Sunday 5 July 2009

The Theory of Consumer Demand

I wrote a few weeks ago about an emerging trend towards people leasing their lifestyle. Rather than buying and owning physical, tangible goods, people are instead getting used to buying into a service or renting a product.

I was pleased then to see a recent announcement by Riversimple - a company which has been setup with the aim of redefining personal transport – to launch a new hydrogen fuel based car and they don’t plan to sell a single one.

Riversimple have a highly disruptive and innovative approach to marketing their cars – not only will they not be selling them - choosing instead to just lease them - they will also not be making them.

Not actually manufacturing a product is obviously not new - big brands like Nike have pioneered the approach of outsourcing the manufacturing to low cost labour economies and using the savings to invest heavily in promoting and building their brand as well as research and development.

This is not however what Riversimple plan to do. Instead, they plan to “open source” their design and development so that others can work with them as well as having a distributed manufacturing model which will allow for more localised production.

When describing their overall approach they say:-

This aligns the interests of the manufacturer with the interests of the consumer and of the environment - everyone wants cars that have a long life span with maximum efficiency and minimum materials usage.

Whilst I love this approach and think their model is great, I don’t actually agree with this.

In an article written in the 1950’s entitled “Bandwagon, Snob, and Veblen Effects in the Theory of Consumers' Demand”, author Leibenstein discusses the reasons for consumer demand and separates these into Functional and Non-Functional.

Functional demand is defined as demand for the qualities which are inherent in the commodity itself – so for a car this would be the basic desire for personal transport.

Non-Functional demand on the other hand is based on more emotional reasons – essentially demand driven by what others are doing or what others will think.

Based on this, rather than “everyone wants cars that have a long life span” – i.e.functional demand - I think what everyone wants is more non-functional, either what other people don’t have (Snob Effect), what everyone else has (Bandwagon Effect) or what everyone else can’t afford (Veblen Effect). This is the heart of consumerism and it won’t be easy to change.

That said, it has been interesting to see these effects at work with the Toyota Prius and how this was marketed.

Within the UK, when the car was launched a budget of £9m was allocated over 3 years with a specific focus on both functional and non-functional consumer demand.

From a functional point of view, they focused on the one big differentiator - the fuel savings – and so targeted the value conscious consumers.

From a non-functional point of view however they targeted two different consumer groups - those who were early adopters and who liked to have and be seen with the latest technology (akin to Snob Effect), and those who were conscious of the environment or at least wanted to be seen as such – hence a media mix ranging from National Geographic to Vanity Fair (Bandwagon Effect).

The big boost for the Prius came from celebrities, with Leonardo DiCaprio kicking this off in 2001 and many more then following suit. This really made the Prius mainstream and allowed it to break out of both the early adopters and the green movement.

On the website for Riversimple they say:-

Our vision is of a world where our relationship with the car has changed dramatically for the better, with new solutions in place for sustainable and responsible mobility.

If Riversimple could emulate the success of the Prius, focusing on both the rational and the emotional reasons for consumer demand, then combined with their innovative purchase model this could be a real game changer and we could indeed see dramatic changes within our relationship with manufacturers, suppliers and their goods and services.

Plus with a car that has doors which lift up, what’s not to like - I can see a Back to the Future remake already!