The price is right

By Alejandro Requejo via ftijournal.com   Article

Is The Price Right?

“Businesses often must set prices and forecast demand without a shred of historical data or relevant comparables — in everything from consumer goods in emerging markets to innovative high-tech products for global markets. …

Because of its speed and low cost, one of the most common research techniques that companies use is contingent valuation. … researchers simply ask customers what they would be willing to pay based on a detailed product description and/or list of features.

The results, however, assume that customers know what they are willing to pay for a product absent any comparables or other context. But customers often don’t know. …

In this article, we look at how discrete choice analysis can address two common high-stakes pricing decisions.

Understanding context is critical. … For instance, consumers may say they value a certain feature of a pain killer such as how quickly it takes effect or its lack of side effects. But the equation can change completely when the context moves from a simple headache to severe arthritis.

By the same token, customers may be very enthused about new features in a smartphone but balk at the time of purchase when they discover the company doesn’t provide temporary replacements when the phone needs servicing.

In order to reliably discover what a customer is willing to pay, the research must simulate customer decisions in the context customers make them.”

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