<< Return to Q1 2008 home

the customer is always right!

Understanding Consumerism
By Al Berrios

Figure 1: The Consumer Risk Matrix quickly assesses an organization’s “consumerism-preparedness”.

(Wordcount: 1,740; Pages: 5) Demand has always been simple to understand – make it and sell it.  For over 200 years in the U.S., organizations of resources were mobilized to mass produce goods.  Before it became a science, organizations during this period priced as much as buyers would pay (figuring that the lower their inventory, the better they were pricing); continuously improved their method of production (the lower their costs, the more money they made); and came up with a myriad of ways to distribute their products (from catalogues to websites).  But demand was essentially treated as a relatively simple nuisance at best, to be manipulated at worst.

As early as 1940s, the service sector (“from burger flipping to investment advice”) was already contributing the same as manufacturers to the U.S. economy.  Unlike goods, you can’t stockpile inventories of services; the only real costs of production are finding workers, training them and paying them, which, despite every effort by industry to make such costs more “predictable”, remain variable; and most vexing, you also can’t disregard or manipulate demand for services as casually as you could goods.

Today, in spite of organization’s attempts to control how their services are produced and consumed, services contributes 6 times more (1) to the U.S. economy than it did in the 1940s, leading productivity over manufacturing by 2-5% (2) more per quarter and generating 58% of the country’s entire GDP (3); it has doubled its share of employees in the last 30 years (4); and absorbs nearly 42% of consumer expenditures (5).  The question is not how this epic economic transition occurred, but rather, has an institutional refusal to accept how demand for services has also changed prevented it from being bigger?

This report claims that rather than innovate along with the economy, organizations have instead opted to repurpose their old business models using dated strategy frameworks, leaving equally epic sums of money on the table.  This report further claims that substituting the old school “demand” mentality for the new school “consumerism” mentality could contribute to an organization’s comprehension of what they need to effectuate in order to exploit this once-per-century economic transition.

Demand Is So 19th Century

Consumerism is the consequence of an economy that has transitioned away from producing goods with easy-to-understand utility for the buyer.  As the name implies, demand is no longer a grouping of generic buyers of goods (and services); it isn’t even demand at all, but the aggregate and articulated consumption preferences of niche groups of consumers with the power to deal with organizations as a nuisance at worst, to be manipulated at best. 

What this means in practice is that there are fewer and fewer obstacles for consumers who change their buying patterns at whim; that loyalty to brands, as manufacturers have become accustomed to, has shifted to loyalty to service, as consumers learn they can access a nearly unlimited assortment of substitutes; and more importantly, the classic notion of marginal utility is taken for granted in expectation of maximum utility.

Consequently, it becomes increasingly difficult to gauge consumption of services as a mere response to prices, income, substitutes, and of course, supply.  It is also necessary to take into account a) points of access to the service and/or its brand and the cost of setting them up by the provider; b) the size of the anticipated consuming target group; c) the consumer’s ability to acquire and process information and make choices; d) the intrinsic value they place on the service’s utility (6); and of finally, e) the tangible impact of the service provider’s reputation.  These determining factors, if you will, are representative of a consumer’s relationship to the service provider.

So, in order to model consumerism as it responds to supply, it is further necessary to modify its curve (i.e. the demand curve).  But due to the more complex nature of consumerism, the axes require richer context.  This report proposes the following:

X = strength of relationship determined by standardizing and plotting the above-mentioned factors;

Y = change in consumer behavior, manifested by how much of a consumer’s total expenditures in a category at a certain point in time is captured by a specific brand.  It is possible that a highly preferred brand causes a shift in budget, time, and resource allocation away from another category of expenditures altogether.

Thus, plotting a consumerism curve would reveal more relevant insights into what consumers demand in a service economy.  More importantly, it also reveals the risk of losing customers due to changes in a business model, or Consumer Risk.

The Consumer Risk Matrix

In 2002, al berrios & co. developed its Consumer Risk methodology (7) to advise organizations on their optimal course of action based on the changing consumer behaviors exhibited in service economies, or their “consumerism curve”.  The methodology involves plotting their c-curve, with equilibrium points determined by supply curve and other pre-established benchmarks (i.e. historical determining factors).  The final result yields a matrix that quickly demonstrate where an organization’s risk of losing customers currently is and where it can shift to, based on changes to their business model. 

The lower left quadrant represents the likelihood of few changes in consumer behavior and low strength in a consumer’s relationship with the brand.  When an organization’s risk is plotted within this quadrant, their risk of losing customers is medium, because although consumers are settled in their buying habits, making purchasing decisions choices based on inertia, convenience, familiarity, and simple utility – typically because they’re copying their parent’s purchasing habits – they’re open to change.  As a result, we can call this quadrant “Don’t-Change-Anything’s” (“DCA”) and as the label implies, this quadrant can remain investment-neutral. 

The lower right quadrant represents the likelihood of few changes in consumer behavior and high strength in a consumer’s relationship with the brand.  When an organization’s risk is plotted within this quadrant, their risk of losing customers is as low as it can be because even when faced with lots of choices and high prices, consumers still choose the same brands.  As a result, we can call this quadrant “Not-Going-Anywhere’s” (“NGA”) and as the label implies, this quadrant can withstand a decrease in investment.

The upper right quadrant represents the likelihood of lots of changes in consumer behavior and high strength in a consumer’s relationship with the brand.  When an organization’s risk is plotted within this quadrant, their risk of losing customers is medium because although consumers are very involved and invested with the brand, always ready to purchase anything with its logo, they won’t hesitate to make an alternative choice to the brand if they acknowledge that it’s in their best interest.  As a result, we can call this quadrant “Keep-‘Em-Happy’s” (“KEH”) and as the label implies, this quadrant requires an increase in investment.

The upper left quadrant represents the likelihood of lots of changes in consumer behavior and low strength in a consumer’s relationship with the brand.  When an organization’s risk is plotted within this quadrant, their risk of losing customers is at its highest because consumers expect maximum utility from a brand as standard and have no investment nor desire to invest, in the brand.  As a result, we can call this quadrant “Love-And-Leavers” (“LAL”) and because this quadrant can be leveraged any number of ways, further investment can be low, neutral, or high, depending on strategic objectives.

Consumerism in Action

A hard-to-pin-down number above 45 million Americans do not have health insurance.  Suppliers believe that demand is broken, so they scorn at anyone subsidizing their product, while (giddily) cheering efforts to legally mandate demand into getting it.  Consumers believe supply is broken, and demonstrate their frustration with supply’s inability to meet their needs by paying as they go (or not paying at all) and managing other parts of their lives more responsibly to avoid requiring risk mitigating products like health insurance.

Another 40-odd million consumers, members of pre-dominantly low-income, unemployed, or minority households, remain “unbanked”, or without banking relationships.  The supply side, not entirely able to pinpoint the obstacle to winning this group of consumers over, have thrown everything but the proverbial kitchen sink in their narrow efforts to supply them with their products and services.  The demand side meanwhile, largely fitting the unbanked demographic, have concluded that Supply in this case, simply does not want to truly understand them enough offer what they want. 

For example, a higher percentage of charitable donations originates within the unbanked group, particularly with regards to tithing (8), proving they have money that perhaps doesn’t so much need advice on how to spend or interest to collect, but instead, more convenient ways to distribute it on their desired purchases; the amount of money this group remits to overseas loved ones has been well-documented and envied by the “unconsumered” banks, proving that “unemployment” or lack of credit is not an impediment to making transactions; and ironically, this group has even developed alternatives to banking, from purchasing at fast-growing dollar-stores, to pooling funds together among friends and family in order to withdraw for major purchases, to even practicing in forms of bartering and trading without money, essentially telling banks the sort of services they’d use, if only they were offered by banks.  

Despite the apparent contraction of the music recording industry, a casual observation on any commute reveals over 70% of fellow commuters plugged into their favorite digital device, enjoying what appears to be, music. Supply believes demand is stealing their inventory.  Demand believes supply is no longer even necessary to their getting what they want.

Theory of Why Supply Is "Broken"

In a recent study (9) of the trajectory of consumerism on selected complex and “messy” industries across a century, we learned that neither innovation nor technological advancement has individually shifted demand across the Consumer Risk matrix, but also the manner in which Supply has supplied Demand.  In other words, decisions to invest in supply to stave off losing customers were, at times, inappropriately made because demand for an industry’s products and services was not perceived to be at risk, but rather not met.

These findings do not make light of improvements in processes, costs, and marketing on the supply side.  Instead, they put a spotlight on what management has always claimed to know: that the consumer rules, and in this new consumerism reality, they’re not merely demanding, but simultaneously supplying: supplying purpose, clarity, and opportunity for suppliers willing and able to understand how to be “consumers” themselves.

Footnotes

(1) Federal Reserve Bank of Dallas, 1994 Annual Report, http://www.dallasfed.org/fed/annual/1999p/ar94.cfm

(2) Bureau of Economic Analysis, Private Services-Producing Sector Continued to Lead Growth in 2006, Jan 29, 2008

(3) Bureau of Economic Analysis, GDP and the Economy, Advance Estimates for the 4th Quarter of 2006 for 2006, February 2007.

(4) Federal Reserve Bank of Dallas, 1994 Annual Report, http://www.dallasfed.org/fed/annual/1999p/ar94.cfm

(5) Bureau of Economic Analysis, GDP and the Economy, Advance Estimates for the 4th Quarter of 2006 for 2006, February 2007.

(6) al berrios & co. Intrinsic Value Pricing service, http://www.alberrios.com/when/cb/pricing.php

(7) al berrios & co. Consumer Risk research, http://www.alberrios.com/c/policy.html#cr

(8) The Poor Give More, http://www.portfolio.com/news-markets/national-news/portfolio/2008/02/19/Poor-Give-More-to-Charity

(9) Strategic Positioning for Managing Consumerism in the Health Insurance Industry, a comparative study of complex and “messy” industries by al berrios & co., Nov 2007

 



Al Berrios is Managing Director of al berrios & co., a strategy innovation consultancy advising organizations on succeeding in a service and information economy. Write or Subscribe to Consumer Strategies Report.