Discrete Choice Modelling is used to predict the behaviour of individuals or groups under future conditions “If we offer this price/product, then what will our consumers do?”

Why use Discrete Choice Modelling?

Supply, Demand and Certainty

The market for a product can be described using two functions – supply and demand. The supply function broadly encompasses all of the things a producer controls or seeks to control – not only their costs but the quantities they produce and how they differentiate both their product (product development) and their brand (advertising).

The demand function maps the aggregate of individual consumers’ willingness to pay.

On the supply or ‘costs’ side, executives apply rigorous analysis, are literate in the accepted best practice, and are able to predict the future with some certainty and accuracy – they follow budgets, enter into long term arrangements with suppliers, exercise leverage over their workforce, lock in the prices of commodity inputs on futures markets, etc, etc.

However, when it comes to analysing the demand or ‘revenue’ side, there seems be no widely accepted best practice, and certainly no rigour or certainty. Most executives would accept the excuse that the demand function describes inherently uncertain phenomena and there is no reliable predictive methodology or science available – but this is NOT the case.

Decision makers (in areas other than transport, utilities, defence and health) are either unaware of DCM, or believe that it is:

• too expensive;
• exclusive (the province of a handful of academic superstars);
• and too time-consuming.

None of these is true.

Future and Simple’s software, processes and commercial focus make DCM a repeatable, reliable, quick, easy, applied science.

DCM versus ‘Common Sense’

Sometimes the problems DCM is used on, and the solutions brought to light, are dismissed as “just common sense”.

To use the Royal Australian Air Force case study as an example - choice models showed that pilots were somewhat immune to salary increases, but responded to more flying time, and less geographical relocations. The recommended optimum packages were implemented, and retention improved remarkably.

Sounds like common sense, doesn't it?

But just remember, there were literally thousands of permutations of salary and conditions which fit in the realm of common sense - all of which could be presented quite reasonably and forcefully in a boardroom. All of them would look and sound like a ‘good solution’.

But, of those thousands of common sense permutations, those thousands of 'good solutions’ - only one is the absolute optimum, and there are plenty that perform well below the optimum.

DCM identifies the optimum. But more importantly DCM quantifies the trade-offs. We can tell you the value of one attribute, in terms of another attribute, or in dollar terms.

To continue with the RAAF example - we can tell you not merely that 'flying time is good', but exactly how much extra flying time a week makes up for a $1,000 decrease in annual salary.

DCM not only takes the guesswork, the 'I reckon' out of identifying what is important to people, it reveals the exact mix of these things that are important to them.

And there's the rub - any other methodology, questionnaire, audit, whatever, would find that people want more of the things they like and less of the things they don't like - more money, more prestige, more excitement, more leisure, more benefits, less paperwork, less meetings…

Only DCM can actually quantify the trade-offs between these things.