Marketing Research PRICING RESEARCH

BY

PAUL OLOLA OMOLO

D65/68454/2013

28th JULY,2015

Why do pricing research? Price is the amount of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having/using the product or service.

Getting the price of a product or service right is one of the most challenging issues facing an organization, this is because:

If they set too low price, they will miss out on revenues.

If they set too high price, they risk alienating customers and loosing market share to competition.

Pricing research therefore reduces the uncertainty risk involved in pricing strategy by:

Determining the optimum combination of product attributes and price.

Estimating potential sales and market share.

Striving for competitive advantage.

Managing risks in a fluctuating market environment.

Choosing the right pricing strategy strengthens the chance of achieving turnover and profit in line with the company objectives.

Factors to consider In pricing research What do you want to find out? • How many pricing points? • How will you select the best price point to test?

Who to interview? • What sample size will I need? • Who do you want to talk to? • Where will the sample come

from? • Specific sub-groups you might

want to investigate? What pricing method should I

choose? • What research budget do I

have or need? • What data collection method is

best? (web/telephone etc.)

In pricing strategy selection

The demand for the Product/Service in the market. Customers perception. The image of the company

in the market. Intensity of competition.

Methods of conducting pricing research

Gabor Granger Pricing Technique The Gabor Granger Pricing Technique was created by Andre Gabor and Clive Granger, and has been in use since the 1960s.

It is a technique whereby respondents are asked about the likelihood that they will buy a product or service at a variety of different price points.

The price is varied till a point whereby the customer would not buy the product/service is determined.

This is a simple method that plots the percentage of people which would be likely to buy a product/service at a number of different prices so that the effect of raising or lowering a price can be easily seen.

Having identified the optimum price for each individual, the expected level of demand for each price point can be worked out and plotted on a price curve.

Price elasticity of demand can also be measured using this method.

This method offers a good indication of the willingness of customers to pay.

How it works For example, consumers can be asked

their willingness to buy different products A,B and C at different price points.

It is assumed that this querying will reveal the price point at which the consumer will no longer be interested in buying the product (Kshs 4,150 +…)

The method is sometimes called the "buy-response method“ and consumers respond with a "buy-not buy" response to each price.

The constant querying enables the pricing analyst to trace out a demand curve for each product at different prices.

Once the demand curve is derived, a revenue curve can be overlaid to help determine the optimal price.

The optimal price is determined where the revenue curve is at maximum.

Disadvantage

It does not replicate the many variables that might influence actual purchase intention and behaviour, such as available budget, competitive context, brand value, external market conditions, etc.

Advantage

It is a straight forward method of measuring price sensitivity

This approach provides a simple demand curve for the product, which indicates the proportion of respondents interested in buying the product at certain price points.

As such, it builds in demand (i.e. this is useful since you may generate a higher proportion of revenue from a lower price point vs a higher price point)

What is it? The price sensitivity meter (PSM) was

initially created by Dutch economist Peter Van Westendorp in 1976.

This is a technique for gauging consumers‟ price expectations for a finished product, often an existing product in an established category.

It enables the marketer to see a range of prices that might be appropriate, and to see the fall off in consumer interest that occurs as price rises.

Key data analyzed is from responses to questions about what prices for a product/service are considered too high/low.

Plotting this information onto price scales shows the high/low price threshold as well as price points considered optimal.

What is it for? Used during new product

development phase to aid in setting price either as an entry price strategy or a premium skimming approach to price. It can help determine which strategy is best.

Established brands will use PSA to guide pricing decisions like : repositioning often used as an input to a test market.

It determines range of acceptable prices and an optimal price point based on an analysis of price/value ratings provided by customers.

Van Westendorp PSA

How does it work? Consider a new Tooth product that

addresses sensitivity, bleeding gums and whitens teeth brighter.

Respondents are asked FOUR questions about a new toothpaste product.

Q1. So low that you feel you doubt the quality. At what price would you consider the product/service priced quality?

Q2.At what price would you consider the product/service to be inexpensive?

Q3.At what price would you consider the product/service is stating to get expensive in that you would give some thought to buying it?

Q4.At what price would you consider the product or service to be too expensive that you would not consider buying it?

The questions asked would produce responses that can be plotted on a graph.

The best price is the one that raises revenue.

Van Westendorp PSA….ctd

Van Westendorp PSA….ctd. Where price curves intersect the following price points are identified:

PMC (Point of Marginal Cheapness)

Price point where more sales would be lost because of questionable quality than gained from those seeking a bargain

PME (Point of Marginal Expensiveness)

Price point above which the cost of the product outweighs the perceived value derived from it

OPP(Optimum Price Point)

Point at which an equal percentage of customers consider the price too expensive as feel it is so low that quality is doubtful

IDP (Indifference Price Point)

Point at which the same proportion of customers feel the product is becoming too expensive as those who feel it is cheap, i.e., where most are indifferent to the price

RAP (Range of Acceptable Prices)

The difference in price between the Point of Marginal Cheapness and Point of Marginal Expensiveness

Van Westendorp PSA…pros & cons

Advantages The Van Westendorp model

offers a simple but powerful way to incorporate price perceptions into pricing strategy

The results from respondents spread over several distributions yields a number of inputs for pricing decisions.

Easy to execute as questions asked are easy to answer with its tools easy to understand.

Disadvantages When a product or service is

conceptually new, however, this model is less effective as customers are not familiar with benchmark prices and their knowledge is limited.

It does not take into account the complexities of the actual buying behaviour.

Depending on the way the questions are phrased, some respondents would make their estimates low or high.

Conjoint Analysis What is it? Conjoint analysis is one of the

terms used to describe a broad range of techniques for estimating the value people place on the attributes or features that define products and services.

The goal of any conjoint survey is to assign specific values to the range of options buyers consider when making a purchase decision.

Armed with this knowledge, marketers can focus on the most important features of products or services and design messages most likely to strike a cord with target buyers.

Where does it work? conjoint analysis evaluates

product/service attributes in a way that no other method can

Traditional survey approaches ask respondents to estimate how much value they place on each attribute. This is a very difficult task for any person to complete.

These types of analysis include : Discrete Modeling, Hierarchical Choice, Card Sorts, Tradeoff Matrices, Preference Based Conjoint and Pairwise Comparisons are some of the names used for various forms of conjoint analysis.

Conjoint Analysis The technique has been used by marketing researchers over years as an effective method of evaluating the value of different elements of an offering.

There are a number of different types of conjoint analysis, but essentially the technique is a trade-off model where respondents are able to compare different offerings alongside each other, and choose between them.

For example, by identifying the value of different features of a document wallet sold locally. The wallet could be differentiated by:

Colour

Type of sealing

Rigidity

Price

These different features present five possible combinations which could be presented to a respondent to find out which they prefer as shown:

Concept sealing Colour Rigidity

Price (kshs)

1 Self-seal Red Hard 450/=

2 Knob Yellow Hard 400/=

3 Button Green Soft 250/=

4 Lace Orange Soft 200/=

5 Glue Grey Light 150/=

Conjoint Analysis….How it works The value in Conjoint Analysis can be

elevated to gain a true judgment on preference, it is important to assign a price to each offering.

Assigning medium, low, middle and high pricing allows researchers to test respondents interests at different price levels which provides different options to put before respondents.

These concepts are presented to respondents whom are asked which they would be most likely to buy.

Despite the technique offering useful evaluation of how buyers value products and services, it works best when the features of an offering are distinct and simple like : pens, envelopes, batteries, laptops etc.

Conjoint analysis then uses sophisticated software to calculate values attributed to different features of the wallet despite not being asked outright.

Adding options to the features chosen as well as pricing levels gives a multitude of permutations for respondents to consider.

Advantage

Allows for greater flexibility and reliability in decision making.

Simulates the choices or trade-offs that customers make between product attributes like price and brands that customers make in reality during purchase decisions.

Disadvantage

It is limited in business to business markets where relationship with the salesperson or the account manager, reliability of delivery and other non-preference variables are assigned in purchase decisions.

Only applicable in business to business pricing research if more variables are added like face to face relationships in a multi-attribute level trade-off.

Market price testing Monadic Price Testing Monadic pricing studies are a fancy name given to „single cell‟ pricing research where respondents are asked a single question about a product.

With Monadic price testing respondents are shown (or read) a single concept, with a single price, and asked about their intentions to purchase or some similar attitude. When more prices need to be measured, more cells are added.

This kind of phrasing is less likely to confuse respondents as they just have to make a choice rather than naming a price. This would at least get you more accurate answers for your particular setting.

Advantage advantage if you test a broad enough range

of prices, you can recreate a demand curve.

Disadvantage A Potential Problem is by focusing the

customer‟s attention on a reasonable price, you may be censoring extreme responses

Needs a lot of respondents to get an answer. just lead the customer to behave as though they are negotiating.

Need to ensure that the question is not overly focused on the price.

Price Laddering Laddering is a well-established technique from psychology and is typically used to encourage self-analysis of behavior and motivations.

Applying this process to test pricing helps us to gather a more complete list of “consequences” and climb towards the hard-to-reach “values”. These “values” are the most useful tools for predicting behavior and identifying potential new opportunities.

Disadvantages

The number of questions which it generates can be large, and the process of repeatedly asking someone seems boring. Having this in mind it is essential to explain the theory behind the technique to the respondent before beginning the questioning.

Answering the later questions can be difficult. Not everyone will be able to do so, and attempting to force an answer is counterproductive.

Recording responses can be complicated, so care should be taken in preparing for and conducting the questioning.

The technique is designed to help people examine their actions and experiences. It is not suitable for investigating hypothetical decisions; people will often find it difficult to answer and answers will be less reliable.

Advantages Price Laddering offers an obvious practical advantage

over Monadic with its smaller sample size requirements.

this technique remains a powerful tool for unlocking the real drivers for things such as purchasing decisions in consumer research.

Questions asked in surveys

Monadic Price Testing 1. “If a LG DVD player is priced at kshs 4,000/= how likely are you to buy

it?”

2. “If a LG DVD player is priced at kshs 4,000/= how likely are you to buy it at the supermarket?”

3. “If a LG DVD player is priced at kshs 4,000/= would you buy it at the stalls-shop in town?”

4. “If a LG DVD player is priced at kshs 4,000/= and SONY DVD player at kshs 5,000/= at the stall-shop in town, would you buy it?”

Price laddering 1. "Why did you choose this product?" - to establish the important attributes.

2. "Why is it good/bad that...?" - to establish the consequences of each attribute.

3. "Why is this important to you…..?" or "How does this relate to your core values?" - to establish the values of the respondent which are affected by each consequence.

Market price testing

Research for: Description Information required Sources of information

Price signaling When consumers are willing to pay more despite lack of knowledge regarding quality

Competitors prices and costs, Legal constraints of price signaling, Product and cost information.

Internal records, secondary data on competitors prices, legal data, inferential information on competitors costs

Price bundling Adopted when products are non-substitutable, perishable & there is asymmetric demand structure for them.

Demand characteristics on various components of the bundle, product and cost information, consumer preferences for various combinations of the bundle.

Internal records, survey data or customer characteristics and preferences, secondary sources of information on competitor costs and prices.

To know how to price products and services in order to achieve the highest revenues requires pricing points research in order to determine prices that:

Will generate the highest revenues.

Attract buyers and traffic.

There are however two key points to consider in market price testing:

1) There is flexibility in product/service pricing.

2) A small difference in the pricing of a product/service has a high impact on revenues.

Various methods can be used to test prices while in the market, these methods require research to determine the optimum pricing points that organizations require. They include the following research :

Market price testing. Ctd Research for:

Description Information Required Sources of information

Skimming pricing

Concept of pricing the product at the point which profits will be greatest until market conditions change or supply costs dictate a price change.

Relative ranges of alternative prices.

Internal Records Secondary data sources Competitor prices.

Penetration pricing

Strategy based on concept that average unit production costs continue to decrease as cumulative output increases.

The lowest market entry price below cost, Costs of production of the good/service.

Internal records, Secondary data, Competitor prices, Legal data, demographic consumer data.

Premium pricing

In price signaling the firm produces inferior products at high prices, in premium pricing inferior and superior products are produced at high prices to exploit joint economies of scale.

Product and cost information, competitors prices and costs, consumer characteristics like maximum price they are willing to pay for a product.

Internal records, secondary sources : markets and transportation costs.

Discounting: Random, second market & periodic.

When consumers in the market have different reservation prices, firms can start at high prices and periodically discount them to draw consumers with lowest reservation prices. Some discount prices in a random manner to take advantage of consumers with heterogeneous costs who buy at undiscounted price where low price is offered.

Information about consumer reservation prices. Product or service and cost information.

Internal records, survey research to determine consumers reservation prices, Internal records.

Cardinal rules for conducting pricing research

1. The Buying process is critical

Understand the who, what, why, where, when and how behind your customers‟ pricing decisions to avoid receiving poor pricing information, focus on capturing the following elements of the buying process into the research design: the buying occasion – when and why they are buying; frequency of purchase; key decision maker; and length of the buying process etc.

2. Not all tools are created equally

There are several methods for collecting pricing data, but they are not exactly same and not a single method can be used all the time. The key is to match the data collection method to the pricing problem for which you are seeking input.

3. Understand how your customers perceive price

Price often plays a highly emotional role in the customer‟s buying decision. When the price is too high, customer‟s experience “shock” and either defect to another supplier or wait until the price comes down before they purchase. On the other hand, a high price can sometimes signal a prestigious image; the customer is filled with a sense of exclusivity and belonging, and is willing to pay premium prices.

In both cases, the price is perceived as high, but the customer‟s reaction in each is different. Understanding how customers view price in the context of their purchase is critical to effective pricing research design.

Rules for conducting pricing research….ctd.

4. Use pricing research to sell and not just to set price

Many organizations use research to make a pricing decision, but don‟t share that information with the sales force to help them successfully execute the pricing strategy. Educating the sales facilitates buy-in to the pricing decision; allows for pricing objections and concerns to be heard and dealt with; and empowers sales reps with the confidence to sell the price, based on the established facts.

5. Use segmentation to select – or reject – your customers

Pricing research in segmentation is often used to identify which group of customers is the “best” to serve. Although these customers are targeted, many companies can‟t resist the temptation to sell their product or service to the whole market in a misguided attempt to grab volume. Consequently, these organizations get dragged down by serving the unprofitable at the expense of their profitable “key accounts.”

By using pricing research and applying this framework to every pricing initiative, you will be able to make better pricing

decisions and dramatically boost profits.

References Kumar, V., Aaker, A., & Day, G., (2002). Essentials of Marketing Research (2nd ed.) John Wiley and Sons, INC.: Pennsylvania : U.S.A. Kotler, P., & Armstrong, G., (2012). Principles of Marketing (14th ed.) Prentice Hall International Inc.: New Jersey, U.S.A. Vithala, R., (2009). Handbook of Pricing Research in Marketing. Edward Elgar Publishing Ltd, Cheltenham.: U.K.

The End

Thank You