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.
Choice Seat Comfort Price Duration Choice Seat Comfort Price Duration

1 Extra-Wide $700 5 Hours 5 Regular $700 5 Hours

2 Extra-Wide $700 3 Hours 6 Regular $700 3 Hours
3 Extra-Wide $400 5 Hours 7 Regular $400 5 Hours
4 Extra-Wide $400 3 Hours 8 Regular $400 3 Hours

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.

Price Utility

$400 65 More Value

$700 5 Less Value

Utility Value
 Duration Utility • This consumer places a greater value on a 3 hour
3 hours 42 travel (the utility is 42) than on a 5 hour travel
5 hour3 22 (utility is 22).
Seat Comfort Utility
• This consumer does not differ much in the value
extra-wide seats 15
that he or she places on comfort. That is, the utilities
regular seats 12
are quite close (12 vs. 15).
Price Utility
$400 61 • This consumer places a much higher value on a
$700 5 price of $400 than a price of $700.

A list of utilities for an

• Average utilities can be calculated for all consumers
individual consumer
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:

Choice Seat Comfort Price Duration Choice Seat Comfort Price Duration

1 Extra-Wide $700 5 Hours 5 Regular $700 5 Hours

2 Extra-Wide $700 3 Hours 6 Regular $700 3 Hours
3 Extra-Wide $400 5 Hours 7 Regular $400 5 Hours
4 Extra-Wide $400 3 Hours 8 Regular $400 3 Hours

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 Ingredient

Pure Mango Mango Fruit Pure Mango Mango Fruit

Juice Blend Juice Blend
Premium Niche Premium Niche Premium Niche Premium Niche
Brand Brand Brand Brand
Brand $7 $7 $4 $4
Pure Mango Mango Fruit Pure Mango Mango Fruit
Juice Blend Juice Blend
National Brand National Brand National Brand National Brand
$7 $7 $4 $4

Attribute Alternatives
 Price

Ingredient Ingredient

Pure Mango Mango Fruit Pure Mango Mango Fruit

Juice Blend Juice Blend
Premium Niche Premium Niche Premium Niche Premium Niche
Brand Brand Brand Brand
$7 $7 $4 $4
Brand Rank = 6 Rank = 8 Rank = 2 Rank = 4
Pure Mango Mango Fruit Pure Mango Mango Fruit
Juice Blend Juice Blend
National Brand National Brand National Brand National Brand
$7 $7 $4 $4
Rank = 5 Rank = 7 Rank = 1 Rank = 3

Rank Ordering
 Price

Ingredient Ingredient

Pure Mango Mango Fruit Pure Mango Mango Fruit

Juice Blend Juice Blend
Premium Niche Premium Niche Premium Niche Premium Niche
Brand Brand Brand Brand
$7 $7 $4 $4
Brand Score = 2 Score = 0 Score = 6 Score = 4
Pure Mango Mango Fruit Pure Mango Mango Fruit
Juice Blend Juice Blend
National Brand National Brand National Brand National Brand
$7 $7 $4 $4
Score = 3 Score = 1 Score = 7 Score = 5

Scoring
 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 (2+0+6+4)/4 3.0

Niche
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.

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