Product design: A pricing framework accounting for product quality and consumer awareness

A systematic framework has been developed to determine the optimal price of a completely new (or existing but improved) chemical product that is being launched (or relaunched) in the presence of a competing product. It has four elements. The first is a pricing model derived from a utility function with constant elasticity of substitution. It accounts for consumers' awareness of the product under consideration and consumer preferences. The second is a set of relationships relating the consumer preferences and the relevant sales data available to a relaunched product to the parameters of the pricing model. In the absence of sales data for a completely new product, the third element is a set of heuristics for choosing a pricing strategy and estimates of the pricing model parameters. The optimal price is finally determined in a profit maximization problem subject to the market size as well as any other constraints. This pricing framework allows simultaneous optimization of product quality and price using product specifications as design variables. It is illustrated with an example on energy drinks. © 2018 American Institute of Chemical Engineers AIChE J, 64: 2462–2471, 2018