Conjoint: Fact-based pricing strategy

Setting the right price is a complex strategic decision. It requires an understanding of how much the customers value the product and services offered by the company itself and competitors. Conjoint analysis is a scientific approach that quantifies how much your customers are willing to pay for your product and services.

Let’s imagine that you are in a business meeting regarding the pricing strategy of a about-to-be-launched product. The R&D department has spent a couple of years to develop the product and now is the time to finally launch the product and hopefully increase the firm’s revenue. You have to make the final recommendation for the pricing strategy.

To make this decision, you have talked to a handful of customers to get them to state their preferences for the up-coming product. However, you suspect that the customers understate how much they are willing to pay for the product.

Additionally, you worry that the few customers do not represent the whole market. Thus, you do not feel comfortable to make the recommendation for the pricing strategy.

Conjoint analysis gives you confidence in the pricing strategy

Conjoint analysis is a scientific tool that addresses the two problems stated above: (1) the selected customers do not state their true preferences and (2) the selected customers are not representative for the whole market.

It solves the first problem by letting the customers reveal rather than state their preferences. Conceptually, the customers are asked to choose between alternatives of the product at different price levels. This is a so-called conjoint experiment.

During the experiment the customer indirectly tell the researcher how much they value the features of product. With this information in hand, the researcher can quantify how much the customers are willing to pay for the product. To quantify this, the researcher applies statistical modelling.

The second problem is solved by inviting a large and representative group of customers to participate in the conjoint analysis. The customers are invited to participate in an online version of the conjoint experiment. Thus, customers from around the globe can complete the experiment simultaneously.

The final outcome of the conjoint analysis is a recommendation for the pricing strategy that is based on facts derived directly from your customers.

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