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VPlus+ Improved Price Optimization Model from

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Copyright © 2000 Renaissance Research & Consulting, Inc. All Rights Reserved

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WHAT IS VPlus+? A model for determining the best price for a good or service Based on Van Westendorp model Modified to improve administration and interpretation

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The Van Westendorp Model Respondent is given a series of discrete price levels (e.g., $200, $300…) Asked to identify four price points with respect to the product or service in question

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The Van Westendorp Questions 1.At what price is the product too cheap, so that you would question its quality? 2.At what price would you consider it so cheap that you wouldnt hesitate to buy it? 3.At what price would you think it expensive, but would still consider it? 4.At what price would you think it too expensive to consider?

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The Van Westendorp Model Cumulative distributions of the price points for the four questions are graphed Where the lines cross yield crucial prices: –The Indifference Price is the price at which the same number think its a bargain as think its expensive –The Optimal Price is the price at which the same number think its too cheap as think its too expensive (i.e., minimizes rejection) –The Lower Bound is the price at which the same number think its too cheap as think its expensive –The Upper Bound is the price at which the same number think its too expensive as think its a bargain

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The Van Westendorp Model

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The Van Westendorp Model Has Two Principal Difficulties The Expensive question is ambiguous – people have difficulty responding –Results in inconsistent answers and ties –Distorts the resulting curves The models intersection points do not take the price itself into account –No measurement of expected value for a given price

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VPlus+ modifies the Van Westendorp model to overcome these difficulties

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VPlus+ assumes that a consumers decision space is divided into ranges that depend on price Price REJECT Too Cheap ACCEPT Bargain CONSIDER Expensive REJECT Too Expensive

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VPlus+ measures these ranges by asking three questions: 1.What is the highest price at which the product/service is too cheap: you would question its quality? 2.What is the highest price at which the product/service is a bargain: you would buy it without thinking about it? 3.What is the lowest price at which the product/service is too expensive: you would not even consider buying it?

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Methodology Questions asked in order Respondent not allowed to use the same or lower price than the one used in a previous question Four cumulative distribution curves plotted –Three questions plus inverse of Bargain

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Results Yields four Van Westendorp points, with one difference: –Indifference Price is the intersection of Bargain and Not Bargain – that is, the price at which half the sample thinks the product is a bargain

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VPlus+ Results

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In addition, VPlus+measures the expected value at each price point –Minimum Expected Value is the product of the price and the percent accepting the item at that price –Maximum Expected Value is the product of the price and the percent accepting or considering the item at that price

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VPlus+ Expected Value Plot

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Results The Value Limits of price are the prices that maximize Minimum and Maximum Expected Value –Lower Limit maximizes Expected Value from Acceptors only –Upper Limit maximizes Expected Value assuming that all Considerers convert –Minimum No-Risk Conversion Rate is the percentage of Considerers that would have to convert for the Upper Limit price to produce the Lower Limit Expected Value Indicator of feasibility of Upper Limit

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The VPlus+ Model Model is calculated in two versions –Discrete –Continuous Each version has advantages and disadvantages

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The VPlus+ Model Discrete Model –Plotted directly from actual price points –Intermediate prices interpolated –Advantage: Accurately reports irregularities in the response curve (thresholds, discontinuities, etc.) –Disadvantages: Interpolation open to question No theoretical framework for prediction Cannot test group differences statistically

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The VPlus+ Model Continuous Model –Curve calculated mathematically from price points –Intermediate points predicted functionally –Advantages: Easier to generalize from Theoretical basis for interpolation Framework for testing subgroup differences statistically –Disadvantage: Smoothes out bumps in the price curve – ignores irregularities and thresholds

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The VPlus+ Model Because neither version is clearly the best in all circumstances, both are calculated, and the results compared –If the Discrete Model shows few irregularities (or they dont reflect real variation), then the Continuous Model is used

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Discrete vs. Continuous Results Note: Solid lines are discrete model, dashed lines are continuous model

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VPlus+ Deliverable In Excel spreadsheet form –Complete statistics for each model on separate pages, including optimum points –Chart of demand curves –Chart of Expected Value

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For more information on VPlus+ Call Paul Gurwitz at 212-319-1833 E-mail us at pgurwitz@renaiss.compgurwitz@renaiss.com

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