0:01
So now we've come to the point in our analysis that we're going to
look at willingness to pay, right.
We've had a lot of build up to this point.
We've looked at willingness to pay with surveys,
and I've shown you a lot of other things that a conjoint analysis can do.
And I promised you can give you willingness to pay and it can.
So we're going to do an example of that right now.
So, let's look at a particular golf that we're considering we've got the magnum
force, ten yards further the average, 8.99 by now I think you know where these
utilities are coming from and that this is just the sum of all those utilities.
And we're going to ask ourself a question.
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How much more would the average golfer be willing to pay for
an increase in distance of five yards?
Okay, so there it is.
It's a little more complicated than what we have done before, but
it's not a lot more complicated than what we have done before.
Here are the basic steps.
The first thing we need to do is calculate the utility gain for
the increase in distance.
So we're going to give the ball five more yards, our engineer said they can do that.
We need to figure out how much happier people will be with that new ball and
calculate it.
Then, we're going to find the new price.
And it's going to be a bigger price, right?
We're going to give them a better ball, we're going to charge a bigger price.
We need to find that new price such that we take back from the consumer the exact
amount of utility that we gave them, when we gave them that improved ball.
So, in that sense it's likely to break even, we give them some utility and
whatever that utility is we come over here to price and we take it back from them and
the difference between that new, price that we calculate, and
the old price is in really that increase in willingness-to-pay.
So, let's apply this to the data.
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First of all, we're going to calculate the utility gain for the increase in distance.
And that's 0.36- 0.12, where does that come from?
Well if you look at distance 0.36 is that 15 yards further,
that's the new ball, right?
because our current ball is 10 yards further,
the new ball would be 15 yards further, that would give them a utility of 0.36 and
then we subtract the original utility which is that 10 yards further ball which
is 0.12, so we have a difference of 0.24.
So now what are we going to do?
We're going to take that 0.24 back in utility from the price.
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And how do we do that?
Well we know we're going to take back 0.24, but
0.24 that difference is not exactly the same as the difference
between any of the price points that I've got in front of me, right?
In particular, we're charging $8.99 per ball and
we're asking how much more would people be willing to pay.
It would be very nice if the $10.99, the utility for
that was just 0.24 less than the 8.99, right.
And then we could just say it's $2 and it's very easy,
because we give them 0.24 in distance, we take 0.24 in utility on price, and
those numbers are just in front of us.
But usually it doesn't work out that way.
And in fact, I bet you can tell by looking at the data,
the new price is going to have to be somewhere between 8.99 and
10.99 because the spread of the utilities, which is the difference
between negative 0.83 and negative 0.08 is greater than 0.24.
So here's how we handle that.
We know the new prices going to be up in a 899-1099 range, we can tell
that because the .24 is smaller than the overall range between 8.99 and 10.99.
What we need to determine is exactly how far is that range we need to go.
And in an order to do that,
we essentially convert it into a percent along that range.
We do that by taking 0.24 and
dividing that by the spread in the two price points that we're interested in.
In this particular example that's 8.99 and 10.99 because we know that
price is going up that's why we're moving up to the 10.99 price point.
That's given right down here.
So the resulting calculation gives you 32%,
that means we're moving 32% up in that price range.
That's what we need to do In order to break even and
take back from consumers the exact dollar amount that's equivalent
to the utility gain that they get on the distance side.
I then take that 32% and multiply it by the difference between the two
price points, 10.99- 8.99, so $2.
And when I make that calculation I get $0.64, and how do I interpret $0.64?
That is the increased willingness to pay for
the increase in distance and you can do that for different segments.
You can do that for different balls that you might be considering.
Not just increase in distance.
You can even do it for decreases in attribute.
Suppose you take something away from consumers.
The exact same math will tell you how much less they would be willing to pay.
This is a very common and
very useful set of metrics that comes out of a conjoined analysis.
Jean Manuel IzaretSenior Partner and Managing Director, Leader of BCG’s Global Pricing Practice
Ronald T. WilcoxNewMarket Corporation Professor of Business Administration & Senior Associate Dean for Degree Programs
Thomas KohlerAssociate Director, Pricing
