What is multipart pricing?

Answer 1

A Conjoint Approach to Multi-Part Pricing

Abstract

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 ¯xed 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 re°ects

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 di®erent price components. These estimates are then

used to evaluate the expected revenues and pro¯ts 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. Each of these methods assumes that a product is sold at a single price, and that

a consumer cannot upgrade or add features to a product by paying an additional

fee. Another assumption common to these methods is that consumer usage rates

do not depend on price. These assumptions are approximately, if not perfectly,

satis¯ed for some products, for example such durable goods as washing machines

and refrigerators. However, there are also categories of products and services where

one or more of these assumptions is not appropriate. For example, some services

charge not one price but two prices, and charge additional fees for add-on features.

Examples are car rentals, some HMO plans, prescription drug plans, Xerox copying

services, memberships to health clubs, museums and zoos, and telephone services

(Danaher 2002; Narayanan, Chintagunta and Miravete 2007). Some of these services

charge an additional variable fee. For example, institutional users pay a per page

charge for copies on a Xerox machine; and members of an HMO pay a deductible for

each visit to a doctor or each purchase of a prescription drug. Other services, like

car rentals, cellular phone services, museum and health club memberships, charge

a ¯xed fee and allow \free" use up to a certain level, beyond which consumers

have to pay a usage-based unit rate. This induces a two-way dependence of price

and consumption | the price charged by a provider in°uences consumption while

the price a consumer pays depends on his or her usage level. Some services allow customers to purchase optional features, such as rollover minutes for cell phone

services and extra life insurance for car rentals and air travel. Other services, like

HMO and prescription drug plans, do not allow service enhancements but o®er

alternative plans with bundles of add-on features. Still other services, such as cable

television, allow unlimited use for a monthly fee but allow consumers additional

subscriptions to such options as digital channels, high-de¯nition broadcasts, pay-

per-view, broadband internet access and IP telephony.