Product Design Bias
Real estate development continues to be a stodgy, risk averse industry when it comes to product development and innovation. This is understandable considering how much risk is involved in all other aspects of the development process, but this can result in blind spots or biases that can result in spending more than one must on the product. We have found evidence of, and this article will primarily focus on, this bias in multifamily residential, but these insights may be applied to other product types. Fundamentally, it is important that a developer recognize that they are developing a product for a customer, and that customer has their own set of decision drivers which, no matter how a developer might try to rationalize their decisions, may not align.
What are the sources of bias?
While not comprehensive, there are three major sources of bias about which a developer should be aware and contemplate whether one of these may influence their decision making with regards to interior standards.
Fear of the competition - Most developers will conduct a survey of comparable products in the marketplace in order to inform their decisions on finishes. In terms of risk aversion, the logic behind this is sound. If one’s product is equal or better than the competition, this should ensure that one can charge at least the same rental rate as the competition. However, as we will see below, not all finishes should be treated equally.
2. Developer creativity or ego - Many developers got into the business of real estate specifically to create something. Therefore, many exhibit strong creative tendencies which may result in clever or innovative approaches that they, later upon having some success, believe to have created a competitive advantage for which there is demand. Others merely wish their product to be better looking or more impressive than their competitors, purely to stroke their own ego. Both approaches are often flawed and a developer should try to evaluate their own product in light of their customer without overindulgence in creativity or ego.
3. Design staff - Possibly the largest potential area for interior finish bias comes from the developer’s own design staff. Generally, designers went into the design industry because well designed spaces, products and/or buildings appeal to them on a fundamental level. Then they receive training to better understand what constitutes good design, higher end finishes, more expensive brands, etc. Combine this with the fact that the individual in a decision making capacity, whether the lead architect or a developer’s internal head of design, likely has 10-15 years of experience, meaning that they now likely garner a six figure salary and have their own ideas about what finishes they would prefer in their own living space. This is often out of sync with the developer’s core customers, who may be either recent graduates, blue collar workers, retirees or other demographics not at their peak earning potential and for whom other considerations are more important than interior finishes.
So how does one determine what my customers want?
For developers with an existing product and track record, we recommend first challenging yourself on the third rails on which the interior design may rely. It is important to recognize that these may be imperfect assumptions rather than truisms. Next, conduct rigorous surveys on both existing customers or individuals who fit the profile of a likely renter. Survey questions should not just focus on what a customer wants, but whether or not they are willing to pay for it.
Recommended Method and Tools?
While one may have success with simple surveys, the best practice would be to conduct a MaxDiff survey. MaxDiff (Maximum Difference Scaling) is a technique used to determine the relative importance or preference of various items (e.g., features, attributes, products, etc.) to respondents. It is a form of choice-based conjoint analysis and helps in understanding how people rank or prioritize different options.
How MaxDiff Works
Survey Setup: In a MaxDiff survey, respondents are presented with multiple sets of items (or attributes) and asked to select the most and least preferred items from each set.
Ranking Items: For each set, the respondent might be shown 4–6 options and asked which they like the most and which they like the least. These answers are recorded to determine the relative importance or preference of each item across all sets.
Scaling: The data collected is then analyzed to create a preference score for each item, indicating how preferred or important each item is relative to others.
Key Points
MaxDiff is particularly useful when dealing with a large number of items and when researchers want to understand how much more important one item is compared to another.
This method provides a rank order of items, allowing businesses to prioritize what customers care about most, even when the total number of options is large.
Example
If you were conducting an A/B/C survey to gauge customer preferences for three types of kitchen layouts (A, B, and C), the MaxDiff method would ask respondents questions like:
"Which layout do you prefer most, A or B?"
"Which layout do you prefer least, B or C?" The survey would involve multiple rounds, each with different comparisons, to extract preference data.
Each scenario would include its relative value, increase or decrease in rent, for instance to determine whether or not individuals value an option sufficiently to pay for it
Benefits of MaxDiff
Relative Importance: Provides clear insight into how much more one option is valued over others, which is often more valuable than absolute ratings.
Scalability: Can handle a large number of items without overwhelming the respondent.
Real-World Preference: Reflects trade-offs in real-world decision-making, where consumers often have to prioritize features or options.
Drawbacks
Complexity: Requires careful survey design and statistical analysis to interpret the results correctly.
Respondent Fatigue: Can be mentally taxing if too many items are presented to the respondent.
In summary, MaxDiff is a powerful survey tool to uncover preferences and prioritize options based on customer feedback in situations with multiple alternatives.
If you wish to conduct a survey of this nature, we recommend Qualtrics
What do the surveys show?
At least two of our clients have conducted these types of rigorous surveys. The general takeaway is that only 20-25% of renters care about purely aesthetic interior finishes, which may look better or be more expensive, but add no real utility. By the way, it is into this cohort that the design staff discussed above would sort themselves into. Examples of these would be quartz or granite countertops vs. laminate countertops and black appliances vs. stainless steel appliances. This is not to say that no one cares about these things, and we recommend offering 20% of ones units with upgraded finishes at a premium to enable individuals to self select into those units. However, we see in the industry that nearly all developers assume they must put in stainless steel appliances and quartz countertops just to keep up with the competition. This is inaccurate, and means developers are wasting money on up to 80% of their units. Again, lets push the logic of equivalence discussed above further. the original assumption was that one can only charge as much as the competition by providing an level of interior finishes equal to them in quality. However, if a survey of customer desires finds that, while all renters may prefer a quartz countertop, and will take it if included in the unit, they are unwilling to pay any more for that upgrade. Therefore, by putting in quartz countertops in all their units the developer has wasted hundreds of thousands of dollars which may have been better applied to investor returns, or even providing some other enhancement which provides true utility (like an island for more kitchen storage). The surveys also indicate that the other 80% tend to prioritize other factors, such as utility and value. Therefore, reducing project costs with more cost effective finishes and as a result charging less in rent than the competition (passing the savings on to the customers) is also a viable strategy.
Not just for aesthetic decisions
This is just one example of an insight which can be gleaned from this sort of survey work. While we might like to see a revolution in interior finishes better suited to the rental customer, any developer should be able to utilize this technique to test any number of theoretical improvements to their product. Does that unique little detail really add value, or is it just a fallacy coming from one of the sources of bias listed above? It is our contention that developers can utilize this technique to better refine their product to ensure cost is most efficiently allocated to either drive greater profits or improve affordability.
