Chpt 03 customer perception-driven pricing

Tim J. Smith
Pricing Strategy: Setting Price Levels,
Managing Price Discounts, &
Establishing Price Structures
PowerPoint by
Tim J. Smith, PhD
Managing Principal, Wiglaf Pricing
Adjunct Professor of Marketing & Economics, DePaul University
© 2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter 3
Customer Perception Driven Pricing
Using Conjoint Analysis to Identify
Value Trade-Offs and Define Prices

Agenda
• 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?
• Which method of price setting is found to be the most
useful for which kinds of pricing challenges?
• Stretch Question: What is the value of a brand in
monopolistic competition?

Customer Perception Driven Pricing
• 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
– Breyer’s Ice cream with Hershey’s Chocolate Chips
– Case Forklifts with automatic vs. manual transmissions
– Security software bundled with online data backup offerings
– Tide with color safe bleach

Why Conjoint
• 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

Conjoint creates Part-Worth Utility Functions
• 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 is a Market Research Based Tool
• As a market research technique, the quantification of
value comes from the perspective of the customer, not
the company
• Has similar challenges to other market research
techniques
– Shows a snapshot of customer willingness to pay with
limited ability to demonstrate how product valuations will
evolve
– Requires markets with many customers, not just a few (In
B2B markets, this would include Seagull, not Hawk
markets)

Customer Valuations Vary
• Conjoint analysis can reveal the dispersion of value that different customers place
on a product or its features
– This dispersion can lead to a range of prices that appear to be acceptable to the market
for a product
– The acceptable prices range to come out of a conjoint analysis is much narrower than
that from a raw exchange value model, but broader than that from economic price
optimization
• Dispersion of valuation between consumers can be meaningfully used to enhance
profitability through Segmentation
– Customers will place different value on a product than the producing firm, both greater
and lower valuation
– Greater valuations can derive from customers having alternative uses for a product than
was originally intended by the producer, or from satisfying a need greater than was
anticipated.
– Lower valuations can derive from customers perceiving a wider variety of alternatives
than originally anticipated, or no longer needing a set of benefits delivered.
– If consumer dispersion between valuations of specific features can be aggregated into
meaningfully different groups, conjoint analysis can form the basis of highly valuable
market segmentation

Example: Mango Juice
• 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

Attributes under Consideration
• 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

Attribute Alternatives
Price
Ingredient Ingredient
Brand
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

Rank Ordering
Price
Brand
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
• Research subjects are asked to rank order their preferences

Scoring
 The researcher then proceeds to prepare the data for evaluation by scoring it
from 0 to 7, where the lowest score is that which yields the lowest utility and
the highest score yields the highest utility.
Price
Brand
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

Part Worth Utility
Feature Part Worth
Utility
Ingredient Pure Mango (2+3+6+7)/4 4.5
Fruit Blend (0+1+4+5)/4 2.5
Brand Premium
Niche
(2+0+6+4)/4 3.0
National (3+1+7+5)/4 4.0
Price $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.

Product Utility
• 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 (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

Using Utils to determine Price Differentials
• 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 Util is valued at $.75/util
 
 5.15.5
4$7$


Util

Potential Compelling Offers
• 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

The Larger Market
• Different customers will have different utility rankings,
and therefore different part-worth utilities for the
various attributes
• The aggregate market’s part-worth utility for specific
attributes is the average of the individual participants
part worth utility.
• If there are meaningful differences between groups of
market research participants in their utility rankings,
researchers can segment the market and uncover the
utility different segments would place on different
product compositions.

5 Steps to Conjoint Analysis
1. Attributes Definition
2. Stimulus Presentation
3. Response Measurement
4. Evaluation Criterion
5. Data Analysis

1. Attribute Definition
• The attributes and attribute level lists need to be full, relevant, and executable.
– Conjoint can only value an attribute this is included in the research, and only within the
range of levels examined
– Adding more attributes quickly adds complexity, and costs, but also delivers more insight
and flexibility
• Attribute Types
– Physical attributes
– Performance benefits
– Psychological positioning.
• Attribute Levels
– Thee attributes are examined at specific discrete levels, not on a continuous scale
– Need to ensure that the levels span the dimension under investigation, but is fine
enough to indicate intermediate points.
– For example: Commuter bicycle the tires at three levels of narrow, medium, or wide
width, or the selection could be expanded to include five levels with extra wide and
extra narrow.

• Verbal
– “Brand: National”
– The attribute is listed along with its level
– Advantages:
• simplicity in execution
• efficiency in collection of data
• variety in number of attributes and levels which can be
considered in a single study

• Paragraph
– “The brand would be a nationally well known brand.”
– Attribute is described using natural language in
complete sentences
– Advantage:
• provides a more realistic and complete description of the
product which would lead to more reliable measurements
of results.
– Disadvantage:
• Descriptions will be long
• it limits the total number of descriptions to a small number

• Pictorial
– Visual props used in an interview setting.
– Advantage:
• Realistic
• Pictorial representations are more likely to accurately
communicate the meaning of different attribute levels
• Participants are less likely to suffer from information
overload in reviewing multiple lists of features,
• the task itself is more interesting and less fatiguing
– Disadvantage:
• the cost to prepare and present the stimulus can be high.

• Rank ordering
– Nonmetric measurement
– Participants are provided with a stack of cards
where each card holds a product description or
stimulus presentation. Participants are then
asked to divide the cards into two halves of
preferred and not preferred products, and then
repeat the procedure of starting with the
preferred half, moving through out the pile, until
the ranking has been complete.

• Paired comparisons
– Nonmetric measurement
– Two products are presented at a time and the
participant is asked to state their preference.
Which commuter cycle do you prefer?
Grey
Disc Brakes
700x38C Street tires
Made in China
Well known brand
Price is several dollars
more than average
Black
Pivot Brakes
26” X 1.95”
Rugged tires
Made in the USA
Unknown brand
Price is average
OR

• Rating scales
– Participants are asked to rate
their level of interest in a
product.
– The scale can be continuous as
shown in the exhibit or discrete,
such as giving a product a rating
between 1 and 100 in whole
numbers
– Functionally, researchers have
shown that rating scales and
rank ordering can yield similar
results under many
circumstances
• Commuter Cycle
– The cycle is Grey
– The cycle has disc brakes
– The cycle is better than average
– The cycle is several dollars more than average
– The cycle is made in China
– The label on the cycle is a well known brand
• Based on the information above, how likely is it
that you would purchase this commuter cycle
Not at All
Likely
Very
Likely

4. Evaluation Criterion
• Criteria used to rank preferences
– Overall Preference or Intention to Buy
• Overall Preference
– When studying more established markets, preference
evaluation have been identified to be more useful in estimating
market shares.
• Intention to Buy
– Suitable for new product classes and service that consumers to
not purchase currently.
– These studies help researchers estimate the potential market
size.

5. Data Analysis
• The type of data analysis that is conducted will depend upon the prior
decisions regarding response type.
• Rank ordering
– Recognize that we don’t really know by how much one alternative is
preferred over another.
– We can only analyze the ordering of preferences through techniques such as
monotone analysis of variance (MONANOVA), PREFMAP, or LINMAP.
• Paired Comparisons
– Participants have been asked to state their probability of choice,
– LOGIT and PROBIT methods can be used to accommodate the fact that
probabilities lie between zero and one.
• Rating scores
– Regression analysis such as ordinary least squares (OLS) or minimizing sum of
absolute errors (MSAE).

A rose is a rose by any other name
• Conjoint Analysis is marketed under a variety
of names
– Discrete choice and tradeoff analysis are two of
the more popular names
– Regardless of name, each variant shares the same
basic principles

Summary
• 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.
• Project Plan: attribute definition, product description selection, response
type selection, evaluation criterion, and data analysis

Chpt 03 customer perception-driven pricing

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