What does the consumer want? Why do individuals prefer one product or service over another? And how, precisely, do most consumers make their purchasing decisions?
These questions, which have baffled marketers since the first mass-produced product was placed on a shelf for sale, ultimately determine the success or failure of virtually any business venture. And much to the chagrin of many corporate executives, consumer attitudes today are, if anything, harder to read than ever as people freely rummage through an abundance of choices for everything from ordering a cup of coffee to buying a mobile phone to choosing a retirement plan.
But there is help on the way for marketers. Recent work on the art and science of consumer behavior has refined, updated, and strengthened an analytical tool known as consumer choice modeling, initially developed in the 1960s by Daniel McFadden, a winner of the 2000 Nobel Prize in economics. Simply put, this model examines the personal reasons for individual choices and provides techniques researchers can use to measure and predict those choices. By exploring why individuals make specific trade-offs among various product options, consumer choice modeling can determine the features that people in different economic and demographic strata are looking for and how much they are willing to pay.
Originally, this technique suffered from a lack of sophistication. A typical implementation involved asking respondents to react to lengthy paper-and-pencil surveys offering a series of preconfigured and static product or service possibilities. Although some insight about consumer preferences was typically evinced, it was often shallow, limited by researchers’ inability to dynamically change the direction of the questioning on the basis of the responses. However, advances in experimental designs and information technology — including broadband Internet access, digital imaging, video, and faster computing speeds — now allow researchers to better approximate the shopping experience when asking questions by adjusting product choices in reaction to a person’s answers. By analyzing the responses from a representative sample of consumers (or potential future customers), researchers can produce econometric models that depict the relative weighting of specific product features and price points.
Early in 2007, Booz & Company applied consumer choice modeling to identify and measure the drivers of demand for mobile phones. One of the more fascinating conclusions of this study: Although Apple Inc.’s iPhone was still months away from release and its price tag would be higher than that of most other phones, the Booz & Company model correctly predicted that it would be the most attractive overall offering to consumers.
In all, Booz & Company surveyed more than 1,800 consumers in the United States by simulating the actual mobile phone purchasing process and asking people to compare their existing package — device and mobile service contract — with alternatives. For example, owners of low-cost Sharp handsets running on pay-as-you-go carriers such as Virgin Mobile or Boost Mobile were offered a US$100-plus Samsung phone with Nextel service and a $250-plus LG phone with Verizon’s network. Respondents were asked, “If these two packages were your only alternatives, which one would you choose: Samsung/Nextel, LG/ Verizon, or neither?” and “If Samsung/Nextel were your only option, would you purchase it or continue to use your current package?”
The majority of the low- end and midlevel consumers we analyzed were highly commodity driven. Other than by offering an attractive handset price, it is almost impossible to convince an individual to change his or her current mobile phone package. In fact, further analyses revealed that one-third of U.S. consumers are unwilling to change their wireless package, no matter how much the handset price is lowered. Such reluctance to switch is unusually high and shows that the wireless device and service industry has largely failed to provide attractive new products with features that consumers attach real value to — at least since Research in Motion Ltd., the maker of the BlackBerry, combined e-mail and voice in one machine in the 1990s.