When pursuing a value-based pricing strategy, the core focus is on Willingness-to-Pay. What are customers willing to pay for given product or service. This can of course be on the overall level but for proper value-based pricing, it should also be on the feature level. How much value do customers put on individual features or combinations of features. This is where Conjoint Analysis comes in handy.
Choice-Based Conjoint Analysis can tell what value customers put on different features (often known as "attributes" and "levels"). E.g. hard disk capacity on a laptop computer could be the attribute and 512Gb, 1Tb, and 2Tb could be the levels. On the same laptop, screen size could be an attribute and 14", 15" and 17" could be the levels in the conjoint analysis.
In a Choice-Based Conjoint Analysis the objective is to find out what value consumers put on each attribute/level, based on the preferences they exhibit when shown different combinations/options. In broad terms the steps are:
- Define the Attributes and Levels to research.
- Find a set of respondents.
- Present each respondent with a random set of hypothetical products. Each product is made of a set of features (attributes) and are presented e.g. 4 products next to each other.
- The respondent then indicates his or her preference among the 4 options shown
- He or she is then given a new set of 4 products and asked to give a preference. And so forth until s(he) has gone through 20-25 different sets of 4 hypothetical products.
- When done over a suitably sized respondent population, the outcome is a calculation of what value the respondents put on each attribute+level.
Knowing the part values, i.e. the value behind each attribute/level, the willingness-to-pay for the overall product can be derived, by adding the sum of the parts. The strength of the method is also that it can be applied to both existing products, competitor products and new products not yet launched, thus making it a very effective tool for the value-based pricing practitioners.
At PriceBeam we offer our Value Attributes study type that does all of the heavy lifting for you when it comes to optimizing prices with conjoint analysis. Get in touch if you want to discuss your needs further.