7 Journal of Marketing Research and Case Studies
perception of the product on consumers may change and consumers may be willing to pay a higher price to own the product. They may also pay more in order to attain a social status or to belong to a group. In this study, we refer to promotion as a policy that is governed to attract more consumers, such as advertisements or campaigns. The study of Zhang and Zhang (2007) is taken as a reference point to the utility function. There are four components in the utility function of a consumer. These components are quality, promotion, WOM and price. The total utility of the consumer is the sum of these four components. All the parameters used for computing utility components scale from 0 to 1. The utility function for consumer i is as follows:
where; · Ki: quality sensitivity of consumer i · Ai: product characteristic value for attribute i · Pij: preference value of consumer i for product attribute j, j={1,2} Product attributes change between 0 and 1, 0 being the lowest quality and 1 being the highest quality possible for that attribute.
Where; · U i1: utility component of quality for consumer i · U i2: utility component of promotion for consumer i · U i3: utility component of WOM for consumer i · U i4: utility component of price for consumer i In the first component of the utility function, influence of product quality is gauged. In order to evaluate the product with respect to consumer’s preferences, we utilized the approach of Jager (2007).
Cost of the product is linearly related with the quality attributes of the product, so increasing these attributes result in higher costs for the company, since higher quality technology products cost more than lower quality products. For the first attribute, we assumed most of the population (60%) prefers mid-range values between 0.4 and 0.8, 20% prefers low values between 0.1 and 0.4 and the other 20% prefers product with values between 0.8 and 1. Since the second product characteristic is “the more, the better” type of attribute, every reasonable
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consumer will prefer higher values. However, because of the budget limitations they might choose to trade some resolution quality for lower price. For this reason, the preference values are uniformly distributed between 0.6 and 1. The second component of the utility function consists of the promotion effects. For each time step, the company has the power to define a promotion strategy.
Consumers are modeled as having memories so that the effect created by the previous time step’s promotion strategy continues to influence consumers to some extent in consecutive time steps. The effect of previous promotion intensity values decays geometrically as in exponential smoothing models. The derived promotion value gets multiplied by the promotion sensitivity value of each consumer at each time step. In the third component, we cover WOM effect.
where; · WOMi: amount of WOM consumer i receives · Si: social sensitivity of consumer i · CWOM: constant WOM sensitivity factor independent of consumer i Each consumer has different preferences and priorities for the product and gets influenced in different levels by external factors. The satisfaction a consumer receives from consuming the product is the first component of the utility function. This component determines the level and the direction of WOM, a consumer disseminates to others. If the person is an opinion leader, then the influence he or she makes will be three times as powerful as a normal consumer in our experiments. The company must pay a fixed amount of money for each opinion leader it collaborates. Opinion leaders that work with the company do not disseminate negative WOM. We assume that only consumers who have purchased the product create a WOM effect. An important concept is that, even though the consumer purchased the product, he can disseminate negative WOM and hamper other consumers’ buying stimuli. The fourth component of the utility function consists of price. where; · PrSeni: price sensitivity of consumer i · price: price of the product · Cprice: constant price sensitivity factor independent of consumer i Price and utility has an inverse relationship. Company sets a predetermined price for each time step. This price is multiplied by the consumer’s price sensitivity. Consumers with higher budget limits will be less sensitive to price and others will be influenced more by the price of the product, but in any case we assume price is an important attribute in the purchase decision so we randomly assign price sensitivity values to consumers between 0.5 and 1 instead of distributing it evenly between 0 and 1