Economic Valuation of Product Features

50 Pages Posted: 11 Oct 2013 Last revised: 16 Aug 2014

See all articles by Greg M. Allenby

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics

Jeff D. Brazell

The Modellers, LLC

John R. Howell

Pennsylvania State University

Peter E. Rossi

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: May 1, 2014

Abstract

We develop a market-based paradigm to value the enhancement or addition of features to a product. We define the market value of a product or feature enhancement as the change in the equilibrium profits that would prevail with and without the enhancement. Conjoint data can be use to construct the demand system necessary to compute equilibrium prices but assumptions about competitive offerings and cost are required as well. We contrast our approach to the frequent practice of computing what we call pseudo-WTP (willingness to pay) and show that pseudo-WTP may greatly over-estimate the value of a feature. We also consider a WTB (willingness to buy) analysis and show how this can overstate market share or sales gains from addition of features. We illustrate our methods using a survey of digital camera owners.

Keywords: product features, valuation, patents, conjoint, Bayesian Hierarchical Models, demand analysis

JEL Classification: C5, C9, L1, l5, D4, M3, K00

Suggested Citation

Allenby, Greg M. and Brazell, Jeff D. and Howell, John R. and Rossi, Peter E., Economic Valuation of Product Features (May 1, 2014). Fisher College of Business Working Paper No. 2013-05-01. Available at SSRN: https://ssrn.com/abstract=2338154 or http://dx.doi.org/10.2139/ssrn.2338154

Greg M. Allenby

Ohio State University (OSU) - Department of Marketing and Logistics ( email )

Fisher Hall 524
2100 Neil Ave
Columbus, OH 43210
United States

Jeff D. Brazell

The Modellers, LLC ( email )

6995 Union Park Center
Ste 300
Salt Lake City, UT 84047
United States
8018846688 (Phone)

HOME PAGE: http://www.themodellers.com

John R. Howell

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States

Peter E. Rossi (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
773-294-8616 (Phone)

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