Category Archives: Consumer Theory

QUESTIONS FOR CLASSROOM DISCUSSION ON CONSUMER THEORY

After reading about the benefits (and potential costs) of a simplified product line, consider the following:

  • In his 2004 book Paradox of Choice – Why More is Less, Barry Schwartz argues that eliminating consumer choice reduces anxiety of shoppers. Do you agree? Does the reduction in anxiety contribute to utility maximization?
  • Does a simplified product line make consumer behavior more predictable? What benefit does this “predictability” serve the firm?
  • Quoting Edible Apple’s article, “Would you rather have a smaller team comprised of only 7 All-Stars, or a full 12-man roster with 1 All-Star, 2 above average players, 3 mediocre players, and 6 benchwarmers?”

Our classroom discussion will take place next Tuesday!

Posted by Prof. C-S

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Consumer Theory

Discussion on “Why a simple product line is integral to Apple’s success” (Edible Apple, 2009).

The article “Why a simple product line is integral to Apple’s success” discusses the success Apple has had carrying a limited number of products as opposed to competitors who carry a larger line of products. This limited product line serves a number of purposes: first of which, it keeps things simple for consumers. Steve Jobs played a large role in this product simplification upon his re-entry into Apple in 1997, saying that if he had trouble deciphering the differences between products, it was unreasonable to expect consumers to do so easily. With this thought in mind, Apple chose to simplify its strategy; instead of a number of varied products for different markets, they would produce four products for four segments: laptops for professionals and the everyday consumers, and desktops for professionals and consumers. A number of Apple product lines, such as the Newton, were cut at this time. Another way in which they used this strategy to keep things simple for consumers was in the clarity of names they chose for their products. For example, the MacBook, MacBook Air, and MacBook Pro are straightforward, with no unnesessary numbers or random letters denoting which model they are.

Another purpose served by the simplification of their product line was the way in which it gave Apple a very streamlined and focused idea of their identity as a company. It allowed them to focus on the products they could produce well and prevent the waste of time and money on inferior products created for the sake of a more varied, and less excellent, product line. Their products—the iMac, iPhone, iPod, and iPad—stem from this thought process, and their simplicity of model and design not only makes it simple for the customer to choose without extensive research, but it also allows Apple to focus on improving them into further streamlined products with an excellence all their own. In addition, this has the added benefit of making technical support simpler as well, not only for the consumers, but for Apple. For these reasons, Apple benefits as much as the consumer from this choice.

The consumers themselves benefit in several ways from limited consumer choice in making their product buying decisions. The first benefit discussed in the article is the relative ease in deciding between different products. The article emphasizes the success Apple had in limiting its laptop product lineup to the Macbook, Macbook Air, and Macbook Pro. Restricting its consumers to only three options allowed them to easily decide which offering was most appropriate to their personal needs—while more “on-the-go” individuals may have opted for the lighter and easily transportable Macbook Air, those desiring more advanced features and capabilities could choose the Pro version.

In addition, Apple’s decision to simplify the names of their products also made it easier on consumers looking to distinguish between models. As a comparison, the article notes that “there are a multitude of Sony Vaio laptops out on market, and if you want to figure out how they differ, you have to study the specs.  How else can you figure out the difference between a Sony Vaio VGN-Z550N and a Sony Vaio VGN-CS215J/R”. Apple customers can quickly decide which product is most practical for their needs without having to do extensive background research, making their buying decision process much simpler and more enjoyable.

To illustrate the advantages of the consumer theory behind Apple’s limited product line, the article makes the fitting analogy: “When it comes to product offerings, Apple’s approach to business is a lot like that of a Basketball coach.  Would you rather have a smaller team comprised of only 7 All-Stars, or a full 12 man roster with 1 All-Star, 2 above average players, 3 mediocre players, and 6 benchwarmers. The Dream team wins everytime, baby.”

A comparable case to the minimalistic product lines offered by Apple Inc. is that of Tesla Motors, Inc.  At the moment, this specialty automobile manufacturer only offers one vehicle model to its consumers.   The Tesla Roadster gained attention by being the first fully electric sports car.  It is in the final stages of developing a second model, The Tesla Model S, to be released in the near future.  This will also be an electric car similar to the coupe-class Roadster, though it will be classified as a luxury sedan.  These two models are marketed to similar demographics.  Tesla doesn’t attempt to sequester more market share by releasing a wide variety of vehicle classes as do most of its competitors in the automotive industry.  In contrast, Ford Motor Company released thirteen new vehicle models for the 2012 year.  These range from compact cars to SUVs to pickup trucks.  Ford markets its products across a variety of demographics, hoping to offer a class of vehicle to satisfy the needs of a variety of consumers.  This diversification business model makes Ford better able to satisfy the individualized needs of its consumers.

Posted by Tommasina, Trevor, Brian and Tim (Section 4)

Consumer Theory

Discussion on “Why a simple product line is integral to Apple’s success” (Edible Apple, 2009).

Summary:
This article discusses Apple’s success and attributes it to the fact that they limit their product lines so as to not confuse consumers. They’ve succeeded by limiting their products and even by simplifying their product names. Each product is named aptly and even indicates who it is geared for (for example, their laptops are Macbook, Macbook Air, and Macbook Pro). The article contrasts this to Sony and other competitors who may have a variety of makes within one model in the hopes of satisfying every possible consumer. The article states that Apple is successful because it is the best at a few things as opposed to being just alright at many things. It prides itself on being an inch wide but a mile deep, instead of a mile wide but only an inch deep.

Commentary:
Consumers sometimes benefit from limited choice, simply because they have less to choose from. In the case of Apple, if someone knows they want an Apple product, it is very simple for them then to go to an Apple store or Apple’s website and pick the product that best suits their needs. Based on Apple’s reputation, the customer can be fairly confident that they will be receiving one of the best products available on the market.

Firms might benefit from limited consumer choice as well. If they’ve already got a strong reputation, simplifying their product lines creates less confusion and simplicity for their customers. It results in not so much the customers deciding what they want, but rather the firms telling the customers what they want. If someone goes to Apple knowing they want an Apple product but are unsure what to get, having a limited selection makes the customer’s decision process that much easier. It is more efficient from both an economic and time standpoint for the firm to hone in on what the majority of consumers think they want.

This, however, could backfire. If a customer knows exactly what they want and a firm with limited selection does not have that product, any well-informed customer will not settle. They will find an equally as reputable firm and purchase the product that more suits their needs.

Real-World Application:
At it’s simplest, this concept could be explained by an ice cream shop. Let’s say you have one ice cream shop (let’s call it Shop A), and it offers chocolate, vanilla, and strawberry ice cream only. Shop A is known far and wide for making some of the best chocolate, vanilla, and strawberry ice cream available. Now, there is another ice cream shop (Shop B). Shop B offers vanilla, but it also offers french vanilla, vanilla bean, vanilla frozen yogurt, vanilla with chocolate chips, vanilla-chocolate swirl, and vanilla with cookie dough. Likewise, it offers a number of chocolate variations.

Any customer who doesn’t know what they want will tend to pick Shop A. They know that Shop A makes some of the best ice cream in the world and so they are guaranteed quality. Adding different elements and variances to the ice cream confuses this customer and so they go where they know they’ll get a good product.

Any customer who knows exactly what they want could pick either shop. They’ll pick Shop A if they know they definitely want a great scoop of chocolate ice cream. However, if they know they want vanilla with chocolate chips, they would clearly not select Shop A and go to Shop B for their ice cream.

As a “real-life” example, the sun glasses company RayBan implements the same type of consumer theory as Apple.  Just as Apple offers consumers a limited amount of computer models, RayBan only offers four different styles of sunglasses.  While other sunglasses manufacturers produce a variety of styles that a consumer can choose from depending on their personal preferences, RayBan is known for their identifiable image.  By providing limited options, consumers know that they can get a stylish, well-made product, and do not have to waste time trying on countless styles of sunglasses.

Posted by Katie, Laura and Chrissie (Section 3)

Consumer Theory

Discussion on “Why a simple product line is integral to Apple’s success” (Edible Apple, 2009).

The article, “Why a simple product line is integral to Apple’s success” details Apple’s approach in determining which products it supplies to customers and why it has found its method of limiting consumer choice beneficial. Apple keeps its product line sparse by offering only its “all-star” products that the company believes it can easily market to consumers or professionals. For example, Apple’s product lineup for a laptop consists only of the MacBook, MacBook Air, and MacBook Pro. These three products make it easy for customers to delineate between laptops with their unique, yet comprehendible names. However, by only offering a small number of options, Apple limits consumer choice. Apple claims that limiting consumer choice has been a key factor in their success because it makes purchasing decisions less confusing for customers, allows Apple to offer only its best possible products, and makes it easier for the company to provide technical support for customers due to the simplicity of the models. 

Consumer theory is a method of analyzing how customers might reach equilibrium between expenditures and preferences by maximizing utility. Determining equilibrium depends on many variables including tastes and preferences and opportunity cost. Apple’s experiences lead top directors in the company to believe consumers value their time and the quality of their product. They place focus on these two aspects because the company considers them imperative to maximizing customer utility.

Consumers are able to benefit from limited consumer choice because with fewer options, their choice is made simpler. Most likely, they will spend less of their valuable time shopping around through varieties of each product or researching the value in different features of models. In addition, consumers are able to determine exactly what they are getting when they purchase an item and are likely receiving the best possible quality product from the producer. With Apple, their simplification of product names, like “Air” and “Pro,” also allow consumers to make a quick and easy decision regarding which product is best for them. In our society people value their time, and the opportunity cost associated with researching products may be leisure time. Consumers can appreciate simplification of product lines so they can spend more time doing whatever else they want to.

On the other side, producers are also able to benefit from limited consumer choice. By focusing on certain products that the company is very skilled in producing, they are able to put forth their best effort and time into these systems. This narrow focus allows talent and resources to be used more efficiently. Simplifying their product lines will cut down on costs as well by making it possible to fulfill orders faster. With fewer choices, it is easier to make customer specified products and quickly ship them out. Additionally, a simplified product line benefits producers because consumers will view their product line as easy to navigate through. Apple has shown that by limiting consumer choice, their revenue and profits have increased.

A similar example of companies simplifying product lines in order to increase profits has been Cisco’s decision to further simplify not only consumer choice but market channels. While Cisco deals primarily in Business to Business transactions and Apple deals with Business to Consumer transactions, the simplification is similar in that it is making it easier for their clients to choose the correct product. Rather than offering a multitude of operating systems, Cisco has chosen only three: IOS (for routers), NX-OS (for data centers), and XR (for service providers). The names may not be as user friendly as those Apple has chosen for their products, but Cisco has managed to make the choice between operating systems much easier as their intended purpose is clearly defined. Additionally, Cisco has decided to focus on their strengths by dropping some of their consumer products, such as their consumer flip camera. This demonstrates that even when dealing in business to business transactions, there is still value in simplifying product offerings. This may go to show that certain industries, primarily the technology sector, may benefit by restricting consumer choice. This may be due to the inherent complex nature of the sector. We have clearly seen how companies and consumers benefit by making the decision-making process easier for consumers while allowing companies to focus on their strengths and provide better products.

Posted by Sam, Paul, and Cindy (Section 2)

Resources:

http://www.oup.com/uk/orc/bin/9780199286416/lipsey_chap05.pdf

http://www.channelbiz.co.uk/2012/02/01/cisco-promises-simplified-product-line-and-market-channels/

http://www.techweekeurope.co.uk/news/cisco-live-advances-promised-on-all-fronts-57517

Apple’s Dream Team: How Limiting Consumer Choice Jumpstarted the Company’s Success

Discussion on “Why a simple product line is integral to Apple’s success” (Edible Apple, 2009).

In the Edible Apple article “Why a simple product line is integral to Apple’s success,” the argument is made that limiting consumer choice is the key to Apple’s success. The fundamental premise of Consumer Theory is that a consumer maximizes his total satisfaction from consuming goods and services, given his personal consumer income constraint. In pursuit of utility-optimization, consumers construct indifference curves between analogous bundles of goods/services based on their own ordinal “relative ranking” of the bundles of goods/services. Apple, in accord with confidence in its product quality, strives to simplify for consumers the “relative ranking” process of Apple’s products versus its competitors’ products by offering a more select and comprehensible product line.  Some companies such as Microsoft and Sony have elected to give consumers a large menu of product choices, often with small differences between both the products’ names and the products themselves.  This strategy has contributed to a market that is overwhelmed with product proliferation and consumers that are confused about how to select between alternatives in various product categories. 

When Steve Jobs made his famed return to Apple in 1997, he was confused by the product offerings.  He determined that if he was confused, consumers must have been confused as well.  Apple has responded to this consumer problem by keeping its product line simple and not attempted to satisfy every consumer need.  The names of the products reflect this simplistic approach to the product line (iMac, iPod, iPhone, iPad) and allow consumers to have a greater understanding of the overall product offering.  This simplistic style is also reflected in the packaging of the products.  Due to Apple’s simple product line, consumers are not as confused and feel empowered by a greater understanding of the product’s capabilities.  For example, many consumers knew the function of the iPhone even before it was released, because Apple released one, simple product rather than a line of iPhones tailored to meet the needs of individual segments of consumers.  Apple’s new and simple approach to business galvanized the company’s success as it ascended to power in the technology industry. 

The author provides the analogy of the 1992 United States men’s Olympic basketball “Dream Team.”  After the United States finished a disappointing third place in 1988, the 1992 team faced a highly anticipated return to the Olympic Games.  The team was one of the strongest ever in any sport and defeated its opponents by on average over forty points per game.  The article asks: Would you rather have seven All-Stars on your basketball team or “a full 12 man roster with 1 All-Star, 2 above average players, 3 mediocre players, and 6 benchwarmers”?  Presumably, Apple’s simple product line is composed of a select few “All-Star” products rather than many products where only a few are great (á la Microsoft).  The author quips, “The Dream Team wins every time, baby” indicating his or her preference for Apple’s simple line. 

Consumers benefit in multiple ways from having a limited number of options to choose from among a company’s product offerings.  Limited product options reduce the need for a consumer to engage in extensive information search about product characteristics.  This not only reduces consumer frustration that results from a difficult and technical comparison of numerous models of a single product, but also makes consumers more apt to buy a product from a company when they are easily able to research and understand how the product fits into their lifestyle.  Simplicity of options offered by a firm makes it easier for consumers to gain in-depth knowledge about the available products and therefore increases consumer confidence.  Ultimately, when a consumer’s needs are fulfilled by a product, trust is built between the consumer and the firm.

Firms also benefit from a limited product offering.  When they offer a limited number of product options, firms are able to direct their employees’ talents more efficiently because they can focus their time and energy into making the few products the company offers truly extraordinary instead of stretching their talents to offer a broad range of mediocre products.  Companies can synergize their workforce to a higher degree, because when a company is focused on a smaller set of products it is easier for that company to have clear-cut and definite goals about the quality and performance of those products.

Both consumers and firms benefit from limited consumer choice when companies are able to provide higher levels of technological support.  Employees don’t have to memorize extensive amounts of information about numerous products.  Rather, they can become vastly knowledgeable about the few products that their company offers.  This eases the burden of knowledge on the employees.  As a result, consumers benefit because they are assured that all of the technical support staff has the necessary knowledge needed to solve their problem.  In return, the high level of technological support provided increases customer loyalty for the firm.

Offering a select line of quality products works particularly well for expensive technology. Specifically, Apple’s comprehensive development of the hardware, operating systems, software, and technical support for its select few computer, media player, and smart-phone products has allowed them to sustain prosperous success. However, companies whose goods are differentiated typically for consumers to express their style preferences—clothing and footwear for example—can also sustain a competitive advantage by offering expanded consumer choice and customization. For case in point, Nike Inc. has offered its NIKEiD service that allows consumers to personalize and design their own Nike merchandise. NIKEiD offers a variety of basketball, skateboarding, and “lifestyle” shoes that can be color and/or monogram customized on a multitude of shoe components. NIKEiD provides an interactive website and phone application, as well as 110 retail customization shops in seven languages and over six countries for consumers to interactively customized their shoes. Brand Keys, a research firm that studies customer loyalty, found that “customization is 30 percent of what draws a person to a brand today as opposed to a mere 6 percent in 1997.” Ultimately, once a company understands the factors driving customer satisfaction in its category, as well as the expectation levels of those customers, it can refine its business model to meet these ends.

Posted by Kathleen, Cameron and Chelsea (Section 1)