- Increasing demand. Economic modeling is becoming more essential as customer experience and growth marketing emerge as major differentiators among big-name brands.
- Powerful tool. By employing techniques like conjoint analysis and marketing mix optimization, economic modeling helps businesses understand their sectors, optimize pricing strategies and measure success.
- Informed decisions. Companies can apply economic modeling to customer experience and growth strategies by identifying key metrics, gathering data on customer behavior and simulating different scenarios to determine optimal strategies.
As mentioned in one of my previous articles, economic modeling is a skill that’s only going to increase in demand as customer experience and growth marketing become the main differentiators among big-name brands.
But what is it exactly, and how should we approach it?
Economic modeling is a powerful tool that can help customer experience and marketing professionals understand their sectors, identify opportunities for growth, optimize pricing strategies and measure success. Through the practice of building economic models, companies can better anticipate customer behaviors and reactions to changing market conditions. Additionally, they can build more accurate forecasts of revenues and costs across multiple channels or product/service lines.
By using economic modeling techniques such as conjoint analysis, marketing mix optimization (MMOP) and discrete choice experiments (DCEs), growth marketers and CX pros can develop deep insights into the needs of their target audience and adjust their approaches accordingly. This ultimately leads to improved customer experiences and greater gains in growth efforts.
In addition to helping with marketing and CX initiatives, economic modeling provides valuable information that can be passed along to developers and engineers to identify areas of potential improvement, such as changes in service or product design.
The result? A more successful, efficient experience that creates lasting value for all involved.
Related Article: How Do You Measure Customer Success? Very Carefully
But What Is Economic Modeling?
Economic modeling refers to the process of creating theoretical frameworks that capture the behavior of individuals, firms and institutions within an economy. The models use mathematical equations to quantify relationships between variables such as supply and demand, production and costs, and inflation and employment. They also help us analyze the impact of different policies or external shocks, such as changes in interest rates, purchasing barriers or changing technology on an economy's overall performance.
It’s quite a dynamic process that involves gathering data, testing assumptions and refining models to improve accuracy. The models can take many forms, from simple graphical representations to complex computational simulations. Often, they’re used to answer a wide range of questions, like predicting market trends or evaluating the effectiveness of business policies. Without modeling, decision-makers must rely solely on intuition and experience, leading to less informed and less efficient outcomes.
Let’s take two methodologies as examples to help us better understand what goes into building economic models: conjoint analysis and MMOP.
Both of the above are analytical tools used in market research to help businesses make informed decisions about products/services and marketing strategies. However, they differ in their approach and application.
- Conjoint analysis is a quantitative technique used to determine how consumers value different attributes of a product or service. It involves presenting consumers with a set of product or service profiles that vary in terms of features and asking them to rank or rate their preferences among the options. Conjoint analysis is often used to estimate demand for different configurations, identify specific features that drive consumer preferences and determine the optimal price of a product. This approach is especially useful for businesses that want to develop products that will maximize consumer interest.
- MMOP, on the other hand, is a much broader approach that involves optimizing a combination of marketing factors to achieve specific objectives. It encompasses the four P's of marketing — product, price, promotion and place — to identify the most effective combination of elements for a given overarching goal, such as maximizing revenue or increasing market share.
The optimization piece of the MMOP process involves analyzing and simulating different scenarios, such as changing the price of a service or increasing advertising spend, to determine their impact on sales and profitability. This technique requires a lot of data and sophisticated analytics to provide accurate insights.
So, while conjoint analysis focuses on consumer preferences and product design, MMOP takes a more comprehensive view of the business and considers a broad range of factors that impact sales and profitability.
Both are useful. And both are examples of economic modeling.
Related Article: Gathering Consumer Data That Matters for Measuring Customer Success
How to Apply Economic Modeling to Customer Experience and Growth Strategies
It should be clear by now that economic modeling can help companies optimize their customer experience and growth strategies by providing insights into how different factors impact consumer behavior and business performance.
But proper execution is always trickier than grasping an overall concept.
To apply economic modeling effectively, businesses should start by identifying the key metrics that they want to optimize, like customer satisfaction, lifetime value, or revenue growth. They should also gather data on customer behavior, such as segmented spending habits, preferences and persona demographics to inform their modeling. Equipped with this information, they can create a model that captures the relationships between different variables, such as price, promotion and product features, to name a few.
Teams can then use the model to simulate different scenarios, such as changing prices, introducing new products or services, or increasing marketing spend. By doing so, they identify the optimal strategies that will maximize the desired outcomes.
For example, they can use the model to determine what price will maximize customer satisfaction while still maintaining profitability, or to identify the best marketing mix to maximize revenue growth. By continually testing and refining the model, businesses can stay on top of changing consumer preferences and market conditions, all while adapting their strategies accordingly.
Identify Key Metrics, Gather Customer Behavior Data
So, to recap, I recommend starting by identifying key metrics, gathering data on customer behavior and creating a model that captures the relationships between different variables. Then use the model to simulate different scenarios and identify the optimal strategies for achieving the main objectives.
Needless to say, economic modeling is a powerful tool that can be used to leverage insights into the needs of target audiences. And rest assured, with this knowledge in hand, you'll be better equipped to drive success for your team and your organization.
Learn how you can join our contributor community.