Conjoint Approach to Multipart Pricing

Multipart pricing is commonly used by service providers such as car rentals, prescription drug plans, health maintenance organizations, 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 multipart pricing. The method reflects the two-way dependence between prices and consumption and incorporates consumers' uncertainty about their use of a service. The proposed method estimates both choice probabilities and usage levels for each consumer as functions of the product features and the different price components. The authors then use these estimates to evaluate the expected revenues and profits of alternative plans and pricing schemes. They illustrate this method using data from a conjoint study of cell phone services. They compare the results with those obtained from using several competing models. Finally, they use the proposed procedure to identify the optimal set of features in a base plan and the pricing of optional features for a provider of cell phone services.