Implications of Consumer Behavior for Patek Philippe PDF

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Patek Philippe Watches Consumer behavior - Term paper Jan Buza Annina Luterbacher Pascal Sennhauser 18 December 2012 Lecturer: Håvard Hansen NHH – Norwegian School of Economics Content   1.  Introduction  ..................................................................................................

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Implications of Consumer Behavior for Patek Philippe Jano Buza

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Patek Philippe Watches Consumer behavior - Term paper

Jan Buza Annina Luterbacher Pascal Sennhauser

18 December 2012 Lecturer: Håvard Hansen NHH – Norwegian School of Economics

Content  1. Introduction ........................................................................................................................................ 2  2. Patek Philippe (1‐2p) ‐‐> J ................................................................................................................... 2  3. Market segmentation (5p) ‐‐> A ......................................................................................................... 2  3.1. Product characteristics ‐> 1 p. ..................................................................................................... 3  3.2. Market segmentation in general ‐> 2 p. ...................................................................................... 4  3.3. Patek Philippe’s target segment characteristics .......................................................................... 5  4. Expected motivation, ability and opportunity ‐> 2 p. ......................................................................... 7  5. High‐involvement learning and decision‐making ............................................................................... 9  5.1. Problem recognition and information search ........................................................................ 10  5.1.1. Problem recognition ........................................................................................................... 10  5.1.2. Internal information search ................................................................................................ 10  5.1.3. External information search ............................................................................................... 12  5.2. Judgment and decision-making based on high effort ........................................................... 13  6. Managerial implications (3p) ‐‐> J ..................................................................................................... 16  Communication strategy .................................................................................................................. 19  7. Conclusion (0.5‐1p) ‐‐> A .................................................................................................................. 21   

 

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1. Introduction Patek Philippe is a Swiss luxury watchmaker founded in 1839, making the company the oldest independent family-owned clock manufacturer of Geneva. Its watches are considered to be among the most sophisticated and precious worldwide (Patek Philippe, 2012d). Patek Philippe prouds itself to not only holding a multitude of patents but also having been awarded the Geneva Seal, a certificate only granted to watches which fulfil twelve hard to meet criteria and are thus of the highest horological distinction (Kessous & Roux, 2008). Patek Philippe watches are marketed as exclusive creations: demand far outweighs supply and customers sometimes have to wait for years for their orders to be fulfilled. They are even required to go through an application process before being accepted as customers, revealing personal information about their financial and educational background in the process. Given the rare nature and the high value of the watches, it comes as no surprise that the company refers to them not as consumer items, but rather as investments (Patek Philippe, 2012d). This paper strives to give managerial implications related to the communication and promotion of Patek Philippe watches. In order to achieve that, we describe the characteristics of Patek Philippe watches and the luxury watch segment the company operates in. This entails a segmentation of the luxury watch market. Furthermore, we discuss motivation, ability and opportunity of consumers of Patek Philippe watches. Subsequently, we discuss the theory of high and low involvement decision-making and the learning processes in the respective situations. The theoretical findings are then applied to customers of Patek Philippe watches. Based on the aforementioned parts, we derive managerial implications related to communication and promotion for marketers of the Patek Philippe brand.

2. Patek Philippe Patek Philippe is a famous watch producer based in Geneva, Switzerland. Founded in 1839 by Antoni Patek and François Czapek it is the first watch manufacturer that started production of wristwatches in 1868 (Jacobs, 2006). Two brothers, Charles and Jean Stern, purchased the company in 1932, and ever since then Patek Philippe remains a family-owned independent watch producer (Patek Philippe, 2012). The independence is becoming a rarity in this fast consolidating industry. Corporations such as LVMH or Financière Richemont are trying to

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acquire watch producers to their portfolios, which already include brands such as IWC (Richemont) or Tag Heuer (LVMH) (Studer, 2000). Patek Philippe currently employs around 1’300 people and produces 40’000 watches every year (significant increase from around 15’000 units produced yearly in mid 90’s) (KPMG, 2008). Although it does not disclose financial data, the average price multiplied by the number of watches produced results in approximately 840 million USD of revenues. Patek Philippe’s brand is not as well known, as Rolex or Breitling by general public, but it is considered to be even more exclusive by the people who know it. The company operates along with IWC and Piaget in the most expensive segment of the watch market. It is produced in much smaller quantities (Rolex produced around 600 – 700 thousand units annually in the 90’s with prices starting at 2100 USD apiece) (Barrett, 2000), and for higher average prices. On average the cost of one piece is above 21 000 USD and its most expensive watch (called Supercomplication) was sold for 11 million USD. The highest amount of money ever paid for the watch (Studer, 2000). Although it uses precious metals and stones for the products, they are not the primary reason for the premium price (Kessous & Roux, 2008). Its expertise makes it capable of producing extremely complicated watches (Jacobs, 2006). In the segment of premium watches Patek Philippe positions itself as a highly sophisticated brand with heritage. It emphasises its long history by featuring “since 1839” in its ads, in the overall design of its web and in its communications. Patek’s two main slogans used in its ads are “Begin your own tradition” and “You never actually own a Patek Philippe. You merely look after it for the next generation”, these are in line with the general branding strategy (Urde et al., 2007).

3. Market segmentation 3.1. Product characteristics Patek Philippe manufactures watches that are characterized by an understated, timeless style which contains of a harmonious combination of personality and discretion, elegance and an aristocratic touch. These watches are exclusive creations. The regular yearly production contains of over 200 models which are produced in small series between 10 and several hundred watches. Every Patek Philippe incorporates the knowledge and experience of generations since its foundation in 1839. The company has filed over 80 patents whereof 20 are major contributions to the history of horology. (Patek Philippe SA, 2012a) Furthermore, 3  

all of the mechanical movements manufactured by Patek Philippe are crafted according to the strict specifications of the Geneva seal (Patek Philippe SA, 2012a; Kessous & Roux, 2008). The rare timepieces crafted by Patek Philippe have their value. On average they are sold for around 21’000$ whereas exclusive complications as the Sky Moon Tourbillon cost around 950’000$ (Studer, 2000; Feth, 2012). While some watches consist of rather simplistic technical features others contain of 686 pieces and are masterpieces of complication with features such as a perpetual calendar etc. (Feth, 2012; Patek Philippe SA, 2012b) A purchase of a Patek Philippe is often related to an important emotional and personal event such as a marriage or the birth of a child. (Patek Philippe SA, 2012a) In order to acquire one of the finest timepieces crafted by Patek Philippe one has not only to pay a high price but to apply with personal information such as education, occupation, income, wealth etc. In the case of a positive decision of the management a delivery date is usually only vaguely defined. It is possible that a customer has to wait for several years for his acquisition. (Feth, 2012) However, the purchase of a Patek Philippe is not only an investment into the present but also the future. The timepieces usually gain value and are to be preserved for the next generation. Patek Philippe cooperates with a handpicked distribution network all over the world to provide appropriate service over generations. (Patek Philippe SA, 2012a) 3.2. Market segmentation in general Market segmentation is generally described as the process of splitting (potential) customers in a market into different, more homogenous segments. Customers within these segments share a similar level of interest in a comparable set of needs satisfied by a product. The process of market segmentation is creative and iterative and aims at satisfying customer needs more closely and by doing so generating sustainable competitive advantage for a company. (McDonald & Dunbar, 2004) The assumption underlying segmentation efforts is that customers who are grouped on the basis of similar needs and buying behaviour are likely to show a more or less homogenous reaction to marketing stimuli (Dibb, 1999). Thus, the segmentation of a market helps a company to select its target market and to design an appropriate marketing strategy that reaches the defined segment efficiently and economically (Tynan & Drayton, 1987). Segmenting the market has therefore always been one of the most important but challenging topics in marketing. Challenging because the choice of an appropriate base for segmentation is crucial but far from obvious and a company has many possible bases to choose from. (Dubois & Duquesne, 1993) 4  

In order to identify the applicable segmentation bases a company first has to analyse the profile of the total market and detect obvious segments and differences among them (Nagle, Hogan, & Zale, 2011). It should always consider all possible ways of segmentation and choose the applicable method on this basis. Hence, a market should be examined for decisive differences in buyer attitudes, usage patterns, values, motivations, aesthetic preferences and degree of susceptibility. (Yankelovich, 1964) Generally, a market can be segmented by geographic, demographic, psychological, psychographic and behavioural variables. A combination of two or more segmentation bases is more common than the use of only one. (Tynan & Drayton, 1987) Many authors further classified these different bases according to whether they are general (e.g. geographic) or product-specific (e.g. user status) and whether they are observable (e.g. geographic) or unobservable (e.g. values). (Wedel & Wagner, 2000) Most companies segment their markets in more than one stage and according to different bases. The primary segmentation is based on the most important base that separates customer groups. A secondary segmentation based on the second most important criterion further distincts the primary segments into subgroups. More sub-segments are conceivable. (McDonald & Dunbar, 2004; Nagle, Hogan, & Zale, 2011) However, market segmentation is only useful as long as it has a substantial influence on the effectiveness, efficiency and manageability of a firm’s marketing activity. The following six criteria have been described in order to determine the effectiveness and profitability of marketing strategies: identifiability, substantiality, accessibility, stability, responsiveness and actionability. (Wedel & Wagner, 2000; Tynan & Drayton, 1987) 3.3. Patek Philippe’s target segment characteristics There are many different possibilities to split the entire watch market into different segments. As a first base of segmentation we consider the price of a watch. The market can be roughly divided into four groups: low price watches, middle price watches, accessible luxury watches and exclusive luxury watches. We consider low price watches to range between 1 and 100$, middle price watches between 100 and 1’000$, accessible luxury watches between 1’000 and 7’000$ and exclusive luxury watches 7’000$ and more. Consumers that buy low price watches typically want watches that are reasonably reliable; however, they won’t be concerned about a good customer service for reparations (Yankelovich, 1964). Patek Philippe is established in the exclusive luxury segment with watches that cost more than 21’000$ on 5  

average (Studer, 2000). Well-known for low-price watches is Swatch, whereas manufacturers like Longines, Rado, Tag Heuer etc. are positioned in the accessible luxury segment. (Lattmann , Läuchli , & Reci, n.d.) A second differentiation criterion is the function of a watch. Some manufacturers primarily focus on an appealing design whereas others concentrate on technical features. Brands like Harry Winston, Chopard and Hermès for example attach high importance to an exclusive design while Patek Philippe focuses on a traditional rather unostentatious design but highly values technical/mechanical complications (e.g. the aforementioned reference 5002). This can be observed by comparing the following models (on the left: Patek Philippe (Patek Philippe SA, 2012c); on the right: Harry Winston (Harry Winston Inc., 2012)). (Lattmann, Läuchli, & Reci, n.d.)

The following graph shows a rough segmentation of the watch market that considers some representative watch makers from each segment (own illustration based on Lattmann, Läuchli, & Reci, n.d.).

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Some authors further highlight that the watch market is preferably segmented by the value criterion. The first segment as the low price segment focuses on a reasonable quality for a low price only. A second segment highly values good quality, nice design and good workmanship. The third segment however includes the emotional value of watches and the motivation/occasion of a purchase. Customers in this segment attach great importance to a well-known brand name, styling, good quality and meaningful emotional value. (Yankelovich, 1964) Patek Philippe mainly focuses on the third segment by emphasizing its heritage/tradition and the emotional bond between generations. (Patek Philippe SA, 2012a) Another possible segmentation approach would be geographical. Patek Philippe sells its watches all over the world but mainly in Europe. However, we consider a geographic segmentation not to be pivotal in its influence on a marketing mix. The target segment for Patek Philippe is thus characterised by customers that are willing to invest a lot of money and time in order to obtain a traditional, technically elaborated wrist watch with high emotional value.

4. Expected motivation, ability and opportunity A consumer’s behaviour is strongly influenced by the effort he devotes to his consumption behaviour and decisions. This effort is mainly determined by a consumer’s motivation, ability and opportunity to make decisions. (Hoyer & MacInnis, 2010) The motivation, opportunity and ability (MOA) framework is established in general consumer behaviour literature to explain a consumer’s processing of information regarding a product or service. The theory argues that a consumer with scarce cognitive resources will only process information about a product if he’s motivated, able and if he has the opportunity to do so. (Clark, Abela & Ambler, 2005) In order to ascertain a consumer’s motivation, ability and opportunity to process information about Patek Philippe’s timepieces we analyse possible determining factors. Motivation Motivation has generally been defined as an inner state of arousal towards the achievement of a goal. A motivated consumer is therefore ready and willing to make goal-directed efforts. (MacInnis, Moorman & Jaworski, 1991; Hoyer & MacInnis, 2010) A consumer’s motivation is affected by the personal relevance of information, the perceived risk and the inconsistency with his attitudes.

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Consumers conceive information about a product or a product to be personally relevant if it is consistent with their self-concept, values, needs, goals and emotions. A consumer in Patek Philippe’s target segment typically invests in a watch to make a subtle statement of status. By buying a Patek Philippe a consumer aims at communicating to be a connoisseur who highly values quality and tradition. Patek Philippe appeals to the target segment by offering products that are consistent with a consumer’s self-concept (connoisseur), values (quality and tradition), needs (social and egoistic needs such as acceptance and prestige), goals (investment in future generations and status statement) and emotions. Information about Patek Philippe and its products is therefore of high personal relevance to potential customers. (Hoyer & MacInnis, 2010) A consumer’s motivation is further affected by the perceived risk, thus the uncertainty about anticipated consequences of buying and using a product. A higher perceived risk leads to a more careful consideration and evaluation of information. The literature typically differentiates six types of risks. (Hoyer & MacInnis, 2010) Concerning the target segment of Patek Philippe two kind of risks are relevant – the financial and the time risk. Customers pay enormous amounts of money in order to obtain an exclusive wrist watch. Furthermore, some timepieces request a personal application. Customers that ordered a Patek Philippe usually have to wait up to several years until it will be delivered. This is due to a small production capacity. In addition, a watch from Patek Philippe will last over generations and is thus an investment into the future. (Feth, 2012) Hence, this acquisition requires a considerable time commitment. The financial and the time risk are thus considered to be rather high. (Hoyer & MacInnis, 2010) The third factor influencing a consumer’s motivation is the inconsistency of processed information with his attitudes. Moderate inconsistency with previously acquired knowledge and attitudes is considered to have a positive impact on motivation. In our opinion Patek Philippe generally reveals information that is consistent with the previous knowledge of potential customers. However, the advertisement that one never actually owns a Patek Philippe but merely looks after it for the next generation might be provokingly inconsistent with consumers’ former attitudes (general assumption that if you pay for something, you own it) (Urde et al., 2007). This then has a positive effect on the motivation. A potential customer’s motivation of processing information about Patek Philippe and its product is therefore considered to be high as it is personally relevant, the perceived financial

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and time risk is relatively high and it might be moderately inconsistent with some customers’ attitudes. (Hoyer & MacInnis, 2010) Ability Factors that influence a consumer’s ability to process information about a product and make acquisition decisions are knowledge, experience, cognitive style, the complexity of information, intelligence, education, age and money. (Hoyer & MacInnis, 2010) Patek Philippe’s target segment consists of consumers that generally have a good educational background, that are successful and wealthy. This is ensured through the application process for the most exclusive timepieces. (Feth, 2012) Furthermore, the processi...