The market value for product attribute improvements under price personalization

a r t i c l e i n f o Article history: First received in 18, July 2012 and was under review for 4 ½ months Available online xxxx Personalization of the marketing mix is a topic of much interest to marketing academics and practitioners. Using discrete choice demand theory, we investigate the aggregate market value for product attribute improvements when firms are engaged in personalized pricing. Our results provide a theoretically grounded rule for how to aggregate consumer valuations to assess the overall profitability of attribute improvements under price personalization. Under common pricing, each consumer contributes the same margin. Profitability of an attribute improvement is thus driven by inducing more consumers to buy. Consumers with high choice probabilities are given less weight in the market valuation under common pricing as they are less responsive to attribute improvements. Under personalized pricing, profitability of an attribute improvement is driven by extraction of consumer surplus from high valuation consumers. Consumers with higher valuations, and consequently higher choice probabilities, are given more weight in the market valuation under personalized pricing. Since individual consumers play a more central role in the market valuation under personalized pricing, estimation of consumer-level valuations is of increased importance. Under common pricing, the market valuation for an attribute improvement is robust to extreme estimates of the consumer-level valuations. Through our theoretical and empirical analyses, we demonstrate that this robustness does not hold under personalized pricing. New product development is crucial to sustained firm performance. Companies that fail to develop new products risk being supplanted by more nimble competitors responding to shifts in consumer demand. While new companies often focus on creating disruptive technologies that alter the competitive landscape, most new product development activity focuses on incremental innovation devoted to improving existing products. For example, at Sony, over three quarters of new product activity is dedicated to improving existing products (Kotler & Keller, 2006). Bayus (1994) notes the existence of a similar pattern across a range of industries (Abernathy & Utterback, 1978) as well as evidence that incremental innovation is more crucial to profitability than breakthrough technology (Gomory, 1989). While new product development is undeniably important, it is also risky. Some studies suggest a failure rate of 95% in the U.S. (Kotler & Keller, 2006). To improve the odds of success, product managers must carefully assess how consumers value product attribute improvements and, importantly, how to aggregate consumer valuations …