The Variety of Pricing Research Methodologies
The issue of pricing has increased in importance as company
pricing strategies have become more complex, and price's
interaction with other marketing tools in tactical and strategic
initiatives is the subject of increasing attention. Our
team recognises that pricing has to be understood at all
stages of a product's lifecycle. Specifically, the importance
to a new brand of understanding the optimum and acceptable
price points for it prior to launch can not be overstated;
and the value of price as a tactical tool at a brand's more
mature stages is well documented.
We approache pricing research in an ad hoc manner, applying
techniques according to their suitability for the objective
being addressed. In doing so we employ elements of two broad
types of pricing technique. Firstly, those in which price
is the only element; and secondly those in which price is
part of a wider set of features. A summary of techniques
used to address marketing objectives is as follows:
Understanding the relationship between price and the entire
product
Non competitive context:
- PSM (Respondent define their own prices);
- Gabor Granger (Respondents react to pre defined prices).
Competitive Complex:
- BPTO.
Understanding the relationship between prices and other
elements of the product:
-Conjoint.
Typically we employ the Non-competitive context approaches
in cases where the study objectives are to identify optimal
and alternative possible prices for new products. Brand
Price Trade Off, meanwhile, is typically used to understand
the likely effect of using price tactically for existing
products; and Conjoint is employed when we need to understand
the importance of price relative to other product features
in driving consumer choice (for example, we may want to
understand the role of promotions relative to price in driving
choice).
Price sensitivity model
Price Sensitivity Model is used to identify price elasticity,
and can be used in a variety of situations. A common situation
where we employ it is when considering a new product, and
need to understand the most appropriate (and possible alternative)
price to employ. It is very often included in broader studies
relating to a chosen product, the key reason being that
the Price Sensitivity Model questioning is extremely concise,
and only takes a couple of minutes to administer. The actual
questioning is as follows:
1. At which price on this scale would (product) begin to
look cheap.
2. At which price on this scale would (product) begin to
look expensive.
3. At which price on this scale would (product) begin to
look too expensive- so that you would never consider choosing.
4. At which price on this scale would (product) begin to
look too cheap- so that you would suspect the quality of
the product and not consider choosing.
Results are presented in a line chart, incorporating cumulative
%s of respondents, in a form such as this:
In this example the following conclusions can be drawn:
- The 'Acceptable' price range is between 20 and
56 roubles. (This is where most respondents think the
product is not cheap or expensive and not too cheap or
too expensive). The recommendation is to not consider
pricing outside of this range.
- The Indifference Price Point is 40 roubles. This
is the price level at which an equal number of people
experience the product as cheap or expensive (where the
cheap and expensive lines cross), and is the price which
they feel most suits the product, given other factors
that exist in the market sector.
- The Optimal Price Point is 40 roubles. This is
the price level where an equal number of people believe
the product to be too cheap or too expensive (where the
too cheap and too expensive lines cross), and represents
the price point which is likely to yield maximum profitability.
It is quite common for the Indifference Price (IDP) to be
equal to the Optimal Price (OPP) but this does not necessarily
have to occur. Often OPP is found to the left of IDP which
indicates that the accepted appropriate price is actually
deemed to be too high to encourage purchase amongst a fair
proportion of potential consumers.
Gabor granger
This is a more pre-defined approach to understanding pricing.
A limited number of price points are defined before research,
and respondents are probed on their likely action at each
of these price points. It is often used in NPD, and it offers
the additional benefit versus Price Sensitivity Model of
detailing the weight of difference in likely sales between
different price points. In addition, Gabor Granger allows
us to understand the likely impact of simple price changes
on existing products, or more complex price changes for
a product which operates in a non competitive market.
Brand Price Trade Off (BPTO)
BPTO methodology involves asking respondents to trade off
brand and price combinations, to identify how likely choices
change as market prices are manipulated. Each study is tailored
to the specific objectives of the research, although typically
it involves presenting respondents with a display of relevant
products at a variety of pricing scenarios.
MAGRAM MR employs BPTOs to answer a range of issues, for
example:
- to measure a brand's elasticity (i.e. % of share that
is lost for % price increase);
- to test out new price scenarios (increases or decreases
in price of one or more brands);
- to understand the optimum price for a brand;
- to understand the likely effect on our brands' sales
from competitor pricing/promotions activity.
The methodology involves showing respondents a set of relevant
brands, at prices which are typically below current market
prices (this is done to allow us to understand the impact
of price reductions), and asking them which brand they would
choose on a typical purchase occasion. The chosen brand's
price is increased and the questioning is repeated with
the new set of prices. This continues until the respondent
has either made approx. 20 choices, or until he/she says
that no choice would be made on the basis that all brands'
prices have become prohibitively high.
A major usage advantage of BPTO is that its data can be
incorporated into a simulation package, which allows us
to understand likely change in choice under a number of
'what if' scenarios (e.g. our main competitor reduces its
price by 5 roubles). We design our own simulation packages,
in consultation with end users, to make them as user-friendly
as possible.
Conjoint
The research approaches discussed above are appropriate
in the majority of cases where price is being considered.
However, if complex structures exist, the conjoint approach
is very beneficial. It is a choice-based approach (i.e.
within it respondents are asked to choose between different
product options, incorporating a range of product features).
Analysis looks at interactions in choice, and simplifies
the output to identify the importance of price relative
to other product features, and thus the ability of each
feature to affect product choice. We run a number of conjoint
studies, to understand the importance of price relative
to other dimensions, such as:
- Brand
- Promotion types
- Packaging types
- Product communication
- Display types
Within each dimension, a number of alternatives are included,
which gives us an understanding of which ones are optimal,
and which ones should be avoided.
Whilst we refer to 'conjoint' overall, there are various
ways of actually designing conjoint studies. As in other
research areas, we take the core concept of the technique
and produce a final design to best meet the study objectives
of each Client.
