Innovations In Price and Satisfaction Research by E-RM

Flexible, Hybrid Methods for Price Sensitivity and “Satisfaction” Measurement

Bart Zehren, E-RM+1 847.864.7159

Evanston, IL, USA

[email protected]

http://your-research-resource.com

E-RM

E-Research for Marketing

E-RM, 2011. All Rights Reserved - Privileged and ConfidentialSlide 2

Measuring Price Sensitivity with Optimization

An adapted methodology grounded in marketing literature, easy to understand

and implement in the field…


Price Sensitivity Measurement – Methodology

GAUGING PRICE PERCEPTION WITH 4 PRICE RELATED QUESTIONS

At what price do you begin to perceive the

product as so expensive that you would not consider

buying it?

4 Points Of Intersection Between The Curves

At what price do you begin to perceive the

product as so inexpensive that you would feel that the

quality cannot be very good?

At what price do you perceive that the

product is beginning to get expensive, so that

it is not out of the question, but you

would have to give some thought to

buying it?

At what price do you perceive the product to be a bargain – a great buy for the

money?

Introduced by Dutch economist Peter H. van Westendorp in the 1970s, this approach is based on the premise that a bounded price range exists with a maximum (above which the product is too expensive to consider buying) and a minimum (below which consumers will doubt product credibility).

Methodology: By plotting proportions of respondents against price, four curves are created that correspond to: Too Expensive, Too Inexpensive, Expensive and Inexpensive.

Too Expensive Too Inexpensive Expensive Inexpensive


Price Sensitivity – Methodology

INTERPRETATION OF THE 4 INTERSECTION POINTS

Indifference Price Point (IPP)

Point Of Marginal Cheapness (PMC)

Point of Marginal Expensiveness (PME)

Optimal Price Point (OPP)

IPP gives the median price paid by consumers already in market or the product price of a market leader.

PMC and PME bound the range of acceptable prices within which a competitive product should be priced in an established market.

OPP is often taken as the Optimal Price.

Intersection between ‘Too Expensive’ and ‘Too Inexpensive’, where an equal number of respondents believes the product is “Too Expensive” as that it is “Too Inexpensive”.

Intersection between ‘Expensive’ and ‘Too Inexpensive’, where an equal number of respondents believes the product is “Expensive” as that it is “Too Inexpensive”.

Intersection between ‘Too Expensive’ and ‘Inexpensive’, where an equal number of respondents believes the product is “Too expensive” as that it is “Inexpensive”.

Intersection between ‘Expensive’ and ‘Inexpensive’, where an equal number of respondents believes the test product is “Expensive” as that it is “Inexpensive”.


0%

20%

40%

60%

80%

100%

1 2 3 4 5 6 7Price

% o

f Res

pond

ents

Too Expensive Too Inexpensive Expensive Inexpensive

IPP

PMC

PME

OPP

Price Sensitivity – A Graphic Illustration

The curves for Too Expensive and Too Inexpensive lie below the Expensive and Inexpensive curves, respectively. Generally, more people will find a price to be Expensive/Inexpensive than Too Expensive/Too Inexpensive.

As price rises, the percentage of respondents finding the price Expensive or Too Expensive also rises, thus these two curves are positively sloped. But, as price rises, the percentage of respondents finding the price Inexpensive or Too Inexpensive falls, giving these curves a negative slope.

Price Sensitivity: Four Crucial Intersection Points


Price Sensitivity Optimizer – The Adamek Adaptation

ADDS PURCHASE INTENT TO YIELD 4 POWERFUL QUESTION PAIRS

1. “At what price do you begin to perceive the product as so inexpensive that you would have serious doubts about its quality?”

a. Now, please rate on a scale of 1 to 10 how willing you would be to purchase the product at the above mentioned price (quoted as “too inexpensive”), where 1 means ‘not likely at all’ and 10 means ‘most likely’.

2. “At what price do you perceive the product to be a bargain – a great buy for the money?”

a. Rate on a scale of 1 to 10 how willing you would be to purchase the product at that price (quoted as “inexpensive”) ,where 1 means ‘not likely at all’ and 10 means ‘most likely’.

3. “At what price do you perceive that the product is beginning to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?”

a. Rate on a scale of 1 to 10 how willing you would be to purchase the product at that price (quoted as “expensive”), where 1 means ‘not likely at all’ and 10 means ‘most likely’.

4. “At what price do you begin to perceive the product as so expensive that you would not consider buying it?”

a. Rate on a scale of 1 to 10 for how willing you would be to purchase the product at that price (quoted as “too expensive”), where 1 means ‘not likely at all’ , 10 means ‘most likely’.


Acceptable Price Range

Price Sensitivity Curve – Maximizes Purchase Intent

Plot means for Price and Willingness to Purchase for four price points respondents perceive as “Too Inexpensive”, “Inexpensive”, “Expensive” and “Too Expensive”.

As price increases from “Too Inexpensive” to “Inexpensive”, willingness to purchase rises. As price increases further, willingness to purchase reaches its peak – the Optimal Price Point. With continued price increases, willingness to purchase decreases.

Price vs. Willingness to Purchase: Optimal Price Point

Optimal Price Point

Too Inexpensive

Inexpensive

Expensive

Too Expensive


Maturity of Markets – Different Price Sensitivities

SHAPE OF CURVE TELLS A STORY

A steep curve with a narrow peak indicates a market of consumers who are familiar with the product category and well informed about prevailing prices. Price tolerances are mature, small and well defined.

Alternatively, a low, flat shape suggests a less informed marketplace with little knowledge about the product being tested. Perhaps a new product category in which consumers are less familiar and experienced.


Measuring and Modeling Customer “Satisfaction”

A methodology grounded in traditional modeling tools, but innovative in isolating

separate, underlying “drivers” of happy and unhappy customers.


Separate Drivers of “Satisfaction” vs. Dissatisfaction

The traditional customer satisfaction model uncovers 2-way “drivers” of “Satisfaction” and Dissatisfaction (Up and Down):

Usual Model: Works Both Ways (Up and Down the scale)

E-RM’s Split Model uncovers 1-way “drivers” that may exist beyond - or beneath - those full scale 2-way drivers (Up or Down):

Works One-Way -- Satisfaction (Up) Only Works One Way -- Dissatisfaction (Down) Only

Result: We learn HOW attributes “drive” overall ratings Up and/or Down.

Ultimate Test of Value: Do we gain new information?


Split Model Concept: How attributes can “drive” overall ratings Up and/or Down

Finds 1-way “drivers” within the usual model’s full range 2-way drivers: Both Ways (Up & Down) 1 Way: Satisfaction Only 1 Way: Dissatisfaction Only

News value: Attributes can behave differently!

Predictor t values, coefficients, etc.

EXAMPLE ONLY: BASED ON HYPOTHETICAL DATA

Drivers of “Satisfaction” and Drivers of Dissatisfaction


Applications for Split Model of Customer “Satisfaction”

Use it to identify factors that can activate “Passives” (per Goodman and Gonier, Quirk’s - Oct. 2011) to high levels of satisfaction and contrary factors (to avoid) that present risks of a “Passive” dropping to the bottom of your “satisfaction” scale.

Use it to operationalize Kano’s model that classifies attributes as either “Threshold” (their absence means more dissatisfaction), “Performance” (their presence or absence has leverage), or “Excitement” (exclusively high end motivators).

In employee surveys, use it to efficiently operationalize Herzberg’s Motivation-Hygiene Theory.


Both Models Require Careful Handling

Price Value Sensitivity Measurement must consider

possible brand effects, the suitability of the basic or adapted model, use of a bounded price range and question sequencing.

“Satisfaction” Modeling Test applications will indicate

whether fuller implementation with better attributes and a more potent overall rating (i.e., not: “satisfaction”) is well advised.

If you know your customers’ price/value considerations and what “drives” their feelings of happiness and unhappiness with you…

…what more do you need to know?


Call for a Consultation

Bart Zehren, E-RM+1 847.864.7159

[email protected]

http://your-research-resource.com

http://www.linkedin.com/in/bartzehrenerm

Evanston, IL - USA

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Innovations In Price and Satisfaction Research by E-RM