Setting the right price for a product or service is a critical decision for businesses, with the balance between attracting customers and maximizing revenue hanging in the balance. Marketing experts Derek Rucker, Eric Anderson, and Sharlene He from Kellogg recognized the shortcomings in existing methods of determining customers' "willingness to pay" (WTP), highlighting the need for a more refined and context-aware approach.
The trio introduced the Comparative Method of Valuation (CMV) in a recent paper published in the Journal of Marketing. Traditional methods often overlook the impact of context and competition, providing inaccurate estimates of WTP. Rucker emphasizes the importance of considering alternatives, stating, "We don’t assume that the answer is that they would buy nothing at all.”
The CMV builds on the Becker-DeGroot-Marschak (BDM) method, adding a crucial dimension by incorporating a consumer's perspective on alternatives. Participants, instead of merely deciding to buy or not, are first asked to choose from various comparative options. This step ensures a realistic comparison, reflecting the diverse choices consumers face in the marketplace.
Rucker explains the process, saying, "We want to ask, if you were not to buy this product, what would you buy instead? That’s going to be the relevant comparison shaping someone’s WTP. We don’t assume that the answer is that they would buy nothing at all.”
The researchers conducted over a dozen empirical studies to validate the effectiveness of CMV, involving nearly 3,000 participants across various contexts. By incorporating comparisons into the methodology, CMV excels at revealing the diverse alternatives consumers consider, providing a more nuanced understanding of WTP.
In a practical application, the researchers tested WTP for a premium version of Kraft Lunchables against regular versions. The CMV method identified distinct customer segments, shedding light on why some consumers had significantly lower WTP than others. This granular insight allows businesses to tailor their pricing strategies based on specific consumer preferences and alternatives.
CMV outperformed its predecessor, the BDM method, in real-world tests of purchasing behavior. Additionally, the researchers demonstrated that CMV excels compared to conjoint, another widely used method for estimating WTP, especially when there are clear comparative options.
As businesses grapple with the challenge of pricing their products effectively, CMV emerges as a valuable tool. Its ability to consider context, competition, and consumer alternatives makes it a more realistic and precise method for approximating real-world purchase situations. While not claiming to have a perfect solution, the researchers acknowledge that CMV represents a significant step forward in refining the definition of WTP and providing marketers with a more reliable methodology.
