2. 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.
3. 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.
4. 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.
5. 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.
6. 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)
7. 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
8. 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
9. 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
10. 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.
11. 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.
12. 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/=
13. 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.
14. 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.
15. 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.
16. 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 :
17. 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.
18. 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.
19. 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.
20. 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.
