In Smart Pricing, Wharton professors and renowned pricing experts Jagmohan Raju and Z. John Zhang draw on examples from high tech to low tech, from consumer markets to business markets, and from U.S. to abroad, to tell the stories of how innovative pricing strategies can help companies create and capture value as well as customers. They teach the pricing principles behind those innovative ideas and practices.

Smart Pricing introduces to marketing and product executives, along with corporate strategists, many innovative approaches to pricing, as well as the research and insights that went into their creation. Filled with illustrative examples from the business world, readers will discover restaurants where customers set the price…learn how Google and other high-tech firms have used pricing to remake whole industries…and understand how executives in China successfully start and fight price wars to conquer new markets.

Smart Pricing goes way beyond familiar approaches like cost-plus, buyer-based pricing, or competition-based pricing, and puts a wide variety of pricing mechanisms at your disposal. This book helps you understand them, choose them, and use them to win.

“Name Your Own Price”: Not Just For Priceline Anymore

New ways to match the right offer with the right customer at the right moment

The New Art of the Price War

How to plan and execute a price war to conquer new sales territories

Are the Best Things in Life Really Free?

What you can give away, what you can’t, and how to defend against “free”

The Snob Premium: From Cachet to Cash

The more you pay, the more it’s worth

Voices on the book

“Setting the ‘right’ price is one of the key management tasks that drive a firm’s performance. Even small price variations can have a major impact on sales and profitability. Therefore, it is important for managers to know consumers’ willingness to pay as precisely as possible in order to harvest their product’s profit potential as much as possible. This book will help you get your price right!”

Professor Dr. Dr. Z. John Zhang
The Wharton School,
University of Pennsylvania, USA.

Full Dissertation

Including all four articles. Available as eBook (PDF) for EURO 19.00.

Precision Pricing: Measuring Consumers’ Willingness to Pay Accurately (287 pages)

Preface: A key challenge in pricing management is to set the price right, both for new and exist-ing products. A key approach to this task takes a demand-oriented perspective, which uses the consumer’s demand and his corresponding willingness to pay as a key guidance for pricing decisions. Such a demand-based approach is in line with the concept of customer orientation – a key success factor in marketing. Against this background, the elicitation of consumers’ will-ingness to pay is a task that has gained considerable attention by marketing researchers over the last years. However, many recent academic research studies on this topic have taken a path towards increased complexity and over-specialization that has not always met the required practicability and cost efficiency of management practice. The current highly innovative dissertation by Reto Hofstetter and Klaus Miller has been written in truly cooperative teamwork and has been able to bridge the gap between im-proved academic methods to measure willingness to pay and the pragmatic applicability needs of applied market research. The authors take an intelligent contingency perspective on the elicitation of willingness to pay and can make managerially highly relevant recommendations of when to use which method for the elicitation of willingness to pay. In order to do so, the authors have taken a very broad perspective – comparing different methods across different contexts – and were also able to improve existing methods. I think this dissertation generates original insights and will make an important contri-bution to pricing research. This dissertation is truly world-class and gives an impressive ex-ample of the benefits of teamwork. It was a great pleasure to supervise the authors’ disserta-tion and I wish Reto Hofstetter and Klaus Miller for their future career and also for their pri-vate lives all the very best.Prof. Dr. Harley Krohmer Executive Director of the Institute of Marketing and Management University of Bern, Switzerland The dissertation contains the following four articles: Measuring Consumers’ Willingness to Pay: Do Direct Approaches Really Work? How Should We Measure Consumers’ Willingness to Pay? An Empirical Comparison of State-of-the-Art Approaches Who Should We Ask When Measuring Consumers’ Willingness to Pay For Product Innovations? The Importance of Involvement for the Direct Measurement of Consumers’ Willingness to Pay

Dissertation by Article

Available as eBooks (PDF) for EURO 9.00 each.

Measuring Consumers’ Willingness to Pay: Do Direct Approaches Really Work? (76 pages)
In the present paper we analyze the direct survey approach to elicit hypothetical willingness to pay in a marketing context. Although the direct survey approach has been neglected and is seen as being inferior to indirect approaches by marketing academia, it is widely used in market research practice. Hence, from the standpoint of a marketing researcher, the question arises if the direct survey approaches really work. As a first attempt to answer this question, we conduct an empirical study and analyze the direct survey approach in a marketing context among 2,048 consumers. Statistically, we find evidence for biased results. Economically, we analyze how well the direct survey approach can be used for business decision making such as setting the profit-maximizing price in a monopoly and forecasting the quantity sold as well as profits. We find the direct survey approach to be able to yield good (not statistically different) estimates for profit-maximizing price and quantity, which may explain the use of the methods in applied market research. Based on literature, theory, and the findings of this study, we further present three methods to improve the results of the direct survey approach ex-post. All three methods are able to improve the validity of the business decisions. We conclude that even though the direct approach shows statistically biased results, it is able to guide the marketing manager to good business decisions.
How Should We Measure Consumers’ Willingness to Pay? An Empirical Comparison of State-of-the-Art Approaches (85 pages)
A precise knowledge of consumers’ WTP is instrumental in economic theory and practice. Market researchers can choose among a variety of methods to determine WTP. However, prior literature provides little guidance on the choice of the appropriate approach to valid WTP measurement. In our study among 1,124 consumers, we address this research deficit and assess four state-of-the-art approaches to measure consumers’ WTP with regard to their external validity and economic outcomes. Specifically, we compare the open-ended question format, conjoint analysis, the BDM mechanism, incentive-aligned conjoint-analysis, and real purchase data. Our statistical analysis shows that hypothetical WTP approaches are not always biased. Specifically, our results indicate a significant mean bias for both hypothetical approaches. However, we only find a biased demand curve for hypothetical conjoint analysis, whereas directly stated WTP from an open-ended question format yields unbiased results with regard to estimating consumers’ demand. Moreover, we did not find a bias for the incentive-aligned methods, the BDM mechanism and incentive-aligned conjoint analysis, which indicates a high external validity of these approaches. With regard to our economic analysis, we find that all methods yield valid estimates of optimal price and quantity. However, only incentive-aligned methods are able to give valid forecasts of optimal profits. Our results can guide market researchers to select the appropriate WTP measurement approach for their business decisions.
Who Should We Ask When Measuring Consumers’ Willingness to Pay For Product Innovations? (70 pages)
When eliciting price preferences (WTP) for product innovations, researchers mainly apply hypothetical survey methods. Such hypothetical survey methods, however, are found to yield biased results. In order to reduce this bias, prior research mainly focuses on improving the survey methodology (i.e. the “how” to ask for consumers’ WTP). In the present study, we propose a different approach to reduce the bias in hypothetical WTP measurement. We argue that respondent specific characteristics, motives, and traits (e.g. the “who” to ask) might play an important role when consumers’ WTP is measured for product innovations. Based on literature and an exploratory qualitative pretest study, we develop a conceptual framework of consumers’ characteristics, motives, and traits that might explain the hypothetical bias. Confirmatory factor analysis shows highly significant effects on the hypothetical bias by the two factors consumers’ certainty in the WTP statement and the degree of strategic answering behavior. Based on these findings, we develop a data-cutting approach that is able to remove the bias to an insignificant level. We validate this approach in a second dataset. As the present study shows, respondents’ characteristics, motivs, or traits (the “who”) play an important role when it comes to measuring WTP for product innovations. Market researchers are well advised to take consumers’ certainty in the answer and their strategic answering behavior into account when evaluating such WTP survey data.
The Importance of Involvement for the Direct Measurement of Consumers’ Willingness to Pay (49 pages)
Knowledge of consumers’ willingness to pay is essential for the successful pricing of new and existing products. This study addresses the issue, under what circumstances a direct measurement approach can reveal consumers’ true willingness to pay. Based on a conceptual discussion and an empirical survey, the authors argue that this issue is not related to the choice of alternative direct question formats but rather related to respondents’ involvement: The authors show that the direct measurement approach can provide a valid instrument to measure willingness to pay in the case of highly involved consumers. This finding has important implications for applied market research, since the direct measurement approach can provide a time- and cost-efficient alternative to indirect measurement approaches such as conjoint measurement, if respondents are highly involved in the underlying product.

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.