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Profit Maximizing Perceptual Positions: An Integrated Theory for the Selection of Product Features and Price

Author

Listed:
  • John R. Hauser

    (Massachusetts Institute of Technology)

  • Patricia Simmie

    (York University)

Abstract

An important component of marketing strategy is to "position" a product in perceptual space. But to realize a perceptual position we must model the link from physical characteristics to perceptual dimensions and we must use this model to maximize profit. This paper integrates psychological theories on how consumers process information with economic models and psychometric measurement, and it develops a theory for selecting physical features and price to achieve a profit maximizing perceptual position. The theory begins with a Lancaster-like transformation from goods space to characteristics space and investigates the implications of a mapping to a third space, perceptual space. We show that all products efficient in perceptual space must be efficient in characteristics space but not conversely. But consumers vary in their preference and the way they perceive products. Thus we introduce distributional components to the theory and derive both geometric and analytic methods to incorporate this consumer heterogeneity. Next, we investigate costs and derive a perceptual expansion path along which a profit maximizing position must exist. Conjoint analysis and quantal choice models provide the measurements to implement the theory. The theory is illustrated with a hypothetical example from the analgesics market and some of the potential psychometric measurements are illustrated with an empirical application in the communications market.

Suggested Citation

  • John R. Hauser & Patricia Simmie, 1981. "Profit Maximizing Perceptual Positions: An Integrated Theory for the Selection of Product Features and Price," Management Science, INFORMS, vol. 27(1), pages 33-56, January.
  • Handle: RePEc:inm:ormnsc:v:27:y:1981:i:1:p:33-56
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    File URL: http://dx.doi.org/10.1287/mnsc.27.1.33
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    References listed on IDEAS

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    1. Ian I. Mitroff, 1972. "The Myth of Objectivity OR Why Science Needs a New Psychology of Science," Management Science, INFORMS, vol. 18(10), pages 613-618, June.
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    Citations

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    Cited by:

    1. John R. Hauser & Steven M. Shugan, 2008. "Defensive Marketing Strategies," Marketing Science, INFORMS, vol. 27(1), pages 88-110, 01-02.
    2. Albritton, M. David & McMullen, Patrick R., 2007. "Optimal product design using a colony of virtual ants," European Journal of Operational Research, Elsevier, vol. 176(1), pages 498-520, January.
    3. Tannous, George F. & Mangiameli, Paul M., 1996. "Adding features to a product: A micro-economic model," International Review of Economics & Finance, Elsevier, vol. 5(2), pages 149-173.
    4. James Kroes & Ravi Subramanian & Ramanath Subramanyam, 2012. "Operational Compliance Levers, Environmental Performance, and Firm Performance Under Cap and Trade Regulation," Manufacturing & Service Operations Management, INFORMS, pages 186-201.
    5. Hauser, John R., 1983. "Price theory and the role of marketing science," Working papers 1403-83., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Fangruo Chen, 2001. "Market Segmentation, Advanced Demand Information, and Supply Chain Performance," Manufacturing & Service Operations Management, INFORMS, pages 53-67.
    7. Mennecke, Brian & Townsend, Anthony & Hayes, Dermot J. & Lonergan, Steven, 2006. "A Study of the Factors That Influence Consumer Attitudes Toward Beef Products Using the Conjoint Market Analysis Tool," Staff General Research Papers Archive 12650, Iowa State University, Department of Economics.
    8. Wayne DeSarbo & Kamel Jedidi & Joel Steckel, 1991. "A stochastic multidimensional scaling procedure for the empirical determination of convex indifference curves for preference/choice analysis," Psychometrika, Springer;The Psychometric Society, vol. 56(2), pages 279-307, June.
    9. Wilhelm, Wilbert E. & Xu, Kaihong, 2002. "Prescribing product upgrades, prices and production levels over time in a stochastic environment," European Journal of Operational Research, Elsevier, vol. 138(3), pages 601-621, May.
    10. Christian Jaag & Helmut Dietl & Urs Trinkner & Oliver Furst, 2012. "Defending Mail Markets Against New Entrants: An Application of the Defender Model," Chapters,in: Multi-Modal Competition and the Future of Mail, chapter 17 Edward Elgar Publishing.
    11. Fangruo Chen, 2001. "Market Segmentation, Advanced Demand Information, and Supply Chain Performance," Manufacturing & Service Operations Management, INFORMS, pages 53-67.
    12. Hauser, John R., 1985. "Theory and application of defensive strategy," Working papers 1642-85., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    13. Oliver J. Rutz & Garrett P. Sonnier, 2011. "The Evolution of Internal Market Structure," Marketing Science, INFORMS, vol. 30(2), pages 274-289, 03-04.
    14. Sabri Khayati & Samia Karoui Zouaou, 2013. "Perceived Usefulness and Use of Information Technology: the Moderating Influences of the Dependence of a Subcontractor towards His Contractor," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 3(6), pages 1-1, December.
    15. Brian Mennecke & Anthony Townsend & Dermot J. Hayes & Steven M. Lonergan, 2006. "Study of the Factors that Influence Consumer Attitudes Toward Beef Products Using the Conjoint Market Analysis Tool, A," Center for Agricultural and Rural Development (CARD) Publications 06-wp425, Center for Agricultural and Rural Development (CARD) at Iowa State University.

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