Three ways we know what consumers want
This post on consumer demand is courtesy of Margaret Zafiriou, an economist who has recently retired from Agriculture and Agri-food Canada. In addition to consumer demand, her areas of interest also include analysis of agriculture and food policy, innovation and competitiveness.
Serious money is spent on market research by industry groups and business to monitor consumer trends. But in the end, does it shed light on what consumers really want and more to the point, what they actually buy? Or what they’ll buy tomorrow?
Three Ways of Knowing the Consumer
Price signals are one way of knowing if products in a marketplace are what consumers want. Prices will generally fall given adequate supply if consumer demand isn’t there. Success in matching supply with demand is ultimately reflected in business profits.
Opinion polls and consumer surveys get at what consumers want by asking questions about their preferences. These are “stated preferences”. The only problem is that what consumers say they want is often not what they end up buying.
For instance, an Agriculture and Agrifood Canada (AAFC) study of “environmentally-friendly” food products found that consumers indicated this was an important attribute in their purchasing decisions. However, items in their pantries didn’t reflect this preference.
Consumers don’t deliberately lie or try to mislead. Surveys – typically conducted out of the real context in which purchases are made - are notoriously incapable of capturing real budget-driven decisions in real food markets in real time with real children whining about their real preference for dinner tonight coming from McDonald’s.
Actual purchasing patterns also reflect consumers’ preferences – some may say more accurately than survey data. Statistics Canada collects such “revealed preferences” data through its Survey of Household Spending, while AC Nielsen publishes scanning data from major retailers on actual purchases. Their “Homescan” data combines actual purchase information with demographic variables, to better understand who buys what.
AAFC (2005) made use of this Homescan data to estimate the benefits to producers, of organic standards as those regulations were being developed. After measuring the price premiums Canadians were willing to pay for organic versus conventional products, they found that price premiums varied by product. They were also volatile, ranging anywhere from 14% to 60% for ready to eat cereal, from 67% to 94% for organic versus conventional milk and over 200% for fruit juices.
More recent studies are combining survey and purchase data to be able to understand better how consumers will respond to the introduction of new technologies.
Brooks and Lusk (2010) combined both “stated” and “revealed” preference data to predict whether consumers would purchase milk from cloned cows or their offspring. Their results concluded that consumers would pay large price premiums to avoid milk from cloned cows, thereby justifying mandatory labeling.
“Consumer –driven agriculture” is the key to marketing success today. Agri-business and farmers in particular are aware that they can’t just supply product anymore; from the customer’s perspective, producers must now supply not only value (price), but must also supply products meeting concerns about animal welfare and health and safety.
With the widespread use of the internet and social media, there’s more information available to understand consumer preferences and trends. But more information also means a lot of noise to wade through.
The best strategy for agribusiness?
Rely on information from reputable organizations and personal networks to help filter out the noise to develop a clear sense of what consumers want.