Establishing Price
In this case there may be just two
variables, price and purchase. Customers
are exposed to a particular price point
and asked to provide some indication of
purchase. Typically, a series of price
points are presented monadically to
independent samples of customers. The
output can be graphed as the number of
units of product demanded at various
price levels. Consumers are expected to
behave rationally and prefer lower
prices to higher prices. In most instances,
the demand is expected to
decrease as price rises.
Improving Price-Value
The next level of complexity is to
introduce product attributes other than
price into the model. Purchase is now
viewed as being influenced by several
variables, each to a different
degree. Some of
the most frequently used
methods are conjoint
analysis and choice modeling.
Consumers are
exposed to multiple product
descriptions and
asked to express preferences
or choices. In addition
to price, attributes
such as quality, style, and
packaging can be quantified.
To what extent are
each of these important in
customer preference and
choice? What values do customers
assign to alternative levels of the attributes?
To what extent do differences in
attributes compensate for one another?
And, perhaps most significant, what is
the likely impact on future purchase of
changes in the levels of price and other
attributes?
This kind of simulation capability is
crucial in aiding decision making to
improve the value of the product. For
example, should greater quality be built
into the product? Will consumers be
willing to pay more for this enhancement?