Predicting Customer Choices

Vanishing mass markets, the proliferation of products and services and new technologies are requiring many companies to redefine their beloved core business doctrine: “Give customers what they want.” At the same time, in the best-selling book The Paradox of Choice, Schwartz (2004) suggests that every consumer decision, from buying a bottle of shampoo or ordering a cup of coffee to choosing a healthcare provider or setting up a retirement plan, is becoming increasingly complex thanks to the abundance of choices available. Much the same is true for customers in many business-to-business markets.

This dramatic explosion in options has ironically become a challenge for customers and businesses alike; Schwartz goes so far as to argue that fewer alternatives are better than many for the well-being of society. However, the underlying problem in predicting customer choices resides largely in the fact that many people make purchasing decisions on the basis of (potentially) many different criteria simultaneously (McFadden 1986), including brand, quality, performance, price, service, features, channel and so on.

Given resource constraints, it is virtually impossible for any firm to excel in all product aspects at once — that is, to provide the highest quality, fastest delivery and greatest variety at the lowest price. Firms must make trade-offs on the basis of what they do best, what their competitors are offering, and the criteria they think matter most to their customers (Verma, Plaschka and Louviere 2002). However, managers often struggle to determine the “best” configuration of product-service offerings that will appeal to their chosen target markets. To create, capture and maintain demand for their offerings, businesses have to balance three key challenges (Verma and Plaschka 2003).

Ambiguity — What do our customers really want? Companies lacking a clear understanding of customer choices often take a scattershot approach, hoping that at least one of their offerings will succeed. Unfortunately, thistype of approach is neither efficient nor profitable for most firms. Markets are frequently flooded with products and services that offer relatively little in the way of added value to customers and that weaken the seller’s bottom line.

Risk — Will our envisioned offerings be successful? Managers face complex choices when deciding which of their product-service bundles to offer. Potential product-service drivers (such as price or specific product-service features) can have several variants, and managers often use experience, benchmarking analysis or simply gut feelings to decide what will be attractive to customers.