Using the polarisation index to explain the structure of price tiers

Abstract

The Polarisation index, developed by Sabavala, Morrison and Kalwani, is a well-known measure of loyalty for repeated discrete choices (Brown et al. 2003). The index refers to choices between two alternatives, but is utilised to show deviations from loyalty in a multiple alternative setting. The index can range between zero and one, where zero indicates pure homogeneity in consumer choice and one indicates maximal heterogeneity among consumers (Fader and Schmittlein 1993). Normal academic research into Polarisation has focused on the unit of analysis as the brand. Given the ability of the index to handle two choice alternatives within multiple alternative settings, and therefore the ability to combine alternatives, this paper applies the index to price tiers. The authors develop polarisations for a number of price tiers and compare these to the market shares for each. Using purchase data from Australia and taking bottled wine as an example, the authors show higher polarisations for the <$7.49 price tier and the >$17.50 price tier. The commercial price tier, where loyalty is in line with market share is $7.50-$12.49. In this paper, the authors explain the methodology behind these findings and discuss the results in relation to a large brand and a niche brand marketing content.