Chapter 4

Techniques for
Understanding
Consumer
Demand and
Behavior

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Objectives
• To learn how both managers and economists use
marketing and other consumer data to analyze the
factors influencing demand for different products.
• To learn how managers work with marketing and
consumer research departments to profile and
understand a company’s customers and to try to
anticipate changes in consumer behavior.
• To learn more about different analytical methods used
by mangers to study and predict market behavior
 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Methods to Analyze Consumer Behavior

Approaches that marketing departments have
traditionally used to analyze consumer behavior include:
1. Expert opinion
2. Consumer surveys
3. Test marketing and price experiments
4. Analyses of census and other historical data
5. Unconventional methods
 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Expert Opinion
• Sales personnel or other experts, such as dealers,
distributors, suppliers, marketing consultants, and
members of trade associations, may be interviewed for
their expert opinion on consumer behavior.
• At least 10 experts from different functions and
hierarchical levels in the organization should be
involved with making an expert judgment on a
particular product.
 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Test Marketing and Price Experiments

• Test marketing and price experiments are particularly important for analyzing
consumer reaction to new products.
– Test marketing allows companies to study how consumers handle, use, and repurchase a product, and it
provides information on the potential size of the market.
• Sales-wave research, consumers who are initially offered the product at no cost are
then re-offered the product at different prices to determine their responses.
• Simulated test marketing involves selecting shoppers who are questioned about
brand familiarity, invited to screen commercials about well-known and new products,
and then given money to purchase both the new and the existing products.
• Full-scale test marketing usually occurs over a period of a few months to a year in a
number of cities and is accompanied by a complete advertising and promotion
campaign.
– Marketers must determine the number and types of cities for the testing and the type of information to
be collected.
– Information on consumer behavior in the test cities is gathered from store audits, consumer panels, and
buyer surveys.
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Techniques for Understanding Consumer Demand and Behavior

Test Marketing and Price Experiments

Price experiments to determine the effect of changes in prices may be
conducted in test market cities or in a laboratory setting.
• Direct mail catalogs can also be used for these experiments, as
prices can be varied in the catalogs shipped to different regions of
the country without a high level of consumer awareness.
• Although testing in a laboratory situation helps to control for other
factors influencing consumer behavior, the disadvantage of this
approach is that it is not a natural shopping environment, so
consumers may behave differently in the experimental
environment.
• Doing an experiment in an actual test market may be more realistic,
but it raises problems about controlling the influence on consumer
behavior of variables other than price
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Techniques for Understanding Consumer Demand and Behavior

Analysis of Census and Other Historical Data

• The most recent U.S. census is always a vital marketing tool,
given the development of targeted marketing.

• Targeted marketing: Selling that centers on defining different

market segments or groups of buyers for particular products
based on the demographic, psychological, and behavioral
characteristics of the individuals.
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Techniques for Understanding Consumer Demand and Behavior

Unconventional Methods
• In May 2001, Procter & Gamble announced plans to send video crews with
cameras into 80 households around the world to record the daily routines of
the occupants.
– The company anticipated that this approach would yield better and more useful data than
the consumer research methods discussed above because consumer behavior would be
directly observed in a household setting rather than in an experimental environment.

• Retailers have found that Western-style supermarkets with clean, wide aisles
and well-stocked shelves do not work well in India, particularly for lower-
middleclass shoppers who are more comfortable in tiny, cramped stores.
– One retailer, Pantaloon Retail (India) Ltd., spent $50,000 in a store to replace long, wide
aisles with narrow, crooked ones to make the store messier, noisier, and more cramped.
Products were clustered on low shelves and in bins because customers were used to
shopping from stalls and finding products such as wheat, rice, and lentils in open containers
that they could handle and inspect.
– Pantaloon Retail (India) Ltd. eventually became India’s largest retailer in 2007 with annual
sales of $875 million.
 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Consumer Demand and Behavior:

Economic Approaches
Simple Regression Analysis

EQUATION 4.1 Relationship Between One Dependent and One Independent Variable: Simple Regression
Analysis

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Consumer Demand and Behavior:

Economic Approaches

FIGURE 4.1 Hypothetical Demand for Oranges.

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

TABLE 4.1 Simple Regression Analysis Results

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Consumer Demand and Behavior:

Economic Approaches

The estimated value of the intercept term is 210.444, while the estimated
value of the price coefficient is –1.578. The demand relationship is shown
in Equation 4.2

EQUATION 4.2 Simple Regression Analysis

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Consumer Demand and Behavior:

Economic Approaches
• Both economists and managers are usually more interested in the price
elasticity of demand than in the absolute changes in quantity and price.
• Calculation of price elasticity at the average price (70 cents
per pound) and average quantity demanded at that price
(100 pounds)

EQUATION 4.3 Simple Regression Analysis

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Consumer Demand and Behavior:

Economic Approaches

FIGURE 4.2 Simple Regression Analysis Actual Versus Predicted Results

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Consumer Demand and Behavior:

Economic Approaches

EQUATION 4.4 Simple Regression Analysis

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Multiple regression analysis

EQUATION 4.5 Relationship Between One Dependent and Multiple Independent Variables: Multiple
Regression Analysis

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

TABLE 4.2 Multiple Regression Analysis Results

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Multiple regression analysis

• The constant term, a, shows the effect on quantity demanded

of other variables not included in the equation.
• The coefficients, b and c, show the effect on quantity
demanded of a unit change in each of the independent
variables.
• Each coefficient shows this effect while statistically holding
constant the effect of the other variable.

EQUATION 4.6 Relationship Between One Dependent and Multiple Independent Variables: Multiple
Regression Analysis

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

FIGURE 4.3 Multiple Regression Analysis, Fit of Price Variable

FIGURE 4.4 Multiple Regression Analysis, Fit of Advertising Variable

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

• The coefficients of the price and advertising variables in Equation 4.6 show
the change in quantity demanded resulting from a unit change in each of
these variables, all else held constant.
• Using the average values of price, quantity demanded, and advertising
expenditure, we calculate the price elasticity of demand in Equation 4.7 and
the advertising elasticity in Equation 4.8.

EQUATION 4.7, 4.8 Relationship Between One Dependent and Multiple Independent Variables: Multiple
Regression Analysis

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Other Functional Forms

It is often hypothesized that a multiplicative

nonlinear demand function of the form shown
in Equation 4.9 (where the variables are
defined as in Equation 4.5) better represents
individuals’ behavior.

• This function is called a log-linear.

• This function is also called a constant
elasticity demand function because the
elasticities are constant for all values of
the demand variables and are
FIGURE 4.5 Log-Linear Demand Curve
represented by the exponents, b and c
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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Case Study of Statistical Estimation: of Automobile Demand

TABLE 4.3 The Demand for Automobiles

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Case Study of Statistical Estimation: of Automobile Demand

TABLE 4.4 Automobile Demand Elasticities

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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Case Study I: Carnation Coffee-mate

In the 1998 book Studies in Consumer Demand: Econometric Methods
Applied to Market Data, Jeffrey Dubin illustrated the relationships between
consumer market data, which managers typically use, and formal
econometric demand studies based on these data. The model included the
following variables in his analysis:
• The price of Coffee-mate
• The prices of substitute goods
• Variables accounting for trends over time and seasonality effects
• Real income (adjusted for price changes) per capita
• Frequency of coffee consumption
• The total volume of all commodity sales in the region
• Real advertising expenditure of branded creamers
• Retail support measures, including in-aisle displays, in-ad coupons, and
special pricing
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 chapter 4
Techniques for Understanding Consumer Demand and Behavior

Case Study I: Carnation Evaporated Milk

Dubin also examined the market for evaporated milk. Marketing studies had
shown that there were two distinct market segments—those individuals who
used evaporated milk in coffee and everyday foods, such as soups, potatoes, and
sauces, and those who used it for holidays and seasonal foods. These groups had
different purchasing patterns, brand preferences, and demographic
characteristics. The model included the following variables in his analysis:
• The price of the Carnation product
• The price of substitute goods
• Variables accounting for trends over time, seasonality effects, and regional
Differences
• Real income level
• The percent of the population that is Hispanic
• Real advertising expenditures
• Retail support measures, including in-aisle displays, local advertising, and
special pricing
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