer confidence.
2.1.1 Economic Downturns and Consumer Purchase Decision
Economic situation is an external factor but directly related to consumer purchase decisions. The business cycles influence the individuals in the economic system as well (Millet et al., 2012). Marketing strategy of a company depends upon managers’
understanding of consumer behavior, especially it is important during a recession (Kotler and Caslione, 2009). During economic downturns, the conditions change as consumers feel the shrinking impact in their wallet or disposable income (Allen and Gale, 2007). ‘The disposable income is defined as the available amount of money for spending and saving by households after income taxes have been deducted’ (Mansoor and Jalal, 2011). The diminished disposable income is a critical challenge for consumers' purchasing decision.
Due to uncertainty, purchase choices are associated with a particular opportunity cost, which makes people often feel pressure and become more cautious. Therefore, consumers try to avoid making wrong decisions and experiencing greater opportunity cost (Mansoor and Jalal, 2011).
Zurawicki and Braidot (2004) defined the economic crisis from consumers’ perspective as
the most traumatizing event that affects family’s life and brings a sudden and substantial
deterioration of economic situation. Quelch and Jocz (2009) indicated that, in general, consumers’ behavior is determined by emotional reactions against the economic conditions.
Due to change in the level of risk perception, and uncertainty, consumers react to economic downturns around them. Pandelica and Pandelica (2011) pointed out that the impact of economic crisis doubles by the decreasing consumer confidence. They also asserted that, the emotional reaction of consumers is one of the major reasons of transforming financial crisis into a global recession and can even prolong the duration of crisis. Therefore, consumers act differently by changing their consumption patterns. In general, increasing unemployment rates, decreasing or freezing of wages and increasing inflation rates causes income shortage (Katona, 1974). As the purchasing power declines and saving gains more importance, consumers are not only affected financially but also psychologically and socially. People tend to read more in the press about economic situation and discuss it with the others. These economic and social outcomes influence social relations also cause a social crisis (Pandelica and Pandelica, 2009).
Consumers become more price-conscious due to their limited budgets. Millet et al. (2012) suggested that, in ideal situation, consumers consider financial gains and avoid financial losses all together. However, economic downturns will motivate individuals to avoid losses, but not necessarily to achieve gains. Nowadays, consumers become savvy, rational and bargain for prices (Ang, 1998). Therefore, it is expected that consumers respond to the situation with distinct buying patterns to avoid negative financial outcomes. Relying on the fact that people have to eat and take care of themselves, some essential items of necessity consumption are not affected heavily by the crisis. Instead, luxurious product consumption is adversely affected from the situation because they are already very expensive and do not satisfy the urgent and primary needs of individuals. Hence, there is a trend towards simplicity of products (Ang et al., 2000). Also, it has been proven that consumers postpone purchase of expensive durables because of reluctance to invest large amount of money (Deleersnyder et al., 2004).
While spending amount decreases, consumers tend to continue research shopping. In this
way, they spend time inexpensively but still are aware of trends. Additionally, consumers
would like to seek for more detailed and cheaper price information. Retailer or store-type
gains importance, which offer relatively cheaper prices. In the last decade, online stores and
social media lead to a remarkable change of consumer behavior and price comparison (Ang
et al., 2000).
During economic downturns, consumers switch from A-brands to private labels (Lamey et al., 2007) or from better-known products/brands to lesser-known because of their price advantage (Ang et al., 2000). It is expected that especially for necessity products, it is a beneficial way for consumers to churn to cheaper products for a certain period of time by lowering quality perception. Purchasing habits for household consumables also changes.
Housewives who previously stocked up weekly or monthly have switched to daily purchasing. And they have switched to “mom and pop” stores and discount stores from supermarkets. Consumers also perform less end-of-aisle impulse purchases (Ang et al., 2000).
2.1.2 Firm Response to Economic Crisis
Firms are the major actors determining the financial flow in an economy. Wan and Yiu (2009) emphasized the importance of fit between organizations and external environment.
They claim that organizations need to adapt to the changes occurring in their external environment. As a response, firm strategies and performance outcomes need to be redefined according to the opportunities and threats encountered. Firms might perceive the environmental change as uncertain and they act conservatively (Amburgey and Miner, 1992). Therefore, they hesitate to change their strategies and prefer to keep their current situation until it is really necessary. Conversely, for some other firms, transformation process is too rapid and sharp (Park and Mezias, 2005). Rather than perceiving environmental changes as a threat, they perceive it as an opportunity (Haveman, 1992) and capitalize to capture the concerning benefits.
Kotler (2011) discussed that in the past marketing strategies were based on infinite
resources and zero environmental impact. However, things are changing and marketers
realized that they have finite resources and environmental costs. Product development,
pricing, distribution and branding policies need to be revised. The recent US financial crisis
caused consumers’ to change their lifestyles according to their lower level of income and
spending. Companies must balance their growth goals according to these changes (Kotler,
2011).
In times of economic crisis, companies often try to reduce marketing budgets (Srinivasan et al., 2005), particularly advertising budgets (Deleersnyder et al., 2009). However, Deleersnyder et al. (2009) found that, companies that handle expenditures without depending on the economic cycle achieve better performance indicators compared to the ones that have rigid strategies during hard times. Additionally, R&D expenditures are considered as well. Srinivasan et al. (2005) asserted that firms following a proactive marketing approach yield superior business performance, meaning that they should be able to turn crisis situations into an opportunity by applying effective R&D investments.
Ang et al. (2000) concluded that consumers preferred firm-related strategies during the Asian economic crisis. They proposed that firms need to increase sales by enhancing product quality and lowering prices or vice versa, but not both at the same time. Due to increased price consciousness, selected promotions such as coupons, premiums and sales discounts are more likely to have effect on purchase. Companies need to adjust to the reshaped consumption behaviors while maintaining the benefits of their products. On the other hand, the environment may force the companies for further adaptive positioning of the product, which requires a complete change of what the product stands for. They should organize managerial decisions considering long term positioning of products due to investment costs. Other than price related strategies, firms might use alternative or additional distribution channels such as discount stores.
2.2 Package Size
2.2.1 Consumer Purchase Decision in General
‘Consumer behavior reflects the totality of consumers’ decisions with respect to the
acquisition, consumption, and disposition of goods, services, activities, experiences,
people, and ideas by (human) decision-making units (over time)’ (Jacoby, 1976). By this
way, consumers satisfy their needs and wants. Also, this process impacts society they
belong to (Perner, 2008). Consumer decision-making process involves the complex
psychological stages that consumers go through and are defined by many authors (Kotler
and Keller, 2006; Bearden et al., 2007; Comegys and Hannula, 2006). Consumer decision-
making process is defined by Kotler and Keller (2006) in the following way. Primarily,
consumers recognize their needs and problems resulting from the difference between the desired and the actual state. In finding ways to identify needs and solve the problems, consumers search for information and evaluate it. Eventually, they make purchase decisions (e.g. purchase a product or not, which brand and where to purchase) and evaluate their choices after purchase. Hence, understanding the drivers of consumer decision-making processes is a core task that businesses need to deal with in order to succeed, survive and gain competitive advantage.
Consumer behavior research aims to understand this process both individually and collectively, and studies consumer characteristics such as demographics and behavioral variables (Furaiji et al., 2012). Factors affecting consumer decision-making process are explained by Mansoor & Jalal (2011) as, consumers’ choices may vary depending on broad set of factors such as earnings, demographics, social and cultural factors. Kotler and Armstrong (2007) defined it in more detail as; personal factors (gender, age, occupation, income, education level and lifestyle); social factors (influence from family, friends and other groups); psychological factors (perception, motivation, attitudes and learning) and situational factors (economic, political, socio-cultural and technological). Packaging is an important marketing communication element, which plays role in both firms’ financial considerations and consumers’ purchase decisions (Mishra and Jain, 2012; Kuvykaite et al., 2009).
2.2.2 Package Size Decisions by Consumers
In terms of packaging decisions, package size influences consumer decision-making as it is highly related to monetary, storage and carrying issues. Additionally, the package size allows consumers to select the best bargain when buying the same brand (Fowler, 1982).
Producers choose package sizes and prices to maximize profits, while consumers select package sizes that maximize their utilities (Gerstner and Hess, 1987). The perishability, relative price and usage rate characteristics of a product are taken into account by both parties while deciding for package size.
In general from the demand side, consumers tend to select larger packages or bulk products
in order to save costs because they are perceived as less expensive to use (Wansink, 1996)
but in turn, they give up usage convenience of smaller packages. Gerstner and Hess (1987)
argued that consumers with low storage costs prefer large packages and therefore are willing to pay lower unit prices. Perkins (1995), Wansink (1996) and Ailawadi and Neslin (1996) found that consumption volume increases when people have an easy reach to the product, as it is available in the household inventory. Consumers are willing to use greater volume of a product because transaction cost or replacement cost for larger package consumption decreases (Lynn, 1992) and consumers are less concerned about running out of stock (Folkes et al., 1993). Product supply may cause consumers to waste money by
"overdosing" (Folkes and Martin, 1992). In a similar manner, after several experiments, Folkes et al. (1993) concluded that diminishing supply levels lead to lower consumption amounts, but package sizes do not have a significant effect on usage amount.
Moreover, when deciding upon purchase of a larger package product, consumers envision themselves as they are in consumption context. This situation leads to cognitive elaboration such as amount of spending, perishability risk and time spend for loading, carrying and unloading, which induces to keep the product in memory for frequent consumption (Chandon and Wansink, 2002). Conversely, smaller package deals may involve unit price and visit frequency considerations. Thus, in order not to give incorrect decisions for household economy, consumers should consider carefully about the usage frequency and volume for product package size decisions.
2.2.3 Package Size Decisions by Firms
Concerning the firm side, Koenigsberg et al., (2010) proposed a framework for analyzing how a profit-maximizing firm determines the optimal package size and price for a manufactured product. They take into consideration the usable life, the costs associated with manufacturing, consumer usage rates, and the utilities obtained by users from consuming besides owning the product. For instance, a perishable product with a low usage rate requires a small package size, unless the marginal cost of the product is not higher than larger packages. Otherwise, firms could have a tendency to produce and promote larger packages.
Besides these effects in their model, they indicated that how much the consumption is
valued by a consumer also matters. For example, if consuming a certain product has high marginal value for consumers, they might be willing to pay high price for a large package although they would waste most of the product. As usage rate and utility from consumption of that product shows differences among consumers, firms can modify product package sizes to either accelerate or decelerate usage for different product types (Wansink, 1996).
For instance, health conscious consumers will be attracted to small portions of the vice products in terms of regulating the consumption amount, this situation will influence the sales volume (Jain, 2012).
Regarding the unit cost considerations, Koenigsberg et al. (2010) generated a model indicating that a firm should produce the smallest package possible when the cost of producing package rises at a linear or increasing rate. By this way, it is assumed that consumers closely match their actual purchases to the number of units of the product that they can consume with a small package choice. When product unit cost is lower, the impact of package size on unit price is more obvious. Nevertheless, economies of scale for the large size packages compensate for the smaller packages for a firm. Their results matched with the model proposed. Therefore, less waste, large number of buyers, a higher unit price and greater profit for the firm. They also concluded that if a firm offers multiple packages, they should also offer at least one small size package. Prahalad (2005) noted that “single- serve revolution” in developing countries has enabled low-income buyers to purchase products that they could not afford otherwise. He found that these single-serve packages might also be suitable for the buyers who do not have income constraints.
Adams et al., (1991) investigated the impact of product downsizing as a pricing strategy without affecting sales. It is a strategy used when firms need to respond to competition and a possible consumer resistance due to lack of price increase possibility. In this way firms cannot improve their profit margin. Also, it is a preferred strategy for single-serving or small household segments. They noted the reasons to decrease package size that firms generally apply. Firstly, it is crucial to maintain a ‘Price Point’ where consumer should be able to notice the prices of different items in the product line according to Weber’s Law of
‘Just Noticeable Difference’. Secondly margin and profitability can be increased, while
consumer either do not perceive the change or forget that downsizing occurred. Other
reasons are increasing the frequency and volume of purchase, responding to demographic
and lifestyle changes, raising the price per unit of volume. Nevertheless, consumers realize
these adjustments and firms may face reaction from the demand side. According to the authors, these challenges can be offset by strategic implications such as creating strong brand loyalty, meeting the changing consumer needs, and downsizing in gradual steps.
Furthermore, it is important to take into account the elasticity of different serving-size and usage-occasion segments as size-conscious consumers may react differently than price- conscious ones.
2.2.4 Package Size Choice During Economic Crisis
Economic downturns create an uncertainty in the minds of consumers. Consumers tend to save their limited budget and try to use it efficiently. By realizing the importance of the situation, they may need to reconsider their choice of package size to pay for the best deal.
In this respect, Ang et al. (2000) pointed out consumer reactions from two different recession periods. It is stated that, during US recession times, consumers were inclined to purchase bulk products to save costs, whereas in Asian crisis this only holds true for less negatively affected consumers due to less disposable income. For these consumers, expenditure per purchase gets less when they purchase smaller packages for multiple products, although unit cost is higher per product. Besides financial benefits per purchase, there is also psychological issue of buying smaller packages. Consumers may perceive larger package purchase as a waste or abundance while smaller package purchase is a saving especially for perishable product purchases.
Referring to this budget regulation during crisis, it can be argued that consumers who are
willing to control their excessive consumption are likely to buy smaller packages. The
recent research of Jain (2012) proved that small packages enhance consumer and social
welfare in the category of vice goods. He asserted that firm profitability increases when
frequency of purchases escalates. Many consumers recognize their inability to resistance of
the vice goods and try to take corrective actions while purchasing, which enables them to
control inventory and therefore consumption (Wertenbroch, 1998). Jain (2012) suggested
that firms offer small packages to satisfy health conscious consumers especially who has
self-control problems. In response to this trend, people may also reduce excessive spending
during crisis.
With the light of previous managerial implications and literature, consumers may change their package size choices in economic downturns. It can be expected that consumers are more likely to choose smaller packages relative to economic growth periods. Thus, it is important for firms to figure out the best strategy to pursue. They can concentrate on mini- packages, maxi-package deals or a mix of both. However, they should also need to find out type of consumers that each strategy could be directed. To conclude, in order to analyze these changes consumer intentions need to be measured thoroughly to make new firm investments. Changing package sizes require manufacturing adjustments, which are high in amount for large-scale multi-brand companies. Moreover, distribution channel and promotion strategies should be settled accordingly to support the adjustments in their packaging strategies.
2.3 The Moderating Role of Cultural and Personal Factors on Consumer Purchase Decision During Economic Crisis
2.3.1 National Culture / Country Specific Effect
Even though globalization has brought a new era of uniformity to the world, cultural aspects needs to be understood carefully by the actors of this playground. Especially international marketers need to give emphasis on understanding the needs and desires of focal consumers not to get negative response (Alden et al., 1999). Companies, which are active in different countries, have to evaluate the cultural characteristics, norms and values while operating. Since culture has an effect on individual behavior, numbers of cross- cultural studies have been conducted in the context of International Marketing (e.g. Manrai and Manrai, 1996; McCort and Malhotra 1993; Samli, 1995). Cross-cultural studies examined the effect of culture on individual consumer behavior. Steenkamp et al. (1999) stated that cultural values play key roles in determining consumer behavior.
Culture is a process that a society produces and accepts all kinds of material and spiritual features. It is transferred from generation to generation within the historical evolution and helps to constitute the distinctive characteristics of a society or group. Culture is not stable;
it always changes by the new generations, with their difference in perception and
acknowledgment. “National cultures are living organisms, not time-free ‘fossils’ ” (Fang,
2005/2006). Defining the concept of ‘culture’ is really complicated (Jin, 2010). Thesubjective aspects of culture include the categories of social stimuli, associations, beliefs, attitudes, norms and values, and roles that individuals share (Erez and Earley, 1993).
Culture ranges from national (broad) to corporate (specific) culture (Davies and Weiner, 1985). Douglas and Dubois (1977) identified culture as a pattern for social relations and a gathering aspect for individuals in a society. This means, culture has an effect on individuals to form a group and sustain the shared values.
Human psychology and consumer behavior is affected by culture in several ways.
According to Legoherel et al. (2009), culture has an influence on the individual behavior.
People from different cultures create their own values; therefore, variance in consumer behavior is expected. Culture difference, is described by Weber and Hsee (1999) as an attitude difference in groups that constitutes a nation. These differences are formed by where and how they live, such as, geography, climate, history, economics, politics and the way of coping with such environmental differences (Weber and Hsee, 1999). In order to gain insights in how individuals interact with each other and give decisions about a situation faced, cultural values need to be examined.
In the marketing history, several cross-cultural researches have been conducted to clarify the distinctions. Hofstede (1991) defined culture as ‘the collective programming of the mind that distinguishes the members of one group or category of people from another’. In the terminology of Hofstede (1980), different cultures imply different mental programming, which governs activities, motivations, and values. To be successful, these different activities, motivations, and values need to be neutralized by personal interaction.
Hofstede’s theoretical framework has been studied in most of the related academic journals and books since 1980. The research among 76 countries gives a very comprehensive insight about cross-cultural differences. It has been revised several times and sixth dimension was added in 2010. In order to compare Turkey and The Netherlands, it is important to understand to what extent these two countries vary from each other in terms of six cultural dimensions of Hofstede et al. (2010).
The first dimension is Power Distance, referring to the results of unequal authority
relations. Turkey scores high on this dimension (score of 66), which means that
dependency, hierarchy in relation and superiors in organizations are often inaccessible.
Whereas, The Netherlands scores low (score of 38) as being independent, having a hierarchy for convenience only, equal rights, superiors are easily accessible. The second dimension is Individualism-Collectivism, where people´s self-image is defined in terms of
“I” or “We”. Turkey (score of 37), is a collectivistic society, in which group belongingness and creating ‘We’ in exchange for loyalty is very important. The Netherlands (score of 80), is an individualistic society, where people are supposed to look after themselves and their direct family only with loosely-knit social framework. Whereas, in collectivist societies, group members act with solidarity (Hofstede et al., 2010).
The third dimension is Masculinity/Feminity. A high score (masculine) on this dimension indicates that the society will be driven by competition, achievement and success. A low score (feminine) on the dimension means that the dominant values in society are caring for others and quality of life. A feminine society is one where quality of life is the sign of success and standing out from the crowd is not admirable. The fundamental issue here is what motivates people, wanting to be the best (masculine) or liking what you do (feminine). Turkey scores 45 and is in the “middle” of the scale but more on the feminine side. This means that the softer aspects of culture such as having consensus with others is valued and conflicts are avoided. Leisure time with group is important for Turkish people.
The Netherlands (score of 14) and is therefore a feminine society. In feminine countries it is important to keep the life/work balance and you make sure that all are included. Dutch are known for their long discussions until consensus has been reached (Hofstede et al., 2010).
Long term orientation dimension is the extent to which a society shows a pragmatic future- oriented perspective rather than a conventional historical short-term point of view. The Dutch score 44, making it a short-term orientation culture. Societies with a short-term orientation generally exhibit great respect for traditions. There is no score declared for Turkey concerning this dimension. In the Indulgence-Restraint dimension, indulgence is enjoying and having fun without being limited by the society perceptions, where restraint stands for a society that suppresses gratification of needs and regulates it by creating strict limitations in line with social norms. There is no score indicated for these countries since it is a recently researched dimension (Hofstede et al., 2010). The sixth dimension
‘Uncertainty Avoidance’ will be analyzed in the next section.
Uncertainty Avoidance
The cultural dimension related to external factors and economic contraction periods is uncertainty avoidance. It expresses the degree to which the members of a society feel uncomfortable with uncertainty and ambiguity (Hofstede et al., 2010). It has a very intense usage in the literature. Several of these articles proposed a theory of high uncertainty avoidance for countries, cultures, societies or employees. (Rapp et al., 2011). The main issue in uncertainty avoidance is how a society or nation deals with fact that the future cannot be predicted. The members in a society perceive a tradeoff between controlling the future or let it go with the flow. According to Hofstede et al. (2010), Leung et al. (2005) and Chui et al. (2002), countries with high uncertainty avoidance reveals rigid and intolerant codes of belief and behavior and high resistance to change. People feel uncomfortable in unpredictable situations (DiRienzo et al., 2007). Whereas, low uncertainty avoidance cultures feels need to control their environment and they are more comfortable with risk in general (Money, 1998), societies maintain a more relaxed attitude in which practice counts more than principles.
In terms of Hofstede et al. (2010) country specific dimension index, Turkey (85) is classified as higher uncertainty avoidance than The Netherlands (53). The interpretations of Hofstede et al. (2010) regarding these two countries are as;
Turkey scores high, which means high need for laws and rules. People try to minimize anxiety by lot of rituals, which may seem religious to foreigners. However, they are just traditional social patterns to relieve tension. In terms of employees, Turkey is classified as high uncertainty avoidance and power distance culture, which is reflected in work relations as, subordinates always accepting their superiors’ directives without questioning (Pellegrini and Scandura, 2006). It is noted that employees who are higher in uncertainty avoidance prefer greater standardization (Hirst et al., 2008). In The Netherlands, people have inner urge to be busy and work hard, need for rules, punctuality and being precise are the norm.
For individual motivation, security is an important element.
Uncertainty avoidance is also researched in consumer behavior literature. Reinmann et al.
(2008) used uncertainty avoidance as moderator between perceived service quality and
customer service satisfaction. They found that when clients from cultures with a high
degree of uncertainty avoidance were less satisfied relative to low-uncertainty avoidant
culture clients when they face a service defect. In terms of consumer repurchase intention,
high uncertainty avoidance has significant effect on likelihood as consumers try to minimize service defect possibilities (Wong, 2004).
Within the scope of this paper, the package size purchase decision of consumers from these two countries will be compared. Furthermore, the influence of economic state on preferences will be analyzed depending on the uncertainty avoidance level. It is supposed that consumers from a higher uncertainty avoidant country behave more cautious in product choice relative to lower level consumers due to the uncertainty of the future (Lee et al.
2007). Thus, it can be expected that Turkish consumers are more likely to choose smaller packages than Dutch people during recession because they would not like to allocate their money at once. A remarkable change between economic states is assumed.
2.3.2 Consumer Financial Risk-Taking Propensity
A consumer’s demographic characteristics (occupation, age, gender, education), personality traits, lifestyle and living conditions (income, household size etc.) co-determine the purchase decision (Hoyer and MacInnis, 2008). As De Mooij and Hofstede (2011) emphasized, the basis for consumer behavior is the understanding of self and personality differences among consumers. Most purchase related decisions are situation dependent.
One of the external influencers is economic crisis. Shama (1981) points out the effect of economic crisis on consumer motives, values, attitudes and expectations. Therefore, the changes in the consumption behavior due to economic crisis are moderated by personality characteristics.
Personality can affect people’s shopping preferences, decision-making processes, self- control, interaction with others, emotions, and even how they handle stress (Carver and Scheier, 2008). ‘Personality traits are defined as the relatively enduring patterns of thoughts, feelings and behaviors that differentiate individuals from one another and are elicited in trait affording situations’ (Roberts, 2009). An individual’s personality is usually
described in terms of traits such as sociability, self-confidence, autonomy, dominance, adaptability, introversion, and aggressiveness and the like’ (Kotler and Armstrong, 2009).During economic crisis, risk perception and risk attitude of a consumer play a role in how purchase intentions develop.
Some studies analyzed consumer decision-making and behavior only in terms of risk
perceptions (Bauer, 1960, Srinivasan and Ratchford, 1991). Weber and Hsee (1998) defined perceived risk as a behavior of individuals under risky situations. According to Mandel (2003) risky situation is the consequence that individuals face when they know the probabilities. In this perspective, risk is a prediction of a possible disappointment. It refers to the uncertainty of outcomes and the possibility of loss (Taylor, 1974; Keh and Sun, 2008). It has been reported that there are two types of perceived risk; personal (social and psychological risks) and non-personal (financial and performance risks). When an incongruous decision is made, social risk taking ends with disappointment and embarrassment while family and friends are involved, whereas psychological risk is the harm to the consumer ego. On the other hand, financial risk can cause a financial loss in case of a bad choice, while performance risk is faced when the functionality or service lifetime does not meet the requirements.
Consumers try to minimize the loss and behave carefully when they encounter with a risky situation or high uncertainty (Canli and Batra, 2004; Ang, 2001). When the level of risk is high, consumers are likely to reduce it by finding better evaluation of products and prefer known or tried alternatives. Dowling (1986) defined the risky choice proposition as, risk perception in product choice that requires high involvement of the individual. By means of advertisement, word-of-mouth and other sources, consumers increase their familiarity with or enhance their knowledge about the product.
Risk taking behavior is directly related to the personality of the individual. Sitkin and Pablo (1992) identified risk preference as a personal characteristic of being attracted to risk. Risk attitude is consumers’ interpretation and how much they dislike the risk content (Pandelica and Pandelica, 2009). Taylor (1974) constructed a model about risk attitude in which consumer behavior is illustrated as a question of choice and risk as well. Depending on the individual and the situation, consumers can engage in both risk-taking as well as risk- avoiding behavior (Smidts, 1997). Risk-aversion is a social norm (Mandel, 2003) that people choose not to purchase the product and try to minimize the undesired outcomes.
Consumers prefer the sure option to the risky option. On the other hand, risk-taker
consumers choose to purchase products whatever it brings as a result in the end. These
consumers have a tendency to choose risky option although the result of the expected value
is less than the sure option (Weber and Hsee, 1999). Kahneman and Tversky (1979)
extensively studied the economic modeling and psychological heuristics of choice or
judgment under uncertainty. They found that people underweight probable outcomes compared to the outcomes obtained by certainty. This tendency improves risk-aversion in choices, which involves sure gains, and risk-taking in sure losses.
However, with regard to the uncertainty in crisis, Pandelica and Pandelica (2009) stated that, as not all the individuals are same, they do not have the same crisis effect perception.
Thus, they proposed four types of consumers in economic contraction related to risk perception and risk attitude. Panicked consumers are those who have a high perception and attitude of the risk. Thus, they are highly risk averse and will try to reduce risk as much as possible. Prudent consumers almost do not perceive the risk but have a higher risk attitude.
They are currently well-informed, have low switching cost and postpone large amount purchases. Concerned consumers perceive a high risk but it does not result in a high-risk attitude. Normally they plan their spending and remain loyal to the brands, although they sometimes can downsize to cheaper items. They are ready to try innovations and new products in the market. Rational consumers have a low risk perception and attitude. They do not take into account information about crisis effects and will not change their current habits. They will continue buying the brands that gives the most satisfaction.
Regardless of the economic state, it can be argued that different consumer behavior might be observed between risk-averse and risk-taker consumers. Due to higher uncertainty in the present and future state during economic downturns, people have a tendency to change their purchase behavior. Ang (2001) found that risk-‐averse consumers are more affected by the state of the economy than their less risk-‐aversive counterparts. Furthermore, prominent change is observed in their consumption in terms of price, product, promotion, and distribution. Risk-averse consumers have a lower tolerance for uncertainty relative to less risk aversive consumers because the importance of gains diminishes and the importance of losses increases (Kahn and Meyer, 1991).
Therefore, in times of economic contraction, financial risk-taking propensity is a
determinant for consumers’ package size choices. They have a tendency to choose the best
option, which does not affect their budget in the long-term but allows them to spread their
risk in the short-term (Katona, 1974). Referring to this situation, it can be expected that
risk-averse consumers are more likely to choose smaller packages than risk-takers in
recession. This means observing a more noticeable difference between these economic
states than risk-takers.
3. Conceptual Framework
The primary objective of this study is to investigate the influence of state of economy on consumers’ package size purchase decisions. During volatile economic periods, firms should be cautious about their strategies in order to satisfy changing consumer needs.
Economical downturns create opportunities for the companies to survive in a highly competitive environment. Some firms choose to modify their package deals to smaller package sizes, which in fact leads to success and allows consumers to manage their limited budget efficiently. Previous practical implications showed that economic downturns positively influence the choice of mini-package offerings rather than maxi-package deals.
Thus, to what extent the consumers are tricked by firms’ smaller package size offerings compared to larger package deals will be investigated.
Besides the main effect, cultural and individual factors are moderators, which may presumably change the strength of the effect. Specifically, financial risk-taking propensity of a consumer has an impact on financial decision. Related to economic downturn, cultural dimension of ‘uncertainty avoidance’ differs between countries, especially the ones that have totally dissimilar backgrounds, different social and political systems. When uncertainty avoidance index is higher for a country, consumers may be willing to spread their available budget to be able to purchase multiple necessity products. The results will be compared between Turkey and The Netherlands. Figure 1 illustrates these relationships.
Figure 1. Conceptual Framework
State-of-the-Economy
(Economic Growth vs. Economic Contraction)
Consumers’ Package Size Decision
(Mini vs. Maxi or Both)
Individual Financial Risk- Taking Propensity
(Risk-taker vs. Risk Averse)
Cultural Factors
(High vs. Low Uncertainty Avoidance)
