TRACKING THE ELUSIVE CONSUMER

By JOHN JULLENS and GREGOR HARTER

From Strategy+Business (www.strategy-business.com)

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 sale, ultimately determine the success or failure of virtually any business venture.

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-ins 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.

In 2007, Booz & Company applied consumer choice modeling to identify and measure the drivers of demand for mobile phones. Booz & Company surveyed more than 1,800 consumers in the U.S. by simulating the mobile phone purchasing process and asking people to compare their existing package with alternatives.

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. 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.

The consumer choice model revealed that owners of handsets made by Sony Ericsson Mobile Communications AB, which tend to be highly designed, full-featured products, care much more than Nokia users about functionality, usage range and purchase location. And although these customers, too, are price conscious, they're willing to pay a premium to have their preferences met. A service provider could use these findings to target Sony Ericsson owners with a slightly less expensive offering that in all other ways matches their current package.

Consumer choice modeling also has the ability to predict the impact of future products and services on the market. To illustrate this, Booz & Company used the data collected from the mobile industry surveys to simulate the characteristics of "the ideal high-end phone" as consumers viewed it. From this, the survey gleaned that three primary factors -- feature, design and brand -- are of paramount value to consumers considering a higher-priced model. These factors, of course, were exactly what Apple focused on in developing its blockbuster iPhone, launched in July 2007.

Significantly, as the model predicted, Apple stumbled when it came to price, which the survey showed matters at all levels of cell phone purchases. At a price point of $599 for an 8-gigabyte phone, the research forecasted that Apple would have difficulty reaching a significant portion of the high-end market. But the same research suggested that performance would improve quickly as soon as Apple cut prices. In fact, that is precisely what happened: In September 2007, Apple discounted the phone by $200, and sales rose well over 1,000 percent in the succeeding quarter from sales in the prior three-month period. And in June 2008, CEO Steve Jobs announced a much faster 8-gigabyte iPhone -- using AT&T's state-of-the-art 3G network -- for only $199, a move that further aligned Apple's pricing with that of its peers and that will almost certainly improve the product's market share.

A perfect research topic for consumer choice modeling would be hybrid-electric vehicles, which have tripled in sales since 2004, though on an admittedly small base. These cars are attractive to consumers put off by higher gasoline prices because they offer improved fuel economy and, since they use the electrical power of the vehicle's cordless battery when they can, because they do not require a new recharging infrastructure. These obvious benefits notwithstanding, sales of hybrids have also risen because of government tax incentives.

But hybrids are not the only possible response to environmental concerns and high gas prices. Advances in diesel and biofuel technology suggest that there may be more palatable choices to power the traditional automobile engine in the near future. Meanwhile, all-electric and hydrogen-powered vehicles are also in development and show some early promise. A great deal will depend on future environmental and tax policies, but at present, auto companies can focus on one factor they can understand and address: consumer demand. What do consumers really want, as opposed to what they say they want?

Each consumer makes his or her car purchase decision by simultaneously weighing diverse criteria, including brand, cost, performance, fuel economy, comfort, styling, service, environmental friendliness and more. But if you asked individuals how they weigh these criteria they would be hard-pressed to articulate their decision-making process.

A consumer choice modeling project focused on hybrids would offer people different vehicle options and allow them to think like car buyers as they compared their typical car preferences with various hybrid possibilities. This study would focus on the reasons individuals make specific tradeoffs among various options, such as fuel usage, CO2 emissions, battery range, performance, vehicle design and price. With this data, auto companies could then deduce whether various consumer segments really want an environmentally responsible car, what features they are looking for and, most important, how much they would be willing to pay.

The efficacy of consumer choice modeling is that it allows manufacturers to isolate and identify customer preferences among an array of realistic product offerings without having to ask the open-ended question, "What do you want?"

Consumer choice modeling is ideally suited for analysis of the most complex consumer decision processes and it yields valuable insights for demand-driven strategy development by providing customer value segmentation maps, measuring market share impact of new product-service combinations, and assessing overall brand equity. Perhaps most important, choice modeling can reveal salient differences between managers' beliefs about customers' needs and preferences and customers' actual needs and preferences.

John Jullens is a principal with Booz & Company in Cleveland. Gregor Harter is a partner with Booz & Company based in Munich