Listening To Your Customers – Not For Luxuries

I do not understand luxury products and services but I understand the market and consumer behavior. In the spectrum of consumption, these fall in the hedonistic end and are more of conspicuous consumptions.  Do the rules of marketing – segmentation, market research, customer preference, willingness to pay. etc – apply to marketing luxuries?  No says Jean-Noel Kapferer and Vincent Bastien, co-authors of  “Luxury Strategy – Break the Rules of Marketing to Build Luxury Brands”  in their article in Financial Times.

Listening to the consumer is the best route to a lack of differentiation, and failure to inspire the dream – the two levers of desire that are the only paths out of the recession in the luxury world.

The SUV In The Driveway

Is that SUV with leather seats and separate front and rear climate control utilitarian, hedonistic or conspicuous? How about when it is parked in a off road trail leading up to hiking trails, when parked in a local mall parking lot, or when parked in your driveway?

This month’s (June) Harvard Business Review has a short piece by Dan Ariely and Michael Norton on conceptual consumption that says,

Conceptual consumption strongly influences physical consumption. Keeping up with the Joneses is an obvious
example. The SUV in the driveway is only partly about the need for transport; the concept consumed is status

As our conceptual consumption shifts from purely utilitarian to hedonistic, so does the price we expect to pay and willingly pay for the products. In the book Richistan,  Robert Frank describes pricing the luxuries for the  “Richistan” segment  as “pushing an open door – no pressure”. This is seen in the data of the prices of SUVs. For example, a VW Touareg is a luxury SUV and is priced more than a same sized Honda Pilot. But a more stark contrast is the price differential between   a Prosche Cayenne, which is built on the same assembly line as Touareg and has almost identical parts,  and Touareg.  While the Touareg could be called hedonistic, the Cayenne falls into conspicuous end of the consumption spectrum and hence provides the marketer with more freedom in pricing them.

The question is can we tease out consumer’s willingness to pay for the hedonistic and conspicuous parts of their consumption?

Do we know value when we see it?

In past few articles I wrote about the price consumers pay and the price marketers get to charge. Those explanations depended on the value consumers get from buying the product. In B2B segments and in some  utilitarian product categories (like a light bulb) it is fairly easy to calculate economic value to the consumers.  But how can a marketer find the value added for the rest of the products? Do the consumers even know the value they get? I would like to remind you here that there is no magic value reader that is available.

I was looking at a JCPenney survey that asked, “Did you get value from your purchase?”. If customers do not know the value how can they answer this? Even if they did, this question does not help find what that value was.

There is one advanced analytical method, it is called by an esoteric and not so relevant name – conjoint analysis. Stated in simple terms the method is about

1. Consumers do not know the absolute value of products they buy but we can deduce that from their preferences and likelihood of purchase. Instead of asking  consumes for how much they value ask them about how likely are they to purchase a given product on a scale of 1 to 100. This is called “Utility” in conjoint analysis. Note that the use of the term Utility does not imply that the product is  utilitarian.
2. Any product can be modeled as a sum of its components, not just utilitarian features (like price and screen size of a TV) but hedonistic features like 1080 dpi and conspicuous features like diamond studded TV. The price should always be a component in your modeling.
3. Show consumes a series of products with different feature set and ask for their rating. From these ratings we can deduce not only the  utility values  of different products but also the relative weights they assign to the components.

This explanation barely scratches the surface, you can find more information on this in a SlideShare presentation I published.  The net is that there are analytical methods that can be employed to get consumers to reveal the values and what components go into that value equation.

With this setup and my previous classification of consumption I will try to model consumer behavior with respect to  utilitarian, hedonistic and conspicuous consumptions and the shift in consumer buying patterns from luxury product categories to “premium” or  utilitarian categories.

Spectrum Of Consumption

As part of my series on consumption and consumer behavior, here is a classification of our consumptions.

1. Utilitarian –  Consumption that is all about serving a purpose
2. Hedonistic – Consumption that has a pleasure component.
3. Conspicuous  – Consumption we do so others can see it, keeping up with Joneses

I make the following claims with the picture below:

1. Some hedonistic consumption have utilitarian component to them
2. Conspicuous consumption fall on the far hedonistic end of the spectrum
3. All conspicuous consumptions are hedonistic with no utilitarian component

Now that we have this classification, next we will look at how we value the products we buy and how this has changed with the economy.