Brand loyalty and risk aversion are topics that have puzzled and excited business leaders for the last century, both being taught in business schools around the country. By default, brand loyalty is fairly self-explanatory; it deals with the perpetuation of good, positive feelings towards a specific product or service. Risk aversion, on the other hand, is roughly defined as the distancing of oneself from risky or unsafe products and services. Both terms can define consumer behavior and investment strategies as well. The following sample research paper was prepared by an Ultius research paper writer.
How to establish brand loyalty
The concept of brand loyalty is inseparable from that of risk aversion, and together they illustrate important aspects of consumer behavior. The former is concerned with how and why consumers remain loyal to certain brands (even if that means paying a premium over relatively similar competition) and the latter is concerned with the risks individuals and companies are willing to take. Therefore, in evaluating the reasons for brand loyalty, one must also examine which risks might generate those preferences, and which might do the opposite, effectively alienating a once loyal consumer demographic.
In an article entitled “Risk aversion and brand loyalty: the mediating role of brand trust and brand affect,” the authors explicitly linked brand loyalty and risk aversion. The author’s main assertion was that “relationship marketing scholars suggest that becoming loyal to a brand is one of the most general strategies consumers develop to reduce perceived risk” (Matzler 154). Indeed, this assertion is held up through other notable scholarship on the issue. Ultimately, as consumers reduce risk towards their perception of a brand, they inherit brand loyalty because they belong to a new inclusive social identity; consequently, companies gain a competitive advantage as consumers become protective evangelists of the brand.
Understanding risk aversion
Business executives, market analysts, and scholars alike examine consumer tendencies in order to understand what causes certain consumers to take more risks than others, and what influences consumer loyalties to any given brand. Most tend to refute the idea that brand loyalty and risk aversion can be predicted solely on the basis of customer satisfaction. Perhaps, to focus solely on customer satisfaction is to ignore social, economic, and cultural conditions that must undoubtedly influence customer behaviors such as brand loyalty and risk aversion. For example, in an article titled “Risk Avoidance and Risk Taking Under Uncertainty: A Graphical Analysis,” Dr. Yang-Ming Chang argued that “predictions about (consumer) attitudes towards risk cannot be made independently of income positions or economic opportunities” (Chang 73).
Others point to the social conditions that underlie risk aversion and brand loyalty. In an article form the Journal of Marketing titled “Resistance to Brand Switching When a Radically New Brand is Introduced: A Social Identity Theory Perspective,” the authors relate brand loyalty to habits of materialistic consumer demographics (Matzler et al). Their logic claims that since a great deal of consumers are materialistic and use possessions to define the self, “brands can represent self-relevant social categories with which customers identify” (Niels 129). Essentially, this resulted in consumers sharing a sense of greater personal identity and social distinction from using specific brands, thus lowering their perceived risk.
However, a cultural perspective on these particular aspects of consumer behavior may be most valuable because it contextualizes economic and social circumstances. In an article from the Journal of Marketing titled “Brands as Signals: A Cross-Cultural Validation Study,” the authors provided a solid foundation for their analysis of brand loyalty and risk aversion by expanding their scope beyond the borders of the United States, and beyond strictly economic or social perspectives. The authors asserted that three of Geert Hofstede’s “national culture dimensions” are very useful in analyzing consumer behavior and brand loyalty: “collectivism/individualism,” “uncertainty avoidance,” and “power distance” (Hofstede).
Though Hofstede is not directly concerned with brand loyalty, his concepts help frame a discussion of the subject because consumer behavior is, after all, a subcategory of human behavior, which Hofstede is interested in on a fundamental level. The first deals with social practices across cultures, the second is essentially another term for risk aversion, and the third implicates economic as well as social structures across cultures. Ultimately, a cross-cultural examination of consumer behavior reveals how economic and social circumstances cause and effect brand loyalty and risk aversion. However, depending on size, locale, and distribution, businesses may or may not be interested in the cross-cultural indications of brand loyalty and risk aversion.
Economic, social, and cultural implications of brand loyalty and risk aversion
Economies have a profound effect on consumer behavior, particularly on the consumer’s level of risk aversion. Consumers take fewer risks in slumps, recessions, or depressions, than they might in times of steady or rapid economic growth (Costas). Unfortunately, this may worsen conditions overall because there is less consumption. In fact, risk aversion might help predict economic cycles, and not only be a reaction to said cycles. For example, in an article from The Review of Financial Studies titled “The Representative Agent of an Economy with External Habit Formation and Heterogeneous Risk Aversion” states, “A long succession of empirical studies have reached the conclusion that the stock market varies due to changes in the risk premium” (Costas 3018). Therefore, risk aversion, and in turn consumer behavior, is fundamental in evaluating economies, and vice versa.
However, certain brands can benefit from tougher economic conditions if they are able to establish and maintain a loyal consumer base. The consumer may seek out brand loyalties in order to reduce risk; consistency can generate confidence and self-assuredness in a time of fluctuation or crisis (Cox). Brand loyalty, unlike risk aversion, is not so easily framed within an economic interpretation of consumer behavior. Inclusion of social implications allows for a better understanding of the relationship between brand loyalty and risk aversion.
Larger social implications
Numerous articles in academic and professional journals examine the social circumstances that create and maintain brand loyalty, and some measure the varying degree of risk aversion amongst the consumer. Matzler et al posited that brand loyalty is a means of self-identity. From this perspective, original inclinations towards brand loyalty are dictated more by the consumer than by the brand. The article supports the argument by stating that brand loyalties are often maintained by the consumer even when the company undergoes a problematic disruption or an entirely new brand is introduced (Matzler et al). Consequently, the consumer may be so convinced of his or her social identification with the brand that they continue to trust and rely upon it even when these obstacles arise. In the article’s introduction, the authors provided concrete examples of disruptions that might have jeopardize brand loyalty of specific brands.
We define market disruptions as major events occurring in the market that threaten customer-brand relationships. These events are not at the individual level (e.g., individual service failures). Examples include aggressive competitors’ sales promotions, industry crises (e.g., salmonella in peanut butter), product recalls (e.g., Mattel’s 2007 toy recall, Toyota’s 2010 recall), negative publicity (e.g., rumor), and disruptive innovations by competitors (e.g., Apple’s iPhone launch). These events can influence the relative standing of the brand in the eyes of the customers (Niels 128).
The authors do a good job noting that said events can occur at an individual level, but the crucial ones affect broad consumer demographics. Granted, most of these disruptions are bound to alienate a number of customers. However, they may also strengthen loyalty amongst smaller communities. This point relates to the previously mentioned idea that customer satisfaction is not the sole motivator of brand loyalty. In fact, brand loyalty is often a means to lower or alleviate perceived risk, and/or to establish a social identity within a consumer culture. The authors make the very same claim, saying:
If perceived value is conceptualized and operationalized as functional utilitarian value, as is prevalent in the literature, it does not capture other non-utilitarian factors such as sociopsychological benefits, that might motivate customers to continue buying what they buy. Meanwhile, the branding literature reveals that brands can provide self-definitional benefits beyond utilitarian benefits (Niels 128-29).
Branding and identity
The authors use this argument to support their application of a consumer-brand relationship within the context of one’s social identity. The main explanation for this was that such filters are not often applied to the analysis of brand loyalty because social identity is not easily measurable on paper; in contrast, the disruptions mentioned earlier provide ways for researchers to measure utilitarian responses to customer-brand relationships. This has also been supported by other scholarship From Sekar Raju, Sadaf Siraj and others. Social identity is an internal, individuated experience that is not easily gauged by statistics, and it relies more upon psychological approaches to consumerism in general.
Furthermore, the article did indicate that marketers are “increasingly” interested by the concept of social identity, and they have sought to channel revenue via that very avenue. One relatively recent example that comes to mind is the series of televised Apple commercials that usually began with the line, ‘Hello, I’m a Mac.’ On screen there are two men; one, the mac, is young, casual, funny, and smart, while the other, the PC, is old, stiff, slow, and stubborn. The men are placed in simple situations, and sometimes it takes nothing more than a brief exchange of conversation for the PC to emerge as the obvious loser, and the Mac as the superior, cooler, option. The intention of this particular advertising campaign was to ask the view to identify with one of the characters. Whether male or female, old or young, the viewer should feel little sympathy for the disgruntled PC, and will likely want to identify with the hipper Mac.
The authors termed this phenomenon, “customer-company identification,” which is, “Defined as the extent to which customers perceive themselves as sharing the same self-definitional attributes with the company” (Niels 129). The authors also linked the consumerist approach to forming a social identity to “the primary psychological substrate for the kind of deep, committed, and meaningful relationships that marketers are increasingly seeking to build with their customers” (Niels 129). The article as a whole was very useful because it explored economic disruptions adverse to any brand’s competitive success, and, “raise[d] the question whether there is an underlying customer-brand relationship mechanism that drives brand loyalty in the face of market disruptions” (Niels 129). Ultimately, Niels’ work addressed the aforementioned question with its “Social Identity Theory”: because the consumer is social, he/she will create and maintain brand loyalties with certain social allegiances in mind.
Although marketers will attempt to shape brand loyalties across consumer demographics via advertisements, slogans, and product packaging, the inclination and practice of brand loyalty occurs primarily on the individual level; the consumer chooses while the businesses can only attract. However, brand communities are often formed (by the customer or the company) in order to create and strengthen brand loyalty based on the devotion to the brand (Batra et al). An article titled “Brand Communities and New Product Adoption: The Influence and Limits of Oppositional Loyalty” from the Journal of Marketing inspected these communities oriented around one brand. In the opening section of the article they explicitly stated that “membership and participation in a brand community have been found to engender a sense of loyalty among members” (Thompson 65).
The article also suggested that these communities not only enabled positive brand loyalty, but they also generated negative oppositional loyalty. Such deep personal commitment “leads members of the community to take an adversarial view of competing brands” while discouraging the use of competing products (Thompson 65). Clearly, such evangelism for a product or brand is invaluable to a company because it has the capacity to tangibly affect sales. Authorship by Maja Kalauz also supported this notion. Consequently, establishing brand communities is extremely valuable for the business, and it is their initiative to ensure that it is valuable for the consumer as well.
The pronounced influence of consumers who share strong associations with a given brand also works through deterring other brands from potentially entering that market. Indeed, as brands develop communities of followers that strongly adhere to brand loyalty, potential competitors, are more inclined to shy away (Thompson 65). This pronounced influence of brand communities implies that brand loyalty is a significant aspect of consumer behavior that companies take into account when exploring new market opportunities. Brand loyalty also fosters a sense of less risk because their inclusiveness into a group that shares their beliefs is a form of validation. This validation within a social group suffices in lowering the perceived risk because the community as a whole is practicing it.
The community aspect of branding
Though a brand may seek to create communities on the consumer’s behalf, the consumer will frequently create their own. One example is motorcyclists who buy bikes from the same brand, say Harley Davidson, and ride together, forming a brand community. The community will favor their brand of motorcycle over all others, and it is likely that they would remain loyal to Harley Davidson. They might also come to perceive other brands of motorcycle as a risk because they do not have the same communal, established confidence in those competitors.
In other cases, the company itself will attempt to propagate a brand community. Facebook provides an interesting and complex example of that attempt. Facebook is essentially one large brand community. Though the consumer does not pay for the company’s uses, and may not view it as a brand, Facebook has branded itself as the prototype in social media. Competitors are often squeezed out of a burgeoning market because the Facebook brand provides the largest community, and therefore instills the most confidence in the consumer, who will become more averse to competitors.
Social implications are extremely relevant to a discussion of consumer behavior. The West is already firmly established as a consumer society, and other countries worldwide are following in suit. Perhaps there is even a mass cultural movement towards consumerism. Economic circumstances are certainly not to be ignored; however, they apply more to risk aversion than they do brand loyalty, while social conditions implicate both. Surely, the economic foundations of risk aversion and decision making based on notions of basic economics do not apply (Chapman et al). Instead, brand loyalty can be used to establish individuality, as well as to form consumer communities. In both cases, the consumer consciously or subconsciously attempts to reduce perceived risks through consistency and commitment.
Cultural frameworks and brand loyalty
Brand loyalty also operates as a cultural framework whereby consumers feel much more comfortable with using a single brand for long periods of time. Individualism/collectivism is one of Geert Hofstede’s six axioms with regard to cultural dimensions of nations. Though Hofstede refers to general social structures, it can be related to consumer behavior because consumer behavior also operates on both levels. On one hand, consumers use brand loyalties to establish an individual social identity, and on the other hand, they form collective units to strengthen those loyalties, and alleviate risk aversion.
Uncertainty avoidance, another one of Hofstede’s six dimensions, relates the degree to which nations avoid uncertainty and ambiguity. When analyzing consumer behavior, it is important to consider how and why consumers take more or less risks. Brand loyalty is in many ways an attempt to alleviate risk, and a consumer loyal to one brand may be uncomfortable with uncertainty surrounding that product, and therefore makes a singular brand choice and sticks with it (Hofstede). This surely reflects the cultural means in which individuals make lifelong decisions for using certain products and services.
“Brand Signals: A Cross-Country Validation Study” from the Journal of Marketing uses Hofstede’s theory of cultural dimensions in order to better understand consumer behaviors such as brand loyalty and risk aversion. By referring to Hofstede, the article was able to contextualize its cross-cultural examination of brands, and their sway on consumer decisions. They pointed out that, “previous work using information economics framework to explain brand credibility and brand equity focuses only on the Unites States” (Erdem 34). Any examination expanding beyond those borders is relatively new, and there are less articles and scholars regarding consumer behavior in newer economies that are beginning to follow the States’ consumer structure.
Despite scholars’ general interest in this facet of cross-cultural consumerism, “relatively little work examines the use of signals or extrinsic cues to judge quality across countries and/or cultures” (Erdem 34). Consequently, international brands have to rely on pre-existing theories in order to evaluate the potential brand loyalty and risk aversion of a new customer base. The access to global data with respect to market research and online behavioral patterns also validates the notion that pre-existing patterns can serve as forms of actionable insight into how a new market will potentially respond.
Marketing perspectives on brand loyalty and risk aversion
Brands are deeply concerned with the loyalty of their customers. What can they do to generate and maintain brand loyalty amongst consumers? How is this achieved? Can widespread brand loyalty allow a brand to survive and even flourish in when confronted by obstacles? Marketers must ask these questions if they desire to use tendencies in consumer behavior to their competitive advantage. Studies have provided a few different approaches to establishing a solid base of loyal consumers.
In an article titled “Win the Brand Relevance Battle and then Build Competitor Barriers” from the California Management Review suggests that one path to brand loyalty, competitive preference, is ultimately futile. “Competitive preference” is the process of selecting one feature of a product, and making sure the brand excels against the competition in that one area. The author, David Aaker, used cars as a brief example:
Winning the brand preference competition for the Cadillac brand, involves making sure that Cadillac is preferred to Lexus and BMW. That usually means being superior in at least one of the dimensions defining the category or subcategory and being at least as good as competitors in the rest (43-44).
Surely, excellence within one specific sphere of a product is essential in differentiating itself from other competitors. Moreover, in the case of SUVs it could be anything from horsepower to fuel efficiency, second-row legroom, etc. However, according to Aaker, this method is generally ineffective because the customer is not always willing to do the due diligence and separate specific distinctions between similar products, even if integral differences exist. Brand loyalty is rarely propagated by a small selective feature, and the consumer is not likely to commit to Cadillac vs. BMW based on the fact that one has more legroom or fuel efficiency than the other. Instead, as suggested in the “Social Implications” section of this paper, the brand should focus on the consumer desire for social identity though material possessions. Hence, it would be more effective to create a persona that consumers can positively identify with such as Mac did in the advertisements mentioned earlier.
Aaker made this point clear in a section called “Brand Relevance Competition,” in which he argued that brands must establish themselves by focusing on facets of the product that are critical to the quality. “The defining ‘must haves,’” Aaker writes, “can include characteristics such as personality, organizational values, social programs, self-expressive benefits, or community benefits” (Aaker 44). Here, the author explicitly pointed out the social constructs that affect consumer behavior. “Personality,” “self-expressive benefits,” and “community benefits” are particularly relevant to earlier discussions of consumer behavior in relation to brand loyalty. Aaker asserted that brands should pay attention to those social components of consumer behavior in order to successfully attract brand loyalty.
Doing so is a sort of risk aversion for the brands themselves. Economic perspectives on the consumer behaviors of risk aversion demonstrate that it is a two-way street, in which markets and consumers affect each other’s willingness to take risks. Social perspectives allow market researchers to understand the causes of brand loyalty, and they can sometimes be applied across demographics and countries. Cultural considerations suggest that brand loyalty and risk aversion will vary among consumers in different cultural contexts. Because this is perhaps the least known field of consumer behavior, marketers can look to Hofstede’s cultural dimensions in order to understand national responses to notions like individualism/collectivism and uncertainty avoidance. For example, a market analyst might suggest that a brand looking to expand in a country where individualism is more valuable than collectivism should focus their efforts on associating their brand with positive social identities. Taken together, economic, social, and cultural circumstances shape managerial approaches to predicting, creating, and maintaining brand loyalty, and reducing the consumers’ perceived risk towards the brand.
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