Precision Pricing: Measuring Consumers’ Willingness to Pay Accurately

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Setting the “right” price is one of the key marketing tasks that drive a firm’s performance: appropriate prices are essential for the success of new and existing products. Even small price variations can have a major impact on sales and profitability (Marn, Roegner, and Zawada 2004). As a firm’s pricing decisions are often based on consumer demand (Monroe 2003), it is crucial to gauge demand as precisely as possible. A popular approach to determine demand for consumer goods in both marketing academia and practice is the elicitation of consumers’ willingness to pay (WTP).

Various approaches to elicit consumers’ WTP exist. These approaches can be categorized into four groups: non-incentive-aligned direct approaches (e.g., direct questioning), non-incentive-aligned indirect approaches (e.g., conjoint analysis), incentive-aligned direct approaches (e.g., the BDM-mechanism), or incentive-aligned indirect approaches (e.g., incentive-aligned conjoint analysis). All these approaches pose promising ways to elicit consumers’ WTP, but have their specific disadvantages. This makes it difficult for market researchers to correctly choose among these methods. Up to date, only little research exists that provides guidance to the market researcher to select the right method for his or her business problem. Further, some of these approaches tend to yield biased measures of consumers’ WTP. Even though such biases have been widely discussed in the literature (i.e., the hypothetical bias), little literature exists on how to reduce or remove such biases.

In our dissertation project, we contribute to marketing theory and practice by providing new insights that help to answer the following two research questions:

1. Which methods to elicit consumers’ WTP are capable of measuring true demand for consumer goods and can guide marketing managers to optimal pricing decisions?

2. How can biases that occur when measuring consumers’ WTP be reduced?

We examine these two research questions in several distinct articles that, altogether, form our dissertation.

In total, we conducted three pretest studies and four large-scale empirical studies among more than 4,500 respondents. Concerning the first research question, we compare direct measurement, choice-based conjoint, the BDM-mechanism, and incentive aligned-conjoint to real purchase data stemming from an online shop. Concerning the second research question, we focus on the improvement of the direct measurement approach, which is widely used in business practice, and present three different ways to reduce measurement bias.

We find that incentive-aligned methods clearly outperform non-incentive aligned methods, as WTP data stemming from the BDM-mechanism and incentive-aligned conjoint analysis are not statistically different from real purchase data in terms of their resulting mean, their distribution, and the outcome of a pricing decision that is based on this data.

All three presented improvement approaches are capable of reducing or even completely removing the measurement bias. Hence, we recommend marketing managers to apply incentive aligned methods, whenever possible. When WTP cannot be measured incentive-aligned (i.e., in the case of product innovations), marketing managers are advised to use one of the presented improvement approaches to reduce or remove a possible measurement bias.

Our dissertation will soon be available in print.

3 Responses to “Precision Pricing: Measuring Consumers’ Willingness to Pay Accurately”

  1. Chris Hopf Says:

    Interesting . . . thanks for the post . . . when were your studies conducted (e.g. – start date / end date) and where? I tweeted your post on Twitter and will watch for your dissertation. Take care, Chris

  2. mrpricing Says:

    Thanks Chris for spreading the “news”!

    We conducted several studies on these issues, the first one already in 2005, the last one this year, most of them in Europe.

    All the best

    Klaus

  3. Dirk Says:

    Interesting research study Klaus! I am doing my literature review for my Master’s thesis at the moment, about topics related to pricing and WTP. When can I expect the publication of your dissertation about the comparison of the different methods and the approaches to reduce the biases? I am looking forward to read the dissertation!

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