Chapter 3
Customer Perception Driven
Pricing
Using Conjoint Analysis to Identify
Value Trade-Offs and Define Prices
• How can the perceptions of customers be used to
set prices?
• How can intangible value be quantified and used
for pricing?
• What is conjoint analysis and how does it use
customer perceptions to inform pricing?
• How does conjoint analysis compare to the other
methods of price setting?
Agenda
• Revolutionary markets
• Lack of sufficient information required (for buyers and sellers) for
pricing
• Rare and unique products
• No reference products/ no elasticity of demand.
• Evolutionary markets
• Markets in which products currently exist.
• Customers and sellers are aware of the product categories
• Conjoint analysis is very appropriate
• Mature markets
• Products available in the markets for quite long time
• Sold through matured markets
• There is little product differentiation in commodity markets
Matching the price setting
approach to market stage
• With evolutionary products, Customers…
•
•
•
•
•
have experience with the product category
can conceptualize potential variations on those products
understand the value of the benefits delivered
hold price expectations
can make informed tradeoffs between competing alternatives.
• Example
• iPhone 2,3,4,5…., iPad mini, most of the electronic gadgets
• Automobiles with automatic vs. manual transmissions
Customer Perception
Driven Pricing
• Conjoint analysis provides much greater relevance and depth
in price setting than other methods
• Discriminates between the benefits of specific brands, product
attributes, service levels, market segments
• Narrower price bands than from Exchange Value Models
• More insight and relevance than from pure Economic Price
Optimization
• Conjoint is pricing according to customer perceived value
Why Conjoint
• In a real purchase situation, however, consumers do not
make choices based on a single attribute.
• Conjoint analysis examines these trade- offs to determine
the combination of attributes that will be most satisfying to
the consumer.

By using conjoint analysis a company can determine the
optimal features for their product or service.
 Conjoint analysis will identify the best advertising message
by identifying the features that are most important in product
choice.
Why conjoint
•
•
•
•
•
•
Determine attributes and attribute levels
Select product profiles to be measured
Choose a method of stimulus presentation
Decide on the response method
Collect and analyze the data
Interpret the results
Steps in conjoint analysis
• Identify the relevant product attributes that are considered
during choice
• Select attribute levels that represent the options actually
available in the market
• Trade-off between the completeness of the representation
and the complexity of the design
Attributes and attribute
levels
• Full factorial designs:
all possible combinations of the levels of the various
attributes
• Fractional factorial designs:
• subset of all possible combinations
Product profiles
Brand
Hard Drive
RAM
Screen
Price
Dell
320 GB
2 GB
15.4 in
$1,200
Apple
320 GB
4 GB
15.4 in
$1,200
Dell
160 GB
4 GB
15.4 in
$900
Apple
320 GB
2 GB
15.4 in
$900
Dell
320 GB
4 GB
12.1 in
$1,500
Apple
320 GB
2 GB
12.1 in
$1,500
Apple
160 GB
4 GB
15.4 in
$1,500
Apple
160 GB
2 GB
12.1 in
$900
Apple
160 GB
4 GB
12.1 in
$1,200
Dell
160 GB
2 GB
12.1 in
$1,200
Dell
320 GB
4 GB
12.1 in
$900
Dell
160 GB
2 GB
15.4 in
$1,500
Example: Laptop Profiles
• Verbal descriptions
• Pictures
• Actual products or prototypes
Methods of stimulus presentation
• Rankings or ratings of the product profiles in terms of
preference, purchase probability, etc.
• Choice of a product from a set of product profiles
Response method
• Conjoint treats a product as a bundle of attributes, features, and
benefits
• The resulting attribute to value relationship is called a part-worth
utility function.
• The sum of the part worth utilities of a product is the consumer
utility.
• Can identify the willingness-to-pay by consumers for products that
don’t exist yet
• Researchers can explore alternative variations of a product, even products
that do not yet exist, and identify the value customers would place on a
product with the associated features
• Can be useful in uncovering new product compositions and potential
price points that customers would accept
Conjoint creates Part-Worth Utility Functions
• Suppose you wanted to book an airline travel and you had a
choice of spending $400 or $700 for a ticket.

The lower priced ($400) ticket is preferable.
• What if the only consideration in booking a travel was
sitting in a regular or extra-wide seat?

You would probably prefer an extra-wide seat.
• Finally, suppose you can take either a direct travel which
takes three hours or a travel that stops once and takes five
hours.

Virtually everyone would prefer the direct travel.
The Basics of Conjoint Analysis
• Q: Would you prefer an airline travel with A or B?
A: regular seats, that costs $400 and takes 5 hours.
B: costs $700 has extra-wide seats and takes 3 hours.
• Extending this, we see that if seat comfort, price and duration
are the only relevant attributes, there are potentially eight
travel choices.
C h oice
S eat C om fort
P rice
D u ration
C h oice
S eat C om fort
P rice
D u ration
1
E xtra-W id e
$700
5 H ou rs
5
R egu lar
$700
5 H ou rs
2
E xtra-W id e
$700
3 H ou rs
6
R egu lar
$700
3 H ou rs
3
E xtra-W id e
$400
5 H ou rs
7
R egu lar
$400
5 H ou rs
4
E xtra-W id e
$400
3 H ou rs
8
R egu lar
$400
3 H ou rs
A Practical Example of Conjoint
Analysis
• Given the above alternatives:
• Product 4 is very likely the most preferred choice.
• Product 5 is probably the least preferred product.
• The preference for the other choices is determined by what is
important to that individual.
• Conjoint analysis can be used to determine:
• Relative importance of each attribute, attribute level, and
combinations of attributes.
• If the most preferable product is not feasible for some reason, identify
the next most preferred alternative.
• Using other information, such as background demographics be able to
identify market segments for which distinct products may be appealing.
• A traveler may like the comfort and arrival time of a
particular travel, but reject purchase due to the cost.
In this case, price has a high utility value.
• Utility can be defined as a number which represents the
value that consumers place on an attribute.
• Utility represents the relative "worth" of the attribute.
P rice
U tility
$400
65
More Value
$700
5
Less Value
Utility Value
D u ration
U tility
3 h ou rs
42
5 h ou r3
22
S eat C om fort
U tility
extra-w id e seats
15
regu lar seats
12
P rice
U tility
$400
61
$700
5
A list of utilities for an
individual consumer
• This consumer places a greater value on a 3 hour
travel (the utility is 42) than on a 5 hour travel
(utility is 22).
• This consumer does not differ much in the value
that he or she places on comfort. That is, the utilities
are quite close (12 vs. 15).
• This consumer places a much higher value on a
price of $400 than a price of $700.
• Average utilities can be calculated for all consumers
or for specific subgroups of consumers.
• Back to the question above:
Would you prefer an airline travel with regular seats, that
costs $400 and takes 5 hours, or a travel which costs
$700 has extra-wide seats and takes 3 hours?
For the consumer:
C h oice
S eat C om fort
P rice
D u ration
C h oice
S eat C om fort
P rice
D u ration
1
E xtra-W id e
$700
5 H ou rs
5
R egu lar
$700
5 H ou rs
2
E xtra-W id e
$700
3 H ou rs
6
R egu lar
$700
3 H ou rs
3
E xtra-W id e
$400
5 H ou rs
7
R egu lar
$400
5 H ou rs
4
E xtra-W id e
$400
3 H ou rs
8
R egu lar
$400
3 H ou rs
Utility value =15+5+42 =62
<
Utility value =12+61+22 =95
• While fresh mango juice is common within tropical
areas, it is harder to find in more northern latitudes
• Potentially, a new hot consumer product
• Mango juice is relatively expensive to produce in
relation to other juices, such as grape or orange
• Producers vary between offering pure Mango Juice
and Mango Fruit Blends
Example: Mango Juice
• 32 ounce container of Mango Juice has been determined
• Formulation:
• Pure
• Fruit Blend
• Branding
• National Brand
• Boutique Brand
• Price levels
• $4 or
• $7
• Each of three attribute is posed at two different levels for this example,
but more attributes can be included and more levels can be considered
Attributes under Consideration
Price
Ingredient
Brand
Ingredient
Pure Mango
Juice
Premium Niche
Brand
$7
Mango Fruit
Blend
Premium Niche
Brand
$7
Pure Mango
Juice
Premium Niche
Brand
$4
Mango Fruit
Blend
Premium Niche
Brand
$4
Pure Mango
Juice
National Brand
$7
Mango Fruit
Blend
National Brand
$7
Pure Mango
Juice
National Brand
$4
Mango Fruit
Blend
National Brand
$4
Attribute Alternatives
Price
Ingredient
Brand
Ingredient
Pure Mango
Juice
Premium Niche
Brand
$7
Rank = 6
Mango Fruit
Blend
Premium Niche
Brand
$7
Rank = 8
Pure Mango
Juice
Premium Niche
Brand
$4
Rank = 2
Mango Fruit
Blend
Premium Niche
Brand
$4
Rank = 4
Pure Mango
Juice
National Brand
$7
Rank = 5
Mango Fruit
Blend
National Brand
$7
Rank = 7
Pure Mango
Juice
National Brand
$4
Rank = 1
Mango Fruit
Blend
National Brand
$4
Rank = 3
Rank Ordering
Price
Ingredient
Brand
Ingredient
Pure Mango
Juice
Premium Niche
Brand
$7
Score = 2
Mango Fruit
Blend
Premium Niche
Brand
$7
Score = 0
Pure Mango
Juice
Premium Niche
Brand
$4
Score = 6
Mango Fruit
Blend
Premium Niche
Brand
$4
Score = 4
Pure Mango
Juice
National Brand
$7
Score = 3
Mango Fruit
Blend
National Brand
$7
Score = 1
Pure Mango
Juice
National Brand
$4
Score = 7
Mango Fruit
Blend
National Brand
$4
Score = 5
Scoring
Feature
Ingredient
Brand
Price
•
•
Part Worth
Utility
Pure Mango
(2+3+6+7)/4
4.5
Fruit Blend
(0+1+4+5)/4
2.5
Premium
Niche
(2+0+6+4)/4
3.0
National
(3+1+7+5)/4
4.0
$7
(2+0+3+1)/4
1.5
$4
(6+4+7+5)/4
5.5
Part-worth Utility is found by averaging product scores among attribute
Part Worth Utility measured in Utils, an economist metric of utility.
Part Worth Utility
Product
Utility (Utils)
Utility
Ranking
Pure Mango, Premium Niche Brand, $7
4.5 + 3.0 + 1.5 = 9.0
6
Mango Fruit Blend, Premium Niche Brand, $7
2.5 + 3.0 + 1.5 = 7.0
8
Pure Mango, Premium Niche Brand, $4
4.5 + 3.0 + 5.5 = 13.0
2
Mango Fruit Blend, Premium Niche Brand, $4
2.5 + 3.0 + 5.5 = 11.0
4
Pure Mango, National Brand, $7
4.5 + 4.0 + 1.5 = 10.0
5
Mango Fruit Blend, National Brand, $7
2.5 + 4.0 + 1.5 = 8.0
7
Pure Mango, National Brand, $4
4.5 + 4.0 + 5.5 = 14.0
1
Mango Fruit Blend, National Brand, $4
2.5 + 4.0 + 5.5 = 12.0
3
• To find the utility of a product, we simply add the part worth utilities
• We can see that the part-worth utility valuation creates the same utility
ranking as was reported in the survey ranking
Product Utility
• Because price was one of the attributes being measured in
the conjoint analysis, we can place a monetary value on
Utils.
• Over the price range from $7 to $4, the part-worth utility
ranges from 5.5 to 1.5.
• Thus, a differential Utility is valued at $.75/util
Util 
$ 7  $ 4 
5 . 5  1 . 5 
Using Utility to determine Price Differentials
• The preference value this participant places on a national brands
versus boutique brands is 1 util, or $0.75.
• The premium niche brand detracts value from the product for this
participant with respect to national brands.
• The preference value this participant places on a Pure Mango Juice
versus a Mango Fruit Blend is 2 utils, or $1.50.
• Purity in mango juice adds value for this participant.
• Potential products.
• Market a boutique brand of pure mango juice competing against an
established national brand of mango fruit blend priced at $4 would have
to market their product at a price less than $4.75 to attract this research
participant.
• $4.75 is found by adding the util difference between premium niche
versus national (-1.0 utils) and the util difference between pure mango
juice and mango fruit blend (2.0 utils), which yields 1 util, where 1 util is
valued, by the customer, at $.75
Potential Compelling Offers
• Question-3 on Page 57
Class Work-3
1. Attributes Definition
2. Stimulus Presentation
3. Response Measurement
4. Evaluation Criterion
5. Data Analysis
5 Steps to Conjoint
Analysis
• Conjoint analysis tends to dominate pricing challenges with
evolutionary, differentiated products
• Conjoint analysis treats a product as a sum of its parts, including
features, attributes and benefits
• Conjoint analysis reveals the part-worth utility that customers place
on specific attributes.
• Dispersion between the part-worth utility functions of customers can
be used to identify market segments and estimate market shares of
products serving those market segments.
Summary