In a perfect world, at least to economists, all decisions are rational and made with perfect information. In this economists’ paradise, buyers will choose the best products and the market will reward sellers who make the best products with higher sales.
This assumption may make the economics simpler but as Joseph E. Stiglitz noted in his 2001 Nobel prize lectures, unrealistic assumptions about available information lead to poor economic models (http://en.wikipedia.org/wiki/Joseph_Stiglitz).Understanding how much information a customer has when making a decision is critical in understanding why good value products fail and expensive or poor ones succeed.
Case Study: Hebel Power Flooring
93% of flooring for a second storey home addition in Australia is particle board, a relatively cheap, low quality material and the default choice for many builders.
Hebel Australia produce a premium flooring panels product called “Hebel Power Floor”. Unlike particle board, the Power Floor panels don’t squeak or transfer sound, they don’t sag or bounce and have a solid concrete like feel. Unlike other wooden floors it is also fire
resistant. Costing around 5% of the total construction price more than the other alternatives, Hebel believe it is a truly superior product that should sell well. Unfortunately customers didn’t appear to agree with less than 1% of the market choosing it for flooring.
SurveyEngine were engaged to develop a models of choice to understand how customers were purchasing flooring for home additions. Data was collected and modelled from an online experiment where potential customers were presented hypothetical flooring alternatives with different prices and features.
It is important to note, that unlike the real world, the experiment provided full information on all the products and respondents had freedom to choose as if all products were available. The models deliberately assumed perfect information.
The “Over Confident” Model
The choice model predicted a huge preference for the Power floor and that at current pricing, the market share should be 67%. This figure however was wildly off the true market share of 1%.
These models were of the type described by Stiglitz, accurate, but with the assumption that the entire market had perfect information about, and access to, the superior Hebel product.
On it’s own, such a model would be regarded as poor predictor of a new product. However understanding that the models were produced with the assumption of perfect information meant that an valuable insight about consumer information could be made.
If actual demand was 1% percent but true demand (with perfect information) was 67% percent, the discrepancy could be explained as an information gap.
This information gap included all impediments to purchase and inefficiencies in the marketing and distribution. This could include of imperfect information from lack of awareness, absent POS material, poor branding, lack of product availability, non-existent to poor education of builders on the product and also stock availability and inertia other products sales.
The Choice Model revealed four important facts.
- confirmation that the product was, as suspected, superior to the alternatives.
- that the pricing was if anything, too low.
- valuation of each feature revealed that thermal and acoustic properties and fire rating were key sales triggers.
But most importantly….
- poor marketing and distribution of the product that was the main reason for poor sales, not the product or pricing.
Following the study, senior company representatives confirmed anecdotally through their own investigations that the product was indeed poorly marketed by their distributors. They embarked on an education program,sharing the insights above, showing how distributors
could acheive more sales, higher margins and add their own value added services such as installation warranties. Since implementing the channel marketing strategy, sales of Hebel Power Floor have increased dramatically. Importantly, this has been achieved without reducing the product price.