How To Measure Customer’s Willingness to Pay for Ancillary Products

1. How To Measure Customer’s Willingness to Pay for Ancillary Products Stowe Shoemaker, PhD University of Houston

2. Les Miserables The duty of the innkeeper is to sell to the first comer, food, rest, light, fire, dirty linen, servants, fleas, and smiles; to charge for the open window, the closed window, the chimney corner, the sofa, the chair, the stool, the bench, the feather bed, the mattress, and the straw bed; to know how much the mirror is worn and to tax that; and by five hundred thousand devils, to make the traveler pay for everything, even the fleas that is dog eats.

3. Goals of Seminar Present methodologies to measure customer’s willingness to pay Provide example of questionnaires for each methodology discussed Detail how to calculate the sample sizes needed for each methodology Allow time for questions Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

4. Important Definitions and Video to Illustrate Concepts Reservation Price Reference Price Consumer Surplus Video Clip of Taxi Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

5. Price Sensitivity The price a customer could be expected to pay for a product or service; usually expressed as a range of prices. Although can be thought of as price elasticity. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

6. When Doing Price Research • Obtain information about: • buyers’ perceptions and knowledge of prices with product category • purchase and use experience with the product category • Travel frequency (e.g., loyalty program membership and status, etc.) • Other possible information that may impact results Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

7. Methods for Collecting Price Response Data • Customer surveys: direct questioning • Conjoint measurement/discrete choice • Historical market data Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

8. Direct Questioning of Consumers • Method of Consumer • Magnitude scaling • Price Sensitivity Measurement • Lewis and Shoemaker article Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

9. Magnitude Scaling • Directions: Below are some pairs of different flights that are available. For each pair please indicate which flight you would take by circling the number that corresponds most closely with the description of your choice. Assume you are interested in purchasing this flight for a business trip and that the pair of flights represents the only choice available. You will be paying for the flight out of your budget. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

10. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

11. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

12. Prefer Multiple NP Prefer Non Stop Strongly Moderately Slightly No Preference Slightly Moderately Strongly 1 2 3 4 5 6 7

13. Direct Questioning of Consumers: Price Sensitivity Measurement Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

14. 5 Questions • At what price would you consider this product to be so inexpensive that you would have some doubts about the quality of the product? • Used to determine optimal price • At what price would you still feel this product was inexpensive, yet have no doubts about the quality of the product? • Used to determine the indifference price Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

15. 5 Questions - Continued • At what price would you begin to feel that this product is expensive, but still worth buying because its perceived quality? • Used to determine indifference price • At what price would you feel this product is so expensive that regardless of its perceived quality it is not worth purchasing this room? • To determine optimal price Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

16. 5 Questions - Continued • Please state the price that you think you would expect to pay for __________? • Used to determine reference price Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

17. Examples of ways to measure responses: ___ ___ ____ ____ ____ ____ ____ ____ ____ ____ P1 P2 P3 P4 P5 P6 P7 P8 P9 P10 Price? _________ Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

18. Steps In Analysis(Lewis and Shoemaker) • Type in data and put in one chart • Sort data by price point • Calculate frequency of each price point • Calculate: Cumulative proportion of those who find price to be unacceptable because it is too low • Calculate: Acceptable cumulative • Calculate: Cumulative proportion of those who find price to be unacceptable because it is too high is labeled • Calculate Acceptable high • Add all data to one spreadsheet • Plot graphs Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

19. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

20. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

21. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

22. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

23. Conjoint Measurement • Assumption that value of a product is made up by the value of different components • The purchasing of a product/service involves trade-off’s (e.g., the hotel is a little out of the way, but I want the frequency points)

24. Conjoint Measurement - example • Individual provides an overall preference judgment for various products and then researcher uses mathematical analysis to tease out the value of each level of the attribute • Example: fitness facility; sauna (yes, no) and locker size (small, medium, large) 2 x 3 or 6 combinations

25. Conjoint Measurement - continued Attribute = sauna locker size Level = Yes, No S, M, L Card: small locker with a sauna

26. Conjoint Measurement - continued • 2 x 3 or 6 combinations Sauna Y N Small rank 2 rank 4 Locker Med rank 1 rank 3 Large rank 5 rank 6

27. Conjoint Measurement - continued • change ranks to utility pts to capture preferences 5 is highest 0 is lowest Y Sauna N Small 4 2 average= 3 Locker Med 5 3 average = 4 Large 1 0 average = 0.5 average=3.33 average=1.67

28. Conjoint Measurement - continued • think of utility as average value; so sauna: yes = 3.33 no = 1.67 locker: small = 3 medium = 4 large = 0.5 • recall, # 1 rating was medium locker with sauna 3.33 + 4 = 7.33 • recall, # 2 rating was small with sauna 3.33 + 3 = 6.33

29. Conjoint Measurement - continued • change ranks to utility pts to capture preferences 5 is highest 0 is lowest Sauna Yes No 4 (6.33) 2 (4.67) Locker 5 (7.33) 3 (5.67) 1 (3.83) 0 (2.17) S M L

30. Conjoint Measurement - continued • For problems with more than 2 features, calculate the averages using regression; instead of looking at averages, we look at beta weights Y = a + βx were b is the beta weight

31. Conjoint Measurement - continued • Although not shown, it is possible to estimate utilities for all levels of all attributes even though respondent rates only a subset e.g., product with 5 attributes (3 with 3 levels, 2 with 2 levels); 3 x 3 x 3 x 2 x 2 = 108 fractional factorial design allows us to rate 16 of the 108 combinations

32. Steps In Performing Conjoint Study • Determine Number of Factors (Benefits) and the level of each factor • Construct the cards via a design program (e.g., SPSS) • Present cards to respondents and have them rate each card • Estimate utilities for each level • Construct ideal benefit profiles using calculated utilities

33. Conjoint Measurement - Example • Motor coach study • You are selecting a New England Fall Foliage Motorcoach tour. The total package price includes the following: • Two dinners from a selected menu • 3 days and 2 nights • All taxes and gratuities • Room based on per person • Each of the 8 cards represents a package tour. Please rank order the cards in order in which tour you would most likely select, placing this card on top, down through your least likely selection (on the bottom of the pile.)

34. Conjoint Measurement - Example • Items Studied • Daytime activities • Some preplanned, some free time 1 • All preplanned 0 • Total package price • $159 1 • $179 0 • Tour company • You are not familiar with the company’s reputation 1 • You are familiar with the company’s reputation 0 • Accommodations • Deluxe chain hotel 1 • Historic Inn 0 • Meals • In hotel 1 • In host city’s restaurant 0 • After dinner entertainment • Preplanned activity 1 • Evening free 0

35. Profile Number 1 Daytime activities all preplanned $179 Tour Company Familiar type of accommodations deluxe chain hotel Type of Meals In hotel After Dinner Entertainment Free Profile Number 2 Daytime activities some free time $179 Tour Company Unfamiliar type of accommodations country inn Type of Meals In hotel After Dinner Entertainment Free Profile Number 3 Daytime activities some free time $159 Tour Company Familiar type of accommodations deluxe chain hotel Type of Meals In host city After Dinner Entertainment Free

36. Profile Number 4 Daytime activities all preplanned $179 Tour Company Unfamiliar type of accommodations deluxe chain hotel Type of Meals In host city After Dinner Entertainment Preplanned Profile Number 5 Daytime activities some free time $159 Tour Company Unfamiliar type of accommodations deluxe chain hotel Type of Meals In hotel After Dinner Entertainment Preplanned Profile Number 6 Daytime activities some free time $179 Tour Company Familiar type of accommodations country inn Type of Meals In host city After Dinner Entertainment Preplanned

37. Profile Number 7 Daytime activities all preplanned $159 Tour Company Unfamiliar type of accommodations country inn Type of Meals In host city After Dinner Entertainment Free Profile Number 8 Daytime activities all preplanned $159 Tour Company Familiar type of accommodations country inn Type of Meals In hotel After Dinner Entertainment Preplanned

38. Conjoint Model Tested Y = β0 + β1*Price + β2*Meals + β3*Accommodations + β4*Company + β5*Daytime + β6*After Dinner + error NOTE, “β” ARE THE UTILITIES

40. Conjoint Measurement - Example • Items Studied • Daytime activities • Some preplanned, some free time .60 • All preplanned -.60 • Total package price • $159 0 • $179 0 • Tour company • You are not familiar with the company’s reputation -1.60 • You are familiar with the company’s reputation 1.60 • Accommodations • Deluxe chain hotel -.35 • Historic Inn .35 • Meals • In hotel 0 • In host city’s restaurant 0 • After dinner entertainment • Preplanned activity 0 • Evening free 0

41. Sampling

42. Six-Step Procedure for Drawing a Sample • Define the Population • Identify the Sampling Frame • Select a Sampling Procedure • Determine the Sample Size • Select the Sample Elements • Collect the Data from Designated Elements Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

43. Determinants of Sample Size • The importance of the decision (this relates to confidence intervals) • The nature of the research (exploratory vs. descriptive vs. causal) • The nature of the analysis (i.e., if plan to look at subgroups) • Incidence rates (this relates to cost) • Resource constraints Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

44. Sampling Techniques • Non Probability • Judgmental • Convenience • Quota • Snowball Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

45. Sampling Techniques • Probability • Simple Random Sampling • Systematic • Stratified Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

46. Sample Size • Simple Formula = 1.96 * Confidence Interval (.50) (.50) n Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

47. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

48. Eye for Travel: Las Vegas October 2008 (c) Stowe Shoemaker, Ph.D

49. Questions? sshoemaker@uh.edu www..stoweshoemaker.net