Chapter 3
Customer perception –
driven pricing
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pricing - chapter 3
1
How can the perceptions of customers
be used to set prices?
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2
how can intangible value be quantified
and used for pricing?
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3
What is conjoint analysis and how does
it use customer perceptions to inform
pricing?
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4
Hoe does conjoint analysis compare to
other methods of price setting?
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5
Which method of price setting is found
to be the most useful and for which
kinds of pricing challenges?
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6
Stretch question :what is the value of a
brand in monopolistic competition?
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Matching the price – setting approach to
the market stage
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Revolutionary markets
Evolutionary markets
Mature markets
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Revolutionary markets
In revolutionary markets: both executives and
their customers lack sufficient critical in
formation required to use most methods of
price setting.
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revolutionary markets are rare
and unique
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They are created by the introduction of the first
product into a new market such as:
The first electric-powered car
The first personal computer
The first railroad line
The first mobile phone network
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The new product creates an
entirely in a revolution
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This revolutionary market will have no
history from which one could even hope
to identify the elasticity of demand
through econometric means and hence
economic price optimization becomes a
highly useless approach.
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Furthermore:
Customers in this revolutionary market will
have no experience with the product
category.
Product category experience is necessary
for customers to learn the features and to
inform them of the expected value of
differing product configurations.
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Evolutionary markets
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Evolutionary markets
Evolutionary markets
are common
They are markets in which products currently exist
customers currently purchase and product are
evolving.
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Product evolutions are found in subtle shifts in the
features of products. such as:
adding chocolate chips to ice cream
Power transmissions to forklifts
Faster customer service in banking
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By many measures evolutionary products
represent more than 98% percent of the new
products on the market.
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By evolutionary we mean products that make
improvement to the status quo rather than
disrupt the current evolution of products.
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The improvement in evolutionary markets
typically derive from adding new features or
benefits to existing products
Whereas new products in revolutionary
markets address customers need in an
entirely new manner
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In evolutionary markets customers have
experience with the product category
Through there experience customers will have
become aware of the existing products and
their competition.
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They may also have developed sufficient
insight to conceptualize different
combinations of product attributes and
predict their benefits.
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In evolutionary markets :
Customers hold sufficient information that is
critically required to make informed
statements regarding their preferences and
therefore executives can reliably conduct
conjoint analysis .
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Because evolutionary product enhancements
are more common than revolutionary
product creation
Most marketing managers will rely heavily
upon conjoint analysis.
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Conjoint analysis is particularly
appropriate and useful for brand
managers
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In evolutionary markets not only will
customers have familiarity with different
features – products – and product categories
but they also highly likely to be familiar with
the existing brands.
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Marketing executives of branded goods can
use this familiarity to identify price points
for the product under different comparing
brand identifications – co branding
arrangement and new brand introductions.
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As such they can select the best brand
association for a new product in an
evolutionary market.
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As such conjoint analysis generally provides
much deeper and more precise insights into
the appropriate price in evolutionary markets
while exchange value models continue to be
the workhorse in revolutionary markets.
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Mature markets
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Mature markets
For pure commodities sold to
highly mature markets
economic price optimization
is often used to guide pricing
decisions.
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There is little product
degeneration in commodity
markets thus there is little to
guide the price differential
required for an exchange value
model to added values of
competing commodity
products - & therefore conjoint
analysis is unlikely to reveal
significant information.
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As such economic price optimization
continues to dominate pricing discussions
for commodity products and products tend
to be sold at the market clearing price.
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Conjoint analysis
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• In conjoint analysis researchers measure
preferences between products .
• Products are treated as a bundle of
attributes-features –and benefits where
price can be one of those features in a
conjoint analysis study.
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• By measuring their preferences –researchers
can detect how customers make tradeoffs
and use these tradeoffs to decompose a
product valuation into the sum of the values
that customers assign to specific attributesfeatures and benefits.
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• In this manner – executives can determine
how customers value specific product
formulations and quantify the source of
pricing power within their product.
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• In identifying the value that customers place
on specific product attributes –features –and
benefits-conjoint analysis creates a partworth utility function.
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• Because a specific product is the collection
of a set of attributes-features and benefits –
the value of that product to a customers-or
its customers net utility is the sum of their
part-worth utilities.
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By decomposing a product value into its pertworth utilities- executives can ask (what if)
questions .
they can posit alternative variations of product
formulations-each with its own cost structure
and identify which product formulation could
be priced the highest priced the lowest
capture the largest contribution margin or
capture the highest sales volume at a given
price. even product formulations that
currently don’t exist can be valued through
conjoint as the sum of a product’s part-worth
utilities .
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• The richness of these results enables
executives to uncover new product
compositions and potential prices to identify
which specific product formulation at a
specific price is likely to deliver the highest
profit .
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• Conjoint analysis is a market research
technique and as such the quantification of
value comes directly from the customers’
perspective. .
• This is very important .
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• Recall in the exploration of the range of a
good price- one of the key ingredients of
capturing a better price is knowing how
customers value a product.
.
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• The closer a firm can price its products to a
point just below the value customers place
on that product- the higher the price the
customers will place on a product – conjoint
analysis will measure it.
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• Customer valuations will vary between
customers and conjoint analysis will reveal
these variations .
• The dispersion in valuations can lean to an
understanding of the expected demand at a
given price even before a product is
launched .
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From this anticipated demand curveexecutives can use some of the techniques
explored in economic price optimization in
identifying the price most likely to deliver the
highest profits but with much greater
accuracy and relevance.
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If consumer dispersion in valuations of
specific features can be aggregated into
meaningfully different groups-conjoint
analysis can form the basis of highly
valuable market segmentation.
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Using customer preferences to
reveal part – worth utilities
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In a conjoint analysis study:
Researcher ask participants that are
representative of the target market to
identify their preferences between
different products.
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The products that customers choose
between are themselves compilations
of specific sets of features attributes
and benefits.
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After customers make selections the
responses are analyzed with statistical
methods .the results from this analysis are
the customers’ part-worth utility functions.
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Example:
Fresh mango juice is common in tropical
regions but is harder to find in latitudes
farther north.
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As the world’s population becomes more
mobile- however many peoples in northern
climates are familiar with mango juice- either
from their travels abroad or from their
familiar roots in a tropical climate.
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Drink makers have increasingly become aware
of the potential demand for mango juice in
northern climates and have recently been
making products to serve the growing
demand.
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• However mango juice is relatively expensive
to produce – transport and distribute to
northern climates .
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• In response many producers have chosen to
offer mango juice blends rather than pure
mango juice. in mango juice blends the
beverage is made mostly of non-mango
juices such as grape orange and apple but
will contain some mango or an additive to
impart a mango flavour.
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• For concreteness consider a hypothetical 32ounce container of mango juice.
• The producer can either offer pure mango
juice or a mango fruit blend & and the
product can be sold under a well-known
national brand or a new premium niche
brand.
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• The executives would like to know
the potential prices of the different
formulations of mango juices
marked under different brand
names.
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• In this hypothetical example
there will be three attributes
under investigation :
ingredients-brand-and price
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Each attribute will be investigated at two
different level for this simplified
example but more attributes and levels
could be explored in a more realistic
investigation .
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• The two ingredient levels are pure mango
juice and mango fruit blend.
• The two branding levels are well-known
national brand a premium niche brand .
• The price levels under consideration are $4
and $7.
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See Exhibit 3-1 for a 2*4 matrix depiction
of the eight different potential product
attributes and levels.
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Mango juice attributes
Price
Brand
Ingredient
Ingredient
pure mango juice
premium niche
$7
Mango fruit
blend
premium niche
$7
pure mango
juice
premium niche
$4
Mango fruit
blend
premium niche
$4
Pure mango juice
National
$7
Mango fruit
blend
national
$7
Pure mango
juice
national
$4
Mango fruit
blend
National
$4
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• In this conjoint analysis study –
participants are asked to rank the
potential products in order of
preferences .
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• For our example consider a participant
that most prefers pure mango juice
with a national brand priced at $4 and
least prefers mango fruit blend priced
with a premium niche brand price at $7.
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• continuing to rank the products from 1
being the most preferred to 8 being the
least preferred the participant exhausts
the potential product formulations .
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• See exhibit 3-2 this particular
participant’s ranking
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Mango juice attributes
Price
Brand
Ingredient
Ingredient
pure mango
juice
Mango fruit
blend
pure mango
juice
Mango fruit
blend
premium niche
$7
premium niche
premium niche
premium niche
$7
$4
$4
Rank=6
Rank=8
Pure mango juice
National
Mango fruit blend
national
Pure mango juice
national
Mango fruit blend
national
$7
$7
$4
$4
Rank=5
Rank=7
Rank=2
Rank=1
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Rank=4
Rank=3
69
• The participant
ranking of potential
products is a
measure of the utility
that he or she places • Those with the
highest utility were
on each specific
ranked first – while
product formulation .
those with the
lowest utility were
ranked last.
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• The researcher can
use this to prepare
the data collected
from this participant
for evaluation by
scoring it from 0-7
• Where the lowest
score is that which
yield the lowest
utility and the
highest score yields
the highest utility.
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See exhibit 3-3 for the researcher’s
preparation
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Mango juice Score
Price
Brand
Ingredient
Ingredient
pure mango
juice
Mango fruit
blend
pure mango
juice
Mango fruit
blend
premium niche
$7
premium niche
premium niche
premium niche
$7
$4
$4
SCORE=2
SCORE=0
Pure mango juice
National
Mango fruit blend
national
Pure mango juice
national
Mango fruit blend
national
$7
$7
$4
$4
SCORE=3
SCORE=1
SCORE=6
SCORE=7
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SCORE=4
SCORE=5
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• These product score can be used to
evaluate the part-worth utility function
of this participant
• The part-worth utility of a specific
attribute level
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• For simplicity we will measure partworth utilities with a metric called utile
an economist's unit of utility
• See exhibit 3-4
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Mango juice part-worth utility
Attribute
Ingredient
Brand
Price
Level
Average
Score
Pure mango (2+3+6+7)/4
Fruit blend (0+1+4+5)/4
Premium
niche
national
$7
$4
(2+0+6+4)/4
(3+1+7+5)/4
(2+0+3+1)/4
(6+4+7+5)/4
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Part worth
Utility
(utils)
4.5
2.5
3.5
4.0
1.5
5.5
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• To find the participant’s utility for a specific
product formulation
• We simply add the part-worth utilities
associated with the specific attribute levels
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• We can see that the utility valuation
from the sum of part-worth utilities
reproduces the same rankings as the
participant reported in the survey
• See exhibit 3-5
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Mango juice utilities
product
Utility (utils)
ranking
Pure mango /premium niche /$7
4.5+3.0+1.5=9
Mango fruit blend /premium niche/$7
2.5+3.0+1.5=7.0
Pure mango /premium niche /$4
4.5 +3.0+5.5=13.0
Mango fruit blend /premium niche/$4
2.5+3.0+5.5=11.0
6
8
2
4
Pure mango / national /$7
4.5+4.0+1.5=10.0
5
Mango fruit blend /national/$7
2.5+4.0+1.5=8.0
7
Pure mango / national /$4
4.5+4.0+5.5=14.0
1
Mango fruit blend /national /$4
2.5+4.0+5.5=12.0
3
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• Because price was one of the
attributes being measured in the
conjoint analysis
• We can place a monetary value on
the unite of utils.
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• Specifically the ratio of price disparity in the
study design to until disparity between the
two price points found from the customer the
calculated pert-worth utilities ranged from
5.5 to 1.5 utils
• We find the valuation of $0.7/util
• See equation
($7-$4)
$ 0.75 / util =
(5.5 utils – 1.5 utils)
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Armed with this information
• We can calculate the preference value
that this participant places on different
attribute levels.
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For instance
• Exhibit 3.4 shows that the difference in
utility of a national brand versus
premium niche brand is 1 util or $0.75
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• For this participant the premium niche brand
detracts value from the product with respect
to a national brand.
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• Likewise exhibit 3-4 shows that the
difference in utility of pure mango juice
versus a mango fruit blend is 2 utils or
$1.50
• Purity in mango juice adds value for this
participant
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• We can also use the attribute-level
valuations to compare different products
that could be made.
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• For instance a new entrant to this
market promoting a premium niche
brand of pure mango juice competing
against an established national brand
of mango fruit blend priced at $4 would
have to market its product at price less
than $4.75 to attract this research
participant.
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• This product valuation is found by
adding the part-worth utility differences
between premium niche versus
national (- 1.0 UTILS) and that between
pure mango juice and mango fruit
blend (2.0 utils) which yield 1 util.
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• This participant values 1 util at $0.75 so
this product could attract this
participant away from the $4
established brand only if priced at or
below $4.75
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Different customers will have different ranking leading
to different part-worth utility functions.
The aggregate market’s part-worth utility for specific
attributes is the average of each individual
participant’s part-worth utility.
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Rather than finding the aggregate market’s utility for a
product formulation it is often more insightful to
identify the willingness to pay of each different
product formulation for each research participant to
create potential demand curves for the market of
specific product for mutations.
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If there are meaningful differences between the utility
ranking of market research participants that can be
aggregated researchers can also segment the
market and uncover the prices that different
segments would be willing to pay for different
product compositions.
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Study design
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There are five basic steps in a conjoint
analysis :
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1. Defining the attributes and attribute
levels
2. Presenting the stimulus
3. Measuring the response
4. Setting the evaluation criterion
5. Analyzing the data
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1.
Defining the attribute
• One of the key values of conjoint
analysis is its ability to identify the
value that customers place on different
attributes
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• To accomplish this task researchers
must clearly define the attributes under
investigation and the levels of those
attributes to be investigated
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• Conjoint analyses cannot identify the
utility of attributes and levels that are
not stated hence the attribute and level
lists need to be full relevant and
excitable.
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Example:
we could consider a commuter bicycle
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• A commuter bicycle could be described as a
compilation of :
physical attributes performance benefits
psychological positing
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• Physical attributes refer to tangible
issues such as :
The frame weight
Hardware features (such as tire width
and braking system
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• Performance attributes are the benefits
that the commuter bicycle will deliver
such as stopping distance under wet
conditions or the effect of frame weight
and tire width on cycling speed or
durability in handling potholes in the
street
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• Psychological positioning refers to the
feelings that the product could invoke such
as the emotional connection a brand might
have to lance Armstrong or the assurance of
stopping quickly in high traffic or the desire
to improve one’s health and look more fit by
commuting to work.
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Presenting the stimulus
• The more popular forms of stimulus
presentation include
verbal descriptions
Paragraph descriptions
Pictorial representations
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Measuring the response
• Measurements of preferences can use
nonnumeric means such as rank ordering or
paired comparisons
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• They can also use metric approaches such
as rating scales or ratio scales
• Each of these approaches has been
investigated with multiple variations.
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• In rank ordering studies participants typically
are provided with a stack of cards where
each card holds a product description or
stimulus presentations .
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• Participants are then asked to divide the
cards into two piles preferred and not
preferred and then repeat the procedure
starting with preferred half moving through
the pile until the ranking in complete
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• In a paired comparison approach two
products are presented at a time and the
participant is asked to state her or his
preferences.
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See exhibit 3-6
Paired comparison :which
commuter cycle do you
prefer?
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Paired comparison :which commuter cycle do
you prefer?
• Gray
• Disc brakes
• 700 * 38c street
tires
• Made in china
• Well – known
brand
• Price is several
dollars more
than average
• Black
• Pivot brakes
• 26 “*1.95 “rugged
tires
• Made in united
state
• Unknown brand
• Price is average
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• With rating scales participants are
asked to rate their level of interest in a
product .
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Setting the evaluation criterion
• Two evaluative criteria commonly requested
are either a statement of overall preferences
or intention to buy.
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Analyzing the data
The type of data analysis that is
conducted depends upon the
prior decisions regarding
response type.
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