How Much Does the Market Value an Improvement in a Product Attribute?

Elie Ofek () and V. Srinivasan ()
Additional contact information
Elie Ofek: Harvard Business School, Soldiers Field, Boston, Massachusetts 02163
V. Srinivasan: Graduate School of Business, Stanford University, Stanford, California 94305–5015

Marketing Science, 2002, vol. 21, issue 4, 398-411

Abstract: A firm contemplating improvements to its product attributes would be interested in the dollar value the market attaches to any potential product modification. In this paper, we derive a measure of market value such that the comparison of the measure against the incremental unit cost of the attribute improvement is key in deciding whether or not the attribute improvement is profitable. Competition from other brands, the potential for market expansion, and heterogeneity in customer preference structures are explicitly modeled using the multinomial logit framework. The analysis yields a closed form expression for the market's value for an attribute improvement (MVAI). A key result we obtain is that customers should be differentially weighted based on their probability of purchasing the firm's product. In particular, customers who exhibit a very high or very low probability of choosing the firm's product should receive less weight in detemining MVAI. Because the probability of choice varies across products, the answer to the question of how much the market values an improvement depends on which firm is asking the question. It is shown that customers whose utilities have a greater random component should be weighted less. Furthermore, the measure developed is robust to the influence of outliers in the sample. An empirical illustration of the MVAI measure in the context of a new product development study is provided. The study illustrates the advantages of the proposed measure over currently used approaches and explores the possibility of competitive price reactions.

Keywords: New Product Development; Product Positioning; Multibrand Competition; Conjoint Analysis (search for similar items in EconPapers)
Date: 2002
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

Downloads: (external link)
http://dx.doi.org/10.1287/mksc.21.4.398.130 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:inm:ormksc:v:21:y:2002:i:4:p:398-411

Access Statistics for this article

More articles in Marketing Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().