In most industrialized countries, functional foods have become more and more popular with consumers because of a growing awareness of the relation between health, nutrition, and diet. This study examines consumers’ preferences and willingness-to-pay for functional dairy product attributes in Germany using cross-sectional choice experiment data. Random parameter logit and latent class models are employed to model preference behavior and to account for preference heterogeneity among consumers. It is also tested whether willingness-to-pay estimates obtained from the random parameter logit model are subject to starting point bias. Furthermore, this study investigates consumers’ real functional food choices in Germany by using a scanner database of yoghurt and dairy drink sales. Both a bivariate probit model and an almost ideal demand system model are employed to examine the consumers’ actual choice behavior towards functional dairy products. The empirical results obtained from the random parameter logit model reveal significant preference heterogeneity among consumers with regard to price. Omega-3 fatty acids and a health claim of support for healthy blood vessels and healthy metabolism are found to be the most preferred attributes, whereas a health claim of just support for healthy blood vessels is ranked below these attributes. Furthermore, respondents reveal the highest positive willingness-to-pay for omega-3 fatty acids. The random parameter logit model results further indicate that willingness-to-pay estimates are not prone to starting point bias, implying that choice experiments provide unbiased willingness-to-pay estimates. The results of the latent class model reveal class-specific heterogeneous preferences. Specifically, three distinct classes of consumers are identified each revealing different preferences for the same functional dairy product attributes. The results obtained from the bivariate probit model indicate that the two choice decisions whether to purchase functional dairy drinks or not and whether to purchase functional yoghurts or not are not statistically independent. The results also reveal that the probabilities of purchasing functional dairy drinks and functional yoghurts are influenced by several socioeconomic characteristics. The empirical results of the almost ideal demand system model indicate that age and household size influence the consumption of functional and non-functional dairy products. The demand for yoghurts and dairy drinks (both functional and non-functional) is income inelastic, suggesting that these products are necessities. Own-price elasticities for functional yoghurts and functional dairy drinks are close to zero, implying that the demand for these functional dairy products tends to be price-independent. Furthermore, functional and non-functional dairy products (yoghurts and dairy drinks) are not likely to be seen as substitutes.