Threshold effects in pricing of high-involvement services

What is it about?

The purpose of this research is to test for price threshold effects in the demand for high-involvement services for small businesses. The authors use a stated preference choice-based conjoint study of small business telecommunications demand. Using survey data, individual-level parameter estimates for a demand model are achieved via the Hierarchical Bayes method of estimation. Findings: For demand for small business telecommunications services, the authors find very strong positive impacts of nine-ending and zero-ending prices on the demand for a common bundle of telecommunications services (wired telephone service, broadband Internet, and cellular telephone service), even at prices so high a shift in the left-most digit does not occur. The advertising, brand, or product manager or statistician who assumes threshold effects are not extant in high-involvement service demand may find conventional demand estimation methods lead to erroneous conclusions and less effective pricing strategies.

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Why is it important?

In the statistical literature on price-ending effects on product demand, most products for which demand is modeled are low involvement consumer products priced at less than ten monetary units per unit of product. There is a lacuna in this price-ending effects literature regarding small businesses and high-involvement services offered at three-digit prices via monthly subscription. This research indicates that testing for threshold effects should be de rigeur in the methodology of demand estimation for telecommunications or other high-involvement services.

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