Developers of innovative new technologies or services face a series of trade-offs in their design phase.   They can enhance the market appeal of the product or service by incorporating richer functionality and superior quality, but doing so increases the development and production costs as well as the required price to break even.  The trade-off is further complicated by the presence of multiple level offerings of the same brand, since these can often cannibalize each other.  For example, if a telecommunications provider introduces a "basic" and "deluxe" version of a new service, the choices made in the pricing and features for each version will affect the overall market success and profitability of the line as a whole. 

Fortunately, market research methodologies exist that can help to optimize design before production and market launch occur.  Just as designers must make trade-offs in their specifications, these survey methodologies require buyers to make trade-offs as a way of quantifying the impact of price and design on choice.  Termed "conjoint" or "choice" analysis, these methods involve an interesting data collection approach that presents consumers with product choices and asks them to behave as they would in a real purchase situation.  Ultimately, the information is used to create a simulation tool, based on a rigorous mathematical model, to help managers test the impact of various  features and price configurations on the demand and profitability of their products or services.

Implementing a Choice Study

The first step in designing research for the optimization of a product or service is to carefully identify the parameters of the optimization problem.  This requires a close dialogue between a research professional and the manager responsible for design.  As the chief methodologist at Rockbridge, I often get involved in these conversations with clients.  Ultimately, we try to agree on the following with our client:

• What are the underlying "attributes" that determine design?  Attributes are decisions that vary in the design decision
• Within each "attribute," which "levels" need to be evaluated?  An attribute must have at least two levels.  For example, it may include the absence or existence of an added-value feature, such as a cell phone including a built in camera or not.  Or, it may include a series of options, such as a disposable battery or rechargeable battery, four screen sizes on a TV, or three warranty options. 
• What is the proposed pricing structure, and what is the range of prices under consideration?  For example, some products may have two elements, a one-time (such as installation or equipment purchase) and recurring price (such as a monthly subscription or annual licensing fee). 
• What is the decision context for the new products?  For example, if a line of products are being offered simultaneously, it is critical to evaluate all of them at once in order to make the optimal decision.  In one study, we tested a "discount," "standard" and "premium option" for a portable internet service.  The demand for the "discount" option increased if its price were lower, but it was important to know if the demand came from new sales or from cannibalizing the "standard" option.

After obtaining input on the decision and marketing context from managers, the next step is to design a "choice task" for presentation to consumers in a survey.  A choice task consists of a set of two or more product alternatives, each with different features and prices.  The example below suggests what this might look like for a television product study.  A consumer would be shown this set of alternatives and asked to choose which one he or she would purchase if shopping for the product.  It is critical to include a choice of "none" since it is possible that nothing in the set will be acceptable to the buyer.

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Charles L. Colby is Chief Methodologist at Rockbridge Associates.