A Conjoint Approach to Multi-Part Pricing

Multi-part pricing is commonly used by providers of such services as car rentals, prescription drug plans, HMOs and wireless telephony. The general structure of these pricing schemes is a fixed access fee, which sometimes entitles users to a certain level of product use; a variable fee for additional use; and still another fee for add-on features that are priced individually and/or as bundles. The authors propose a method using conjoint analysis for multi-part pricing. The method reflects the two-way dependence between prices and consumption, and incorporates the uncertainty consumers have about their use of a service. The proposed method estimates both choice probabilities and usage levels for each individual as functions of the product features and the different price components. These estimates are then used to evaluate the expected revenues and profits of alternative plans and pricing schemes. The method is illustrated using data from a conjoint study concerning cellular phone services. Its results are compared with those obtained from using several competing models. The proposed procedure is used to identify the optimal set of features in a base plan, and the pricing of optional features, for a provider of cellular phone services.