Virtual Test Markets (VTM): How will consumers and competitors really decide?

Leading western companies have wide ranging knowledge about their customers. They collect consumer data from sales slips and other transactions and enrich it with the help of external market research. Finally, these rich data sets are being analyzed using modern data mining methods and also knowledge from Psychology is being applied to marketing problems.

But, markets are largely saturated, e.g. mobile telephony penetration rates are close to or above 100% in many western countries, which forces companies to diversify and offer a broad and quite complex portfolio of products. Moreover, customers have become increasingly educated about the ways of classical marketing campaigns.

Customers and their preferences are becoming more individualized. It is hard to predict how customers and markets will react to new products…

Virtual Test Markets: a unique way to understand and predict markets

Virtual Test Markets are computer-simulated virtual worlds inhabited by hundreds of thousands of intelligent human-like simulated customers – representing customers of a real market. Such virtual test markets can be used to test many new product designs, price schemes, marketing campaigns etc. to find the best and must robust business strategy before real-world implementation.

VTMs have a number of unique characteristics to help deal with all the complexity of real markets:

• VTM models take the preferences and characteristics of each individual customer, preserving the high resolution of existing customer data. This results in superior forecasting precision when running what-if scenarios.
• Specify a what-if scenario and find out how the simulated customers react and how adoption rates, usage, sales, market shares etc. develop – for any desired set of customers and target groups.
• There is no black-box problem in VTM models: One can easily find out the reasons for model output by looking at the simulated consumer decisions: Who did what, when and why?

Of course, VTM models cannot predict fundamental changes like the arrival of a new disruptive technology. However, in VTMs it is quite easy to test the impact of new technologies (or any other business hypothesis, e. g. competitor reactions) before their actual market introduction. That way one can develop strategic plans well in advance of competitors, which are still looking at data from the past.

Examples of applications of Virtual Test Markets

1. Virtual Shops   In this VTM simulated shoppers with individual shopping lists are sent into a virtual shop, which has the dimensions, assortment and product prices of a real shop. Shoppers are looking for the items on their shopping lists while in the shop. However, the shelf which customers are passing by can induce unplanned purchases based on customer preferences and the original shopping lists. Link to the live demo.

2. Virtual Mobile Telecommunications:   In this VTM the decisions of real customers of the mobile telecommunications industry are simulated. Here, decisions are not only led by individual preferences but also by the social network and decisions of friends (word-to-mouth etc.) and customers usually arrive at suboptimal decisions just like it is the case with real world customers. Link to the live demo.

More applications of our VTM technology include but are not limited to:

• Telecommunications: Assess the financial potential of new products and services (including all side effects, e. g. cannibalization). Develop mobile plans for a given target group and test it in the VTM before actual market introduction. Improve Churn prediction, Winback, campaign design, ARPU etc.

• Retail stores: Test new shop layouts, shelf configuration, location of displays in the store, pricing of products (including external factors such as weather, nearby competitors, known-value items etc.) in the VTM instead off conducting expensive and time consuming test markets. Test new assortment policies without risk in the VTM before changing anything in real stores.

• FMCG: Test customer response to new brands and branded or non-branded products. Optimize the marketing strategy for new product introductions in the VTM.

• Retail financial services: Test customer response to new services in the VTM, quickly conduct customer retention/loyalty campaigns in the VTM and find out which is the best campaign design. Also, assess your cross-selling potential and the effects of competitor behavior on your market share and jointly and separately for each target group of customers.

• Policy: Each citizen responds in an individual way to new laws and reforms. Simple averages cannot capture this and therefore also not give reliable forecasts as to what macro outcomes will be (growth, unemployment rate etc.). Also, the response of many different types of companies has to be taken into account. Our VTM technology is well suited for the precise assessment of the consequences of new laws and reforms over time by exactly modeling the behavior of all relevant economic actors and the complex interactions between them.

• Other industries can test their strategic and tactical decisions in a fast and precise way using VTMs before charging ahead with implementation of decisions, e.g. the sector for power generation for consumers, the travel industry etc.

Analyx is developing fast and easy to use Virtual Test Markets for clients in various industries

Our teams of business consultants, data analysis experts and modelers work closely with clients to produce easy to use, yet comprehensive Virtual Test Markets for various industries. our custom VTM models are ready for clients within 2 – 6 months, depending on the actual market at hand. While these models are indeed complex, usage of the virtual test market is simple (click picture below to see a visual explanation):

1. The user specifies a what-if scenario in an Excel sheet.

2. The scenario is loaded into the virtual test market.

While the results of VTMs are easy to interpret and understand, we go one step further to increase acceptance of this new method among end users if the client. In developing the VTM we work closely with client staff, especially when modelling the behaviour of customers and competitors. We explicitly take the valuable soft knowledge and experience of practitioners from the client side into the model. Such experience cannot be found in numerical data but is critical for the design of realistic human-like behavioural models for consumers and competitors. Moreover, by better understanding the assumptions behind the VTM users are also more comfortable with VTM results and forecasts.

© 2007 Analyx sp. z o.o. sp. k.

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