Chapter 9

1. Chapter 9 Research Methods for Pricing Decisions

2. Benchmark Survey • McKinsey & Company survey: • About 15% of north American companies do serious pricing research: test marketing, surveys, conjoint analysis, and other methods. • It is a myth that most firms have a serious pricing strategy based on serious marketing research.

3. Coopers & LYBRAND Survey -1997 • 56% of firms had raised prices. • 45% of these experienced increased margins. • Profit motives and cost increases were main reasons for increases. • 31 % of firms had reduced prices. • 29% of these experienced increased margins. • Competitive pressures were main reasons for decreases. • Only 13% of the price changes resulted from scheduled reviews of pricing strategy.

4. Linking Research To Strategy • The usefulness of pricing research depends on the firm’s pricing objectives and its pricing strategy. • A well-developed pricing strategy begins with understanding: • How customers and competitors react to prices; • Their degree of sensitivity to specific price levels, and. • To price changes or price differences.

5. Basic Questions • 1. What are the benefits of the offering as perceived by customers? • 2. Do customers associate quality with price? • 3. Can buyers determine quality prior to purchase? • 4. What is the relative size of each market segment? • 5. What is the maximum amount that customers will pay?

6. Basic Questions • 6. What is the minimum amount customers will pay? • 7. What is the most acceptable set of prices for these customers? • 8. How much would these customers buy at these prices? • 9. Are there different price-market segments? • 10. How will competitors react to specific tactics? • 11. How have previous price changes affected sales volume of the firm? Of competitors?

7. Important Research Issues • 1. Will price sensitivity be tested for a product by itself, or in a competitive context? • 2. Will customers’ responses be tested directly, or indirectly? • Direct approach makes customers sensitive to providing a “rational” answer; • Indirect approach requires measuring customers’ beliefs and perceptions.

8. Important Research Issues • 3. Will each person be asked to respond to one price or several prices? • Responding to one price makes it less likely respondent will guess the underlying research question and provide a “rational” answer. • A single price makes it difficult to determine each buyer’s price sensitivity, and only aggregate measures are possible.

9. Surveys • Basic objective is to elicit facts and opinions from respondents relating either to a predication of the quantity they would be willing to buy at various prices or to their intent to buy in the near future • Pros: • Easy to conduct • One of the least costly research methods • Con: • Unreliable responses

10. Experimentation • Basic objective is to isolate and control various market factors that may affect market demand and then to observe buyers’ reactions to changes in one or more of these factors • Cons: • Often conducted in not a natural shopping environment • Lack of control over factors in natural shopping environment

11. Panels • Household participating in the panel record their purchases by brand and price in a daily diary or their purchases are recorded when they are scanned at a store’s checkout counter • Pros: • Observations accumulate quickly to establish an adequate data base to develop and test models • Cons: • Not representative of the general population • Possibility of errors in recording

12. Some Price Research Techniques • An important pricing research principle. • Generally, respondents should be provided a frame of reference that is consistent across respondents, unless the research is explicitly studying the effect of varying the frame of reference on responses.

13. Price Level Sensitivity:Absolute Thresholds • Direct question approach: • 1. What is the minimum price you would be willing to pay? • 2. What is the maximum price you would be willing to pay? • Simple and easy, but may suggest to respondents that there is a price that is too low or a price that is too high. • Each respondent only responds for two prices. • Extension: use a price scale.

14. Price Limits: Direct Question

15. Price Sensitivity Meter • Five question approach: • 1. At what price would you consider this product to be so inexpensive that you would doubt its quality? • 2. At what price would you still feel this product was inexpensive, yet have little doubt as to its quality? • These two questions provide an estimate of the low acceptable price threshold.

16. Price Sensitivity Meter • Five question approach: • 3. At what price would you begin to feel that this product is expensive but still worth buying because of its quality? • 4. At what price would you feel that the product is so expensive that regardless of its quality it is not worth buying? • These two questions provide an estimate of the high acceptable price threshold.

17. Price Sensitivity Meter • Five question approach: • 5. What price would be the most acceptable price to pay? • This question provides an estimate of the mid-point of the acceptable price range. Usually, respondents indicate some price(s) in the middle of the set of prices they believe are acceptable to pay. • Thus, this approach provides three price estimates: low, most and high acceptable prices.

18. Price Limits: Five Questions

19. Price Categorization • Ask buyers to sort a set of prices for a product into smaller groups according to how they perceive these prices to be similar or dissimilar • The advantage: does not assume there is only one set of acceptable prices in the market • One price might clearly emerge as the best price for the product or service

20. Magnitude Scaling Survey • Ask respondents to express their judgments by choosing among a limited set of categories labeled with cues such as acceptable-unacceptable • The advantage: people can provide meaningful information about the magnitude of their sensory experiences

21. Magnitude Scaling Survey • 1. Judge current product on a scale of 100 • 2. Judge “new” product compared to “old” product • 3. Judge current price on a scale of 100 • 4. Judge how much more or less you would be willing to pay compared for “new” product • 5. Ask respondent to evaluate next “new” product against the original reference product using the same procedures

22. Determining Willingness to Buy • Determining the value buyers attach to attributes • Assumes preferences are formed for a set of attributes • Method: • Observe choices of products with different sets of attributes and price paid for each product • Regress set of observed prices on set of relevant attribute measures:

23. Estimating Sensitivity to Price Differences • For established products, or when introducing a new model into an established product line, the issue of price sensitivity concerns the degree that demand may be sensitive to price differences (different price thresholds)

24. Price Difference Sensitivity: Differential Thresholds • Sequential preferences: two brands. • When comparing two brands, A and B, first establish each respondent’s preference when prices are equal. • Then, while holding the price constant for one of the brands, the price of the other brand is systematically changed by constant amounts, both increases and decreases from the original equal price point. • Respondents are asked to indicate the preferred brand at each comparison.

25. Price Difference Sensitivity: Differential Thresholds • Using a scale that includes an “indifference” or “no preference” response allows for: • Determining the intensity of preferences. • Determining the size of a price differential necessary before a switch might occur. • A “no preference” response when there are price differences indicates the differential price premium that one of the brands might use in the market.

26. Sequential Preferences: Multiple Brands • Respondents are presented with several brands with identical prices and are asked to indicate a preference for one brand. • The price of one brand is then varied up or down over a range of prices. This procedure provides information about preference changes relative to the price structures. • The brand for which price is changed is varied over respondents. This part of the procedure provides information about the relative price positions of the brands.

27. Other Price Research Techniques • Experimental demand curve- only the price of the test brand is varied over conditions and then trend analysis can be used to determine the relative price-volume relationship for the test brand • Tradeoff analysis- designed to determine the relative value buyers place on different factors or attributes of alternative offerings • Limited-profile approach vs. full-profile approach (conjoint analysis)

28. Tradeoff Analysis • Conjoint scaling offers two benefits • Respondents evaluate a product profile instead of one attribute at a time • The measurement process shifts from attitudes to preferences • Conjoint scaling offers two outcomes • Possible to determine the relative importance of price compared to other attributes • Possible to estimate price elasticity

29. Tradeoff Analysis • Discrete choice modeling involves developing choice sets that show product choices available in the market, along with their descriptions This research technique represents a combination of conjoint scaling and brand-price tradeoffs, but with the emphasis on choice rather than preferences

30. Other Price Research Techniques • Conjoint analysis- designed to provide a flexible diagnostic method of exploring buying complexities to determine the relative perceived value in different product attributes including price

31. Conjoint Analysis • Three common terms • Factors are the product or service that provide the benefits buyers derive from acquiring and using the product • Level refers to the number of different options available for a particular factor • Utility refers to the quantified degree of preference a person has for a particular factor

32. Conjoint Analysis • Buyers can be modeled as perceiving a product option as a combination or bundle of features; each feature has a separate utility that can be exchanged with any other feature that has the same utility value • Purchase decisions are made on the basis of these utilities • Conjoint analysis is a quantitative technique for breaking down buyers’ overall preferences into utilities for each product or service feature

33. Other Price Research Techniques • Simulated shopping experiments- designed as a purchase simulation in which buyers are asked to assume they are actually shopping and to make choices as normally as possible • Multiple-choice experiments- designed to study whether there are respondents who are prone to be price conscious and whether they have an unrealistic effect on the test results