Models that Measure Customer Demand

I ran with my friends a small juice cafe in university. Unlike many Pakistani businesses which think about customer demand and all of it after spending millions, we searched for ways to determine, in fact, accurately measure consumer demand, elasticity of demand (i.e., effect of price change on customer demand of our products), quantity consumers would like to consume, product choice, prices, etc. We did that by giving samples to our faculty who we were not our customers actually (sounds funny isn't it!). Our customers were (poor) BSc/BA students only, for whom cost is a major factor, for they come to this university (confirmed from university surveys).

So we used widely used survey thing, without carrying out any reliability and confidence test. What our survey proved was that people on campus are addicted to cheap (& nasty) food. Not many care about the quality which has caused yours truly food poisoning for couple of time. And, that not many would love to pay more than Rs. 50 as regular customers. Because juices were different and each juice had 4-6 fruit or fruit juice(s) as inputs, it justified high prices of Rs. 70-80 per 450 ml glass. I visited Dunkin Donuts in Lahore, and they sell smoothie at Rs. 150. What can you do about ingratitude ! :P (Nah, I'm joking.)

The survey prediction came true. Sales fell as we moved forward. We ran out of friends. Repeatedly, our customers told us, often instructing us, to cut down prices. Unfortunately, we couldn't continue with low prices due to excessive end-semester workload, and had to close the beloved cafe. It has disappointed many, and if i get permission next semester, I'd definitely do it, primarily for my own self, I'm sick of low quality items sold. This experience is shared by many, hence I believe I can create value. Again, I need to research again, and that's were Marketing Models of Consumer Demand, a research paper Chicago & Stanford professor kicks in. It does just the thing.

Here's the abstract of the paper, and you can download its pdf from here.

Marketing researchers have used models of consumer demand to forecast future sales; to describe and test theories of consumer behavior; and to measure the response to marketing interventions. The basic framework typically starts from microfoundations of expected utility theory to obtain a statistical system that describes consumers’ choices over available options, and to thus characterize product demand. The basic model has been augmented significantly to account for quantity choice decisions; to accommodate purchases of several products on a single purchase occasion (multiple discreteness and multi-category purchases); and to allow for asymmetric switching between brands across different price tiers. These extensions have enabled researchers to bring the analysis to bear on several related marketing phenomena of interest.

This paper has three main objectives. The first objective is to articulate the main goals of demand analysis - forecasting, measurement and testing - and to highlight the desiderata associated with these goals. Our second objective is describe the main building blocks of individual-level demand models. We discuss approaches built on direct and indirect utility specifications of demand systems, and review extensions that have appeared in the marketing literature. The third objective is to explore interesting emerging directions in demand analysis including considering demand-side dynamics; combining purchase data with primary information; and using semiparametric and nonparametric approaches. We hope researchers new to this literature will take away a broader perspective on these models and see potential for new directions in future research."

Pradeep K. Chintagunta
University of Chicago

Harikesh Nair
Stanford University - Graduate School of Business

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