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THE PRICE IS RIGHT
In an era of shortened product life cycles, demanding consumers
and tougher competition, the need to get your company’s pricing
strategy right has never been so important. After all, pricing is
the only element of the marketing mix that brings in revenues; all
others entail cost.
It goes without saying that pricing decisions are crucial –
too low and you may achieve the volume but not the margin –
too high and it’s a barrier to trial. Timing is also vital
– if the competition drops their price, do you need to follow?
And if so, by how much?
Historically, the most common approach to pricing has been either
to rely on “gut feeling” (intuition), or on market intelligence
or “follow-the-leader” type pricing, using a competitor
as a benchmark. However, a me-too approach leads to high levels
of competition, and does not take into consideration the long-term
strategic impact of pricing on the brand.
For some markets where prices are very visible, or where there is
a large amount of internal pricing data, it is possible to use econometric
methods to examine the impact of price and understand price elasticity.
However, the fast-paced nature of our environment often makes it
imperative for marketers to consider first-hand consumer feedback
while taking pricing decisions. Gone are the days of cost plus pricing.
Today, marketers need to adopt different pricing strategies (penetration,
skimming, etc.) at different stages of product life cycle.
It is here that marketing research can help marketers in taking
well-informed pricing decisions. By using various contemporary and
sophisticated pricing techniques (or a combination of the same),
marketing research can help marketers to analyze and understand
the price sensitivity of consumers, thereby enabling them to take
key pricing decisions.
Let us discuss the three most commonly used techniques to determine
the price sensitivity of consumers.
Price Sensitivity Meter (PSM)
Developed in the 1970s by Peter H. Van Westendorp, this technique
embraces two theories: The theory of reasonable prices, which states
that prospective purchasers, educated about a product or service
and its market, can examine it and give a rough price range. And
the theory of price signaling quality, which states that buyers
will eliminate a product or service deemed too low in price because
they question its quality.
As a part of this technique, respondents/ consumers are asked four
price-related questions:
l At what price would they consider the product to be a bargain
– great value for money?
l At what price would they consider the product expensive yet still
worth buying?
l At what price would they consider the product to be so cheap that
they would doubt its quality?
l At what price would they consider the product to be too expensive?
The optimal price point is calculated based on the responses to
these four questions.
PSM is primarily exploratory in nature and hence is more appropriate
when a category is new and little marketplace information is available
to suggest how an unfamiliar product may be priced. In markets where
consumers are unfamiliar with a product and have little available
information, they often use price as an indicator of product quality.
Therefore a very low price may cause consumers to doubt a product’s
quality. Prices must be low enough to attract early adopters, yet
high enough to convey worth. An approach such as PSM can help in
uncovering consumer beliefs about the relationship between a product’s
price and its quality.
The Gabor Granger method
This technique works best in a scenario where the price sensitivity
of a product/service is to be tested. It is primarily used when
the marketer is aware of the price range within which they want
to sell.
The technique comprises asking customers to state their purchase
intention at various price points. Based on the responses, one can
assess the likely levels of demand at each price point (the demand
curve in the graph below). Using this estimate of demand, the price
elasticity (or expected revenue) can be calculated to establish
the optimum price point in the market.
Conjoint analysis
This technique is an extremely powerful way of capturing what
really drives customers to buy one product over another and what
they really value.
Conjoint analysis is based on the premise that consumers purchase
a product based on a number of product attributes, such as brand
name, product features, packaging and price. While making a purchase
decision, consumers do a trade-off in their mind between these attributes
(for example, when purchasing a mobile phone, consumers may trade
off between the presence of a camera and the price). Therefore,
if one is able to assess and quantify the importance of each of
these attributes vis-à-vis price, one can realistically estimate
the importance of price in a consumer’s mind (and of course
the importance of other product attributes too).
The technique comprises exposing consumers to a set of product combinations
(including those of the competition) and assessing their preference
level for each of the exposed combinations. The information collected
is processed through a statistical package to derive the “utility”
values of different product attributes. Using these utility values,
marketers can assess the preference of different product combinations
(including those that have not been evaluated by respondents).
Unlike other techniques, conjoint analysis measures the importance
of various product attributes (price, packaging, etc.) in an indirect
way without making the consumer actually think about “importance”
at all. Thus, it reduces the over-emphasis on price, which helps
marketers decide on the right product-price combination.
Pricing decisions, apart from such consumer feedback, are based
on a number of other factors (such as internal costs, product life-cycle
stage, competitive environment, etc.). While all three of the above-mentioned
techniques are used extensively by marketers to take decisions on
pricing, conjoint analysis scores above the rest because of its
flexibility and its ability to reveal the importance of price in
relation to other product attributes. However, that does not mean
the technique is the answer for every pricing-related issue. The
choice of technique depends on the objectives of the research and
hence “a one size fits all” approach is ill-advised.
Moreover, it should be noted that pricing research is like a compass;
it can point you in the right direction, but it cannot take you
there.
VISHAL BALI
Head of Customized Research
ACNielsen, Egypt
www.acnielsen.com
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