Methods for Pricing Research

Methods for Pricing Research

Survey research on price sensitivity helps market professionals

on decision making at each stage of a new product development: concept

analysis, development and launch.

Do you have a new concept to be tested?

Are you developing a new product?

Did your competitors changed their prices?

Is your brand going to launch a new product in the market?

Survey research on price sensitivity can really help

you out on understanding consumer preferences.

This presentation compares six methods of pricing research: their

ability to recover information about customer values, how they are

executed, how can results be interpreted and their limitations.

Concept test

/concept evaluation

Conjoint Analysis

PSM BPTO

Brand Price Trade Off

Monadic scenarios

Discrete Choice Modelling

(Choice Based Conjoint)

Concept test

/concept evaluation

Conjoint Analysis

PSM BPTO


Monadic scenarios




PSM

Price Sensitivity Meter

This method was introduced in 1970’s by Peter van Westendorp, a Dutch economist. It is

based on the premise that there is a range of prices bounded by a maximum that a

consumer is prepared to spend and a minimum below which credibility is in doubt.

In this method respondents must ask to four price-related questions:

At what price would you consider the product to be so expensive that you

would not consider buying it? Too expensive

At what price would you consider the product to be priced so low that you

would feel the quality couldn’t be very good? Too inexpensive

At what price would you consider the product starting to get expensive, so

that it is not out of the question, but you would have to give some thought to

buying it? Expensive

At what price would you consider the product to be a bargain – a great buy for

the money Inexpensive

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 € 2 € 3 € 4 € 5 € 6 € 7 € 8 €

Too Inexpensive

Inexpensive

Expensive

Too Expensive

The cumulative percentages are plotted and the four key intersections are interpreted. It allow us to predict the optimum price point (OPP) and the range of acceptable prices:

These distributions are usually display in a chart, as shown below.

Range of Acceptable Prices

PMC – point of marginal cheapness

PME – point of marginal expensiveness

IPP – Indifference price point

OPP – optimal price point

PSM


OPP

IPP

Range of Acceptable Prices

PSM approach has some limitations:

data is dubious as it relies heavily on consumer’s price awareness in a market,

which means that respondent’s ability to answer these questions is dependent upon

their having a good reference price. For this reason, in a large sense, PSM becomes a

test of price rather than a measure of price sensitivity.

do not provide any insight into the customer values that drive a purchase

decision.

it is misleading because it combines buying intention with price sensitivity.

PSM



Concept test

/concept evaluation

Conjoint Analysis

PSM BPTO


Monadic scenarios



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Definitely

would not

purchase

Probably

would not

purchase

Might or

might not

purchase

Probably

would

purchase

Definitely

would

purchase

5 €

10 €

15 €

Concept test

/concept evaluation

In this method respondents are presented with a product concept and asked how likely

they would be to purchase this product at a specific price.

How likely would you be to purchase this box of chocolates if it cost 10€?

Definitely would purchase, Probably would purchase, Might or might not purchase,

Probably would not purchase, Definitely would not purchase

Concept test

/concept evaluation

The Concept test method has some limitations:

provides no competitive information: respondents do evaluations without any

information about other products that might be available in the market. They are

not able to do trade-offs between features and price to determine their preferred

product, which means they do not model real-world decisions.

relies on price awareness: respondents base their answers on their awareness of

the current pricing in the category.

is inefficient when evaluating numerous product specifications: each

respondent should only evaluate one concept.

relies on aggregate-level analysis: this approach will make respondent

heterogeneity difficult to detect and measure.

cannot indicate what a better or ideal price might be, but only if the proposed

price is acceptable.


Concept test

/concept evaluation

Conjoint Analysis

PSM BPTO


Monadic scenarios



Conjoint Analysis

In conjoint analysis each respondent is exposed to many concepts. Respondents are

asked to make hypothetical trade-offs between products, as buyers are forced to do

when actually shopping.

In each product the combination of features shown together (including price)

changes, so that a large number of product features can be evaluated. Impossible

combinations (e.g., an expensive attribute and a low price) are eliminated.

Example 1:

Considering the purchase of a tablet. Below are 8

options for this tablet. They differ in 3 basic

benefits (weight, the length of the battery life,

and the price). Rank order these 8 options from 1-

8 by assigning 8 to your most preferred option

and 1 to your least preferred option (it is very

important that you assign 8 to your most

preferred option.)

OPTION WEIGHT BATTERY

LIFE PRICE RANKING

1 300 gr 6 hours 500€

2 500 gr 12 hours 300€

3 500 gr 6 hours 500€

4 300 gr 12 hours 500€

5 300 gr 6 hours 300€

6 500 gr 12 hours 500€

7 500 gr 6 hours 300€

8 300 gr 12 hours 300€

Conjoint Analysis

Example 2:

Considering two TV alternatives.

Which would you prefer?

or

1 2 3 4 5 6 7 8 9

Strongly prefer product on left

Strongly prefer product on right

Example 3:

Extremely clear picture quality

$300

Clear picture quality

$200

Please distribute 100 points between the following attributes according to the influence each

has on your decision to purchase

Points

Price

Bonus Airline Miles

Extra Leg Room

Preferred Security/Screening

On-Time Departure /Arrival

Assigned Seating

Total 100

Each respondent provides information on his or her trade-offs so that the utility of each

product characteristic (including price) can be estimated for each respondent. This

individual-level estimation allows the identification of individual differences that can

lead to a market segmentation scheme and can be used to help predict acceptance of

products by different individuals in a heterogeneous market.

The Conjoint Analysis method has some limitations:

requires the respondent to state a preference among a set of configured

products, but it does not ask if the respondent considers the configured

product well enough to buy it.

the respondent task of providing a rating is still not as realistic as choosing

a product, like consumers actually do when shopping.

Conjoint Analysis

Concept test

/concept evaluation

Conjoint Analysis

PSM BPTO


Monadic scenarios




BPTO


BPTO is a simplified form of conjoint analysis in which respondents choose a brand

from a series of price scenarios. This approach is the simplest method for assessing the

relative impact/value of the brand as it only uses two variables: brand and price.

Several brands are shown at once and the customer chooses the preferred option. Price

are adjusted and the customer chooses again. This method allows answering to these

questions:

What are the maximum acceptable prices for a product?

What differences of monetary values are perceived by consumers between the

products being presented?

What market shares can a product achieve at certain price levels if it competes

with other products?

BPTO is most used in consumer type markets where there is little to choose functionally

between products. For other type of products, such as services, industry and technical,

more sophisticated techniques are needed.

BPTO


Example:

Limitations

in most markets it results in exaggerated price elasticity.

Imagine you are choosing a bottle (2 litres) of soft drink from a shop. If the drinks were

priced as follows which would you choose?

Choose a product then click on ‘Select’ to see some new prices and to choose again.

Brand Price Choose…

7 Up 1.20

Coca Cola 1.20

Fanta 1.20

Pepsi 1.20

Sprite 1.20

None of these 1.20


Concept test

/concept evaluation

Conjoint Analysis

PSM BPTO


Monadic scenarios



Monadic scenarios

This approach asks respondents to make a realistic

purchase from a shelf display, price marked as in the real

world. Respondents are not prompted to look at price in

any overt way.

The effects of different price scenarios are evaluated by

creating different displays and obtaining a choice from a

different sample of people.

Monadic scenarios are used to generate an accurate price

elasticity and have been validated across a wide variety of

fmcg (fast moving consumer goods) markets.

This method can be combined with other methods such

BPTO.

Limitations

the cost, as every extra scenario we want to test means an extra sample of people.


Concept test

/concept evaluation

Conjoint Analysis

PSM BPTO


Monadic scenarios





In Discrete Choice Modeling a set of products with different features and prices is

presented to respondent and he/she has to pick one. In this regard, it is based on a

more realistic task that consumers perform every day: the task of choosing a product

from among a group of competitors.

The scenarios can be varied across participants, with different choice sets or different

prices and data is aggregated later. The utility of the products relative to price can be

measured then.

The results from discrete choice modeling are quite similar to those from conjoint as

both approaches allow what-if simulations.

Example:

Which TV would you purchase?

Brand A

81 cm

Wi-Fi, 3D

€500

Brand B

106 cm

No Wi-Fi, 3D

€600

Brand C

101 cm

Wi-Fi, 3D

€700

NONE

If these were my only

alternatives I would not

purchase anything

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Do you want to know more about research on price sensitivity? We can help you decide the most suitable method for you. Contact us, we are at you disposal!

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Methods for Pricing Research