Getting The Price Right Takes More Than Guesswork
| by Michaela Mora |  |
News for October, 2010
as published on October 29, 2010 by the Dallas Business Journal
Setting the optimal price for a product or service is one of the most challenging decisions a business makes. You must consider:
- Customers’ willingness to pay
- Cost of products and services
- Competitors’ pricing
- Market changes affecting demand
It still surprises me when I encounter entrepreneurs who only focus on cost and competitor’s pricing, making assumptions about customers’ willingness to pay without any real research.
For most product categories, there are at least three customer types in pricing attitudes:
- Price sensitive customers, always looking for the lowest price
- Customers who understand value and are willing to pay for the benefits delivered
- Customers who are looking for a trusted partner/brand that can reduce the risk of aggravation later, thus price plays a secondary role in their buying decision
To set optimal prices, businesses should conduct primary research to identify customer pricing segments and determine what product/service attributes and benefits may drive demand in the context of the competitive landscape.
There are two main categories of pricing research methods:
- Direct Questioning: Questions are asked directly about willingness-to-pay, buy/not buy decisions, questions about prices considered too expensive or too cheap, etc. Some of these approaches tend to yield biased results since the questions put respondents in a bargaining mode that only leads to price lowballing, so results should be taken as exploratory.
- Trade-off Analysis: We ask respondents to make a choice between product attributes or product configurations, in which price is another variable among many attributes to consider. Methods in this category tend to mimic the purchase situation in a more realistic way as the studies can be designed to reflect competitors’ pricing, brand consideration, and customer segments. The results are then used to simulate “what-if” scenarios to identify the prices that maximize revenues, profit or share of preference under different market conditions and cost structures.
If done right, pricing research can really help a business to set the optimal prices that lead to growth and profits.
This is part of a series of pricing research posts that Jeffrey Henning and I are writing. The series so far:
- Getting The Price Right Takes More Than Guesswork
- Conjoint Analysis And Realism In Price Research
- Making The Case Against The Van Westerndorp Price Sensitivity Meter
- The Van Westendorp Price Sensitivity Meter
- Monadic Price Testing: “Shh, It’s All About Price
- Estimating Willingness to Pay
To learn more about our price research service visit Price Research.
One out of four consumers is buying 100-calorie snack packs. The Boston Globe ran an article recently concluding that “the 100-calorie packs are a symptom of a broader social trend: Call it bite-sizing.”
I’m not sure that having slightly over 25% of the adult population buying these packs qualifies as a “broader social trend,” but for some the 100-calorie pack is meeting a natural need to control certain aspects of their life.
These small packs attract certain segments of the population, particularly those who think they should exercise more and are trying to have a balanced diet. It seems that for these people the 100-calorie packs give them control over what they eat and compensate for lack of exercise through portion control.
To learn more about our consumer data service visit Consumer Shopping Behavior Insights. To request consumer shopping behavior data and insights don’t hesitate to contact us.
David Lyon, principal at Aurora Market Modeling did a great review of past and current price research methods in his tutorial “Research for Solid Price Decisions” at the 2010 Sawtooth Software Conference in Newport Beach, CA.
The recurring theme across his presentation was the need to take into account respondent psychology and infuse realism in how we ask pricing questions in order to get unbiased results. The price research methods reviewed include:
DIRECT QUESTIONNING
- Willingness-To-Pay Questions: These can get you a ballpark price for radically new products when the price range is unknown. Given their inherent bias, since these questions clearly focus on price and invite respondents to “lowball” and bargain, they should be used only for exploration and followed-up with other price research techniques.
- Buy-Response in Monadic Designs: This approach can work if done right, which means asking about purchase intent in the context of a product description without calling respondent’s attention to the price and thus avoiding the bias found in willingness-to-pay questions. However, in order to measure price sensitivity we need at least two different monadic cells where different price points are asked. This is a simple and unbiased approach, but its precision depends on sample size for each cell, which may be a problem for tight budgets since large samples are recommended and many cells/price points may need to be tested.
- Sequential Proto-Monadic: This approach which tests several price points in a sequential way within the same respondent doesn’t allow to disguise the focus on price and usually results in over-estimation of price sensitivity. David’s advice: Don’t bother using it.
- Van Westendorp Price Sensitivity Meter: With this approach, we look for a “normal” and “acceptable” price ranges between price points considered too cheap or too expensive based on the idea that price acts a proxy for quality. A big issue with PSM is that respondents tend to be inconsistent in how they answer the 4 questions included in the approach: At what price it is too cheap? At what price it is a good value? At what price it is getting expensive? At what price is too expensive? This method can be used for early exploration on small samples, but results should be taken with skepticism as we can expect “lowballing.” The other problem with this approach is that it doesn’t measure purchase intent. However, even the improvement suggested by Newton-Miller-Smith in 1993 by adding purchase intent questions after the “good value” and the “getting expensive” questions, has the problem that we really don’t know the actual purchase probability unless we have market data to calibrate the results.
TRADE-OFF METHODS
- Rating-Base Full Profile Conjoint: This method, where a full profile is presented with variations across all attributes, was widely used a few years back. The major problem with this approach is that it tends to understate price sensitivity. A hypothesis as to why, is that price is taken as an indicator of overall quality resulting in “reversed” price utilities (preference increases with price) or flattened utilities (not much change as price increase) for many respondents. David believes this is due to lack of realism in the task, particularly when hypothetical products are presented, and respondents don’t have anything knowledge or experience to based their choice on, so they use price to evaluate quality (if it is expensive it must be good
- Discrete Choice Modeling or Choice-Based Conjoint (CBC): This includes different types of designs:
- Price-only Choice Models: In this method, respondents have to make a choice among the brand/price options shown, which a natural and easier task for respondents. Here, price is treated as a separate attribute for each brand. It is a good general-purpose approach when concrete, realistic products are tested, although it doesn’t allow simulating the effects of adding or deleting products included in the original set (they are fixed and only prices vary).
- Choices between hypothetical products: These are described by combinations of price and non-price attributes and levels. In order to be efficient, we need to focus on things respondents care about and model them accordingly. In order to get good results, we need to avoid impossible and illogical scenarios.
In the end, the key is to take into account respondent psychology in price research. As David says “give them realistic, natural questions and you’ll get less-biased answers.”
This is part of a series of pricing research posts that Jeffrey Henning and I are writing. The series so far:
- Getting The Price Right Takes More Than Guesswork
- Conjoint Analysis And Realism In Price Research
- Making The Case Against The Van Westerndorp Price Sensitivity Meter
- The Van Westendorp Price Sensitivity Meter
- Monadic Price Testing: “Shh, It’s All About Price
- Estimating Willingness to Pay
To learn more about our price research service visit Price Research.
as published on October 1, 2010 by the Dallas Business Journal
Branding adds a dimension that differentiates a product from others that meet the same need. Regardless, whether the product is a physical product, a service, a retail store, an organization, a person, a place, or an idea, they are all subject to a “branding” process in customers’ mind. In the brand realm, reality is always perception.
As customers’ experience competing products and are exposed to different marketing messages, they associate certain attributes and benefits to these products and perceive differences among competing products based on what they value the most. That’s how brands are born.
Customers’ brand associations may or may not match the intended message marketers want to convey about the brand and the company behind it, which is why it is important to keep an eye on the brand’s health and sources of brand equity with the help of market research.
Branding is about differentiation, which can be rational and tangible (e.g. product performance) or more emotional and symbolic (e.g. what it represents, what feelings it elicits). The sum of all the customers’ associations, perceptions and feelings about a product’s attributes, performance, its brand name, symbols, and the company associated with it gives equity to a brand. Brand equity plays an important role in customers’ purchase intentions and behavior. Companies that track sources of brand equity, how they affect customer behavior, and how they change over time are often steps ahead of the competition.
Measuring brand equity sources requires that marketers have an in-depth understanding of:
- How customers shop for and use the products
- What customers think about the brand and its competitors
- What aspect of awareness and brand image have an impact on customer response
Several qualitative and quantitative research techniques are used to identify sources of brand equity. Qualitative measures can help identify associations to a brand, its strength, favorability and uniqueness. However, quantitative measures are desirable to provide a more solid ground for strategic and tactical recommendations. Quantitative brand tracking studies are often used for this purpose. They act as a marketer’s stethoscope to listen to the brand’s heart and check how healthy it is.
When setting up a brand tracking study, brand managers should include measures of brand awareness, usage, attitudes, and perceptions. Different aspects of awareness such as recall and recognition tell us how strong a brand is, but depending on how and when the purchase decision is made (e.g. at point of purchase or away from it) one may be more important than the other for different product categories.
Usage and customers’ experience with different aspects of product have an impact on perceptions about product performance, but often go beyond product attributes to encompass an overall attitude towards the brand and its maker. In the quest for sources of brand equity, product and non-product related associations and perceptions should be tracked. All these measurements will inform marketers about how to design marketing strategies and tactics that strengthen a brand’s appeal, uniqueness and thus increase its equity.
To learn more about our consumer data service visit Consumer Shopping Behavior Insights. To request consumer shopping behavior data and insights don’t hesitate to contact us.
