Forgoing ownership in exchange: Customer choice and Service-Dominant Logic Sam H. Riethmuller, Australian National University, [email protected]
Gary J. Buttriss, Australian National University, [email protected]
Abstract
Service Dominant Logic proposes that all exchange is the exchange of service and that products are simply mechanisms for service provision. A major implication is that the
transfer of ownership may not be necessary, nor desired by consumers. Nonownership models have the potential to contribute to ecological sustainability. The proposed study explores the impact that nonownership has on customer preference in the household solar market. Choice-based Conjoint analysis will explore the trade-offs that customers make when selecting between ownership and nonownership offers. This study will contribute to the understanding of nonownership models of exchange, offering a market-driven approach to the development of sustainable business models.
Keywords: Sustainable business models, nonownership, service-dominant logic, conjoint analysis, consumption
Forgoing ownership in exchange: Customer choice and Service-Dominant Logic
Introduction
A major assumption of the traditional goods-dominant logic of marketing is that the transfer of ownership from sellers to buyers is an implicit part of exchange. This notion is grounded in Adam Smith’s exploration of how nations can increase their wealth through the trade of commodities (Vargo and Morgan, 2005). Marketing theory, which emerged from economics, has focused primarily on a linear model of exchange whereby “buyers become aware of, try, buy, use, dispose of, and then rebuy goods and services" (Durgee and O'Connor, 1995: 90). In practice, nonownership models have seen widespread adoption, with the leasing or renting of formal-wear, clothing, handbags, home-appliances, art and decor, furniture, automobiles, limousines, electronics, computers, software, stereos, DVDs, tools and jewellery (Forster, 1997; Jesse, 1998; Green, 1999; McWilliams, 1997; Johnson, Christensen and Kagermann, 2008).
Moving from products to services offers the potential of dematerialising the economy and overcoming resource shortages and environmental degradation (Hawkens, 1993; Daly, 1996; Lovins, Lovins and Hawkens, 1999; McDonough and Braungart, 2002; Mont, 2002). Shifting to a business model based on service provision rather than selling products and by retaining the ownership of the physical good through leasing or renting, may enable firms to better manage their resource flows within closed-loop cycles, where inputs and outputs are recycled and reused rather than extracted and discarded (McDonough and Braungart, 2002). In effect, a firm can decouple its ability to meet the needs of customers, and thus its economic
development, from the flow of natural resources and the impact on natural systems.
For example, Xerox moved from selling photocopiers and other office equipment to providing ‘document management solutions’ (Rothenberg, 2007). Adopting this model shifts their focus from selling resource intensive equipment to increasing the office efficiency of its clients, and while this strategy has resulted in an absolute reduction in the number of copiers and other equipment that Xerox may sell, its overall performance has improved by
establishing stronger long-term relationships with its clients, by shifting over 22% of its revenue to consulting services. Similarly, Interface Carpets shifted from manufacturing and selling carpets to leasing module floor coverings (Lovins, Lovins and Hawkens, 1999). By retaining ownership of the physical good, Interface has an incentive to maximise resource efficiency, as well as implement recycling to maximise its return-on-assets. Interface also has the potential to develop long-term relationships with it customers, enhancing the service it offers by continually replacing worn tiles with minimal disruption.
Previous research into nonownership models has predominantly examined cases in business-to-business markets. The focus has been on outlining the benefits to firms through costs-savings, reducing resource risks, better managing cash-flows, opening up new markets or building closer relationships with customers (Mont, 2002; Tukker, 2004); the benefits to the environment through decoupling resource usage and waste from economic development (Lovins, Lovins and Hawkens, 1999; McDonough and Braungart, 2002); or the change process for shifting to such a model (Rothenberg, 2007). Aside from anecdotal evidence and a limited number of studies exploring consumer attitudes (eg Schrader, 1999), there is little understanding of how consumers view nonownership models, and more importantly, how they are evaluated in the face of competing offers and how this effects decision-making
behaviour. Without an understanding of how nonownership models are evaluated and preferred by consumers, they will struggle to perform in the marketplace, and thus fail to deliver organisational or environmental benefits.
The proposed study will explore consumer behaviour in the context of nonownership. It addresses two questions, firstly are consumers prepared to forgo ownership when selecting between ownership-based and nonownership based alternatives? and secondly what tradeoffs do decision makers make in making such a decision? The following section reviews the literature, followed by a brief overview of the context of the study and the methodology to be used. The final section outlines the implications of the study.
Literature review
Markets and marketing are predicated on the concept of exchange and interaction, where two or more actors each transfer something of value to the other in order to satisfy their own needs and wants (Bagozzi, 1978). For a single exchange to evolve into a relationship that is
sustainable over time, it must improve the outcome for both actors (Houston and Gassenheimer, 1987). In a competitive market customers make choices based on the
perceived value (or utility) of one offer compared with what they perceive to be the value of competing offers (Woodruff, 1997).
The traditional goods-dominant logic of marketing takes the view that value is independent of the customer, instead embedded in a product through the production process (Vargo and Morgan, 2005). A firm will then sell the product to the customer in exchange for a certain monetary value, and this objective price paid by the consumer at the point of transaction is the exchange value of the offer. While this exchange value is crucial in ensuring that the firm registers a profitable exchange, it reveals little about how offers are evaluated, preferences are formed and alternatives are ultimately selected. In contrast, use-value, or value-in-use, refers to the “specific qualities of the product perceived by customers in relation to their needs” (Bowman and Ambrosini, 2000: 2). This view explores value from the perspective of the customer, recognising that it is a perception influenced by the characteristics of the individual and their needs.
The Service-Dominant Logic (SDL) of marketing extends the concept of value-in-use arguing that the traditional goods-dominant logic of marketing is incomplete and that marketing is evolving to a new paradigm (Vargo and Lusch, 2004a). Under goods-dominant logic, products and services are seen as distinctly different, distinguished by the features of intangibility, heterogeneity, inseparability and perishability. However this dichotomy is flawed (Lovelock and Gummesson, 2004; Vargo and Lusch, 2004b). Such a distinction fails to recognise that from the perspective of the customer, all market offers are desired and selected for their ability to meet certain needs or provide certain benefits, regardless of how they are labelled by the provider.
Penrose (1959:24-25) contends that “it is never resources themselves that are the ‘inputs’ to the production process, but only the services that the resources can render.” Furthermore, Kotler (1977:8) observes that the “importance of physical products lies not so much in owning them as in obtaining the services they render” and suggests for example, that consumers do not want to buy drill bits, but instead want to buy a ‘ quarter-inch hole’ – or more correctly, the means to hang a picture, or whatever benefit it is that they seek.
buy offerings which render service, which create value”. Under this view, the emphasis is shifted away from making and selling products to sensing and responding to what the customer actually needs and wants (Haeckel, 1999).
The primary thesis of SDL is that all exchange is an exchange of service, and that physical products are simply appliances of service provision. Vargo and Lusch (2004a: 4) distinguish the use of the word ‘services’ – which is a remnant of the goods-dominant logic, and
‘service,’ which they define as “the application of specialized competences (knowledge and skills) through deeds, processes, and performances for the benefit of another entity or the entity itself.”
The view that tangible goods are simply applications for service provision has significant implications for the marketing view of ownership. Levitt (1960) asserts that firms may become myopic when they focus solely on making and selling a particular product. Adopting a SDL may allow a firm to reconceptualise their business model away from selling products to enhancing service-flows. Vargo and Lusch (2004a: 13) contend that firms may be able to “find opportunities to retain ownership of goods and simply charge a user fee.” Lovelock and Gummesson (2004:34) argue that “marketing transactions that do not involve a transfer of ownership are distinctly different from those that do” and that there is a significant need to explore nonownership models of exchange. Obenberger and Brown (1976: 86) note that “the concepts of ‘buying’ and ‘selling’ should be broadened to encompass the ‘usership’
alternative to transfer-of-title acquisitions” (p86). The provider focuses on offering and delivering benefits through service-provision, and any physical good may be leased, rented, shared between a group of consumers or sold, depending on the needs and preferences of the customer.
In response to SDL, Brown (2007: 297) defends the importance of goods on the grounds that ‘things’ are still purchased for their ‘delicious physicality.’ Similarly, Venkatesh, Penaloza and Firat (2006) argue that the ownership and consumption of goods and services can allow individuals to realize their identity and social position. Some customers may wish to pass the ownership of heirlooms across generations (Richins, 1994); and some may want to own a product such as a car so that they are free to modify and adapt it as they desire. Each of these may be benefits of ownership, however they support, rather than refute, SDL, as in each case, they are intangible benefits. Rather than value being embedded in the physical good, instead it is co-created with the needs, meanings, perceptions, memories and actions of the consumer.
Benefits of nonownership models
Ambler (2006: 291) argues that “the buy or rent alternative is not fundamentally important for the marketing of goods…[it] is an incidental financial or operational matter, subsidiary to the marketing of the product itself and to the relationship between the manufacturer and the customer.” However, while nonownership models of exchange may not be appropriate, nor preferable, in all situations, the benefits of such models are not limited to financial.
Berry and Maricle (1973) argue that the increasing pace-of-life and the rate of innovation in technology advances the idea of consumption without ownership in consumer markets. Toffler (1970: 58) reflects that “people want the advantages of affluence and the latest that technology has to offer, but not the responsibility that has until now accompanied the accumulation of resources.” Similarly, Obenberger and Brown (1976) question whether or not consumers prefer outright ownership or only generally follow this course of action
questioning the ownership assumption that pervades marketing thought" and that "the concept of ‘flow-of-title’ should be reconstructed to reflect the notion that title transfers to the
consumer are neither necessary, nor particularly desirable in the view of many” (Obenberger and Brown, 1976: p86)
Durgee and O'Connor (1995) distinguish between ‘terminal’ materialism, where possessing the good is an end unto itself; and ‘instrumental’ materialism where it is the function derived from the good that is the key source of benefit to the customer. More recently, Trocchia and Beatty (2003) explore consumer responses to nonownership models, specifically in the
context of automobile leasing. They conclude that personal ownership is no longer associated with the social status it once was and that consumers are benefit-seeking rather than
ownership-seeking.
Early work into leasing models, particularly in industrial markets suggested that a key motivation for adoption was economic, as such models do not require the same upfront investment as outright purchase. Durgee and O'Connor (1995:90) make a similar argument for consumer markets, with nonownership allowing customers to “experience the best the material world has to offer based on their monthly cash flow rather than on their net worth.” However, while the upfront cost is less than for outright ownership, consumers are often willing to pay more over the long term for immediate access and gratification from the offer (Durgee and O'Connor (1995).
From the customer’s perspective, leasing transfers the responsibility of maintenance, logistics and repair onto the vendor reducing the perceived risk of the exchange (Obenberger and Brown, 1976). Nonownership models may also reduce the evaluative and psychological burden on customers. The perceived risk from making the wrong choice, of selecting an out-of-date style, or adopting a soon-to-be obsolete technology are all reduced in nonownership exchanges, leading to less pressure in decision-making and as a result less post-purchase dissonance (Durgee and O'Connor 1995; Obenberger and Brown 1976). Nonownership models may allow customers to access a greater variety of offers, as well as the ability to upgrade more regularly to better technology (Trocchia and Beatty, 2003).
Both ownership and nonownership may provide benefits to consumers. For some, ownership offers security, certainty, continuity and freedom; for others it is burdensome, restrictive and static. In some situations, nonownership provides access to greater and more benefits than they would otherwise; in others it may reduce the intangible benefits experienced by the customer.
In either case, the physical product remains incidental. The value that a customer experiences – that they co-create – comes from an offer’s ability to service their needs. As with any choice, when faced with the decision between an ownership and a nonownership offer, the decision maker evaluates the benefits and sacrifices, and through making trade-offs, choose the option that they anticipate will best meet their needs. This study explores these trade-offs.
Method
The Household Solar market offers the potential to explore nonownership models (Tukker and Tischner, 2006). Firstly, solar systems can have high upfront costs, and although this has been offset in recent years through government rebates, the recent end to the rebate may stifle future industry growth. Secondly, the market still perceives renewable technology to be
somewhat unreliable (Faiers and Neame, 2006). Thirdly, solar systems have a long life cycle, which may further delay the purchase until the technology improves. Fourthly, industry growth is dependent on rapid diffusion to achieve economies of scale in production and distribution. These economic and technological barriers suggest that nonownership models may offer an important direction for the solar industry, and thus provides an appropriate context for this study.
This study will utilise Choice-based Conjoint Analysis (CBC). CBC involves an experiment where respondents are presented with a series of alternative offers comprising multiple attributes and requires them to make a choice from the stimuli presented. This methodology assumes that that the probability of an individual selecting a particular alternative is
dependent on the utility that they assign to that alternative relative to the utilities of the other alternatives in a choice set (McFadden, 1973; 1986). Using an appropriate experimental design, the attribute levels are varied across scenarios, allowing for the observation of trade-offs made by the decision maker.
Each choice scenario will contain four alternatives – the choice to buy a solar system; to lease a solar system; to receive energy saving advice; or to choose none of the above and remain with their current energy provider. Each of these alternatives allows the consumer to change their energy consumption, reduce their greenhouse emissions and save money off their energy bill. The task will explore the tradeoffs that consumers make when choosing between
ownership and nonownership offers. The sample will consist of approximately 100 respondents, recruited through mall-intercept. Each respondent will be presented with 12 choice scenarios.
Implications
The proposed study makes a number of contributions to theory and practice. It addresses a significant gap between marketing theory and real-world practice. Firms are increasingly utilising nonownership models to better meet the needs of customers, yet marketing theory still retains the perspective that exchange requires a transfer ownership. This research applies SDL to explore if nonownership models are not only accepted by customers, but in some cases may be the preferred alternative. This study will contribute to the understanding of nonownership, and how it effects customer preference and choice. Finally, this research builds on the current research into sustainable business models. While previous studies have taken an internal-perspective that focuses on the benefits and changes to the firm, this
research takes a market-driven approach, where the that the success of any model, sustainable or otherwise, depends on the ability to create superior value in the market. In taking this approach, this research will better position marketing as a key driver in both corporate and ecological sustainability.
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