Pricing Research: The Good, The Bad, And The Good Enough
by Elizabeth Horn

  • Pricing Research

    In this era of product and channel proliferation, companies are struggling to survive.

    Many turn to product innovation (as they should) or even product restaging. Yet, an oft overlooked marketing lever is product pricing. Periodically evaluating your product’s price position is a healthy practice. Pricing evaluation can be complex, so where should your company start?
     
The Good

Clients interested in evaluating pricing often request a “good” way to assess price elasticity. In most cases I recommend some type of trade-off analysis, such as a choice modeling survey using a realistic competitive set. In this method respondents make purchase selections across several survey screens that present the product and its competitors with their features and with different price points. Respondents “trade off” different product options, using both the differences in the product features and the price for each product. This methodology yields an understanding of price elasticities and preferences for product features with respect to others. A simulator is developed using the model results, allowing clients to see the impact of any pricing shifts.

Choice Modeling Example

Client reactions to this method generally are quite positive. It’s intriguing, and it simulates real-world product purchasing. It’s not a new technique (been around for decades), so chances are clients have at least heard of it in business school. More often than not, once choice modeling is explained and demonstrated, the client is onboard and we’re ready to design the research.

But sometimes clients may be less enthusiastic about the “good” pricing method. They may consider choice modeling to be overly engineered, expensive, or even time-intensive. At this point clients will mention the Van Westendorp (VW) technique as an alternative. “What do you think of this method?” they ask. I try not to cringe in response.

The Bad

Many clients gravitate toward the Van Westendorp approach because the analysis is simple, inexpensive, and quick to execute. The method is based on four open-ended pricing questions:

  • At what price would this new product begin to be inexpensive?
  • At what price would this new product begin to be expensive?
  • At what price would this new product begin to be so expensive that you would never consider purchasing it?
  • At what price would this product begin to be so inexpensive that you would doubt the quality and not purchase it?
 

Respondents provide the price for each question. Answers are tabulated cumulatively and graphed as shown. The intersections of the four lines listed below identify the optimal pricing and price range:

  • Lower Bound (Intersection of Too Inexpensive and Expensive)
  • Upper Bound (Intersection of Too Expensive and Inexpensive)
  • Optimal Price (Intersection of Too Inexpensive and Too Expensive)
  • Indifferent Price (Intersection of Inexpensive and Expensive).
 

Choice Modeling Example

 

Ostensibly, this looks and sounds like a great technique, right? Well, no, not really. VW is not one of my favorite pricing methods for several reasons (not all are listed below to avoid boring the reader):

  • Economic theory does not support the meaning behind any of the line intersections. There isn’t any rhyme or reason as to why the crossing of the “too expensive” and “too inexpensive” lines should be the optimal price point, for example.
  • When the product is very new or different, is purchased infrequently, and/or has a low current market share (low overall awareness), respondents do not have any benchmark. So their stated prices cover a very wide, often unrealistic range.
  • There is no guarantee that the VW results will allow for company profit. I remember delivering VW results to a durable goods client about 10 years ago. She wanted to test the viability of the technique before including it in other research. The optimal price range suggested by the price curves was too low to cover manufacturing costs (yikes). VW was dropped from future studies.
  • The basis of the questions is that price is a signal of quality. If the respondents don't understand the quality of the product, then the prices likely are not valid.
  • Lastly, the VW model makes zero allowance for the presence of competitive offerings. Evaluating a product in isolation (sans competitors) is risky; a product’s price acceptance depends upon the context in which it is sold.
 

Intrepid pricing researchers have proposed improvements to VW, such as using priced purchase intent (how likely would you be to purchase this product at a price of X?) to adjust the VW curves and providing a precoded list of prices in lieu of open-ended boxes for answering the questions. These tweaks can improve the results (in fact, we’ve used some of these add-ons to limited success). Yet the underlying technique still stands on shaky theoretical ground.

The Good Enough

When the timing is urgent and the budget is small, I recommend a “good enough” pricing method (hint: it’s not VW). Although several different techniques can be appropriate here, I’ve found that the Gabor-Granger approach performs well across a number of product categories.

Gabor-Granger analysis identifies the optimal price range for a product considered in isolation (however, a competitive set with pricing can be shown to give context). Respondents indicate likelihood to purchase at predefined price points (usually four to five prices are tested). The most important thing to notice is that the pricing evaluation does not require respondents to invent prices. Instead, they react to prices that have been vetted by the client company.

Prices are presented based on responses to previous pricing questions. For example, the pricing series begins with the middle price point. Respondents who will buy at that price are shown the next highest price, and so on. Respondents who would not buy at the middle price are shown the next lower price, and so on.

The percentage of respondents who would buy the product is plotted as the demand curve (example shows demand as the blue line). Revenue is calculated as % Demand x Price x 1,000 Respondents (example shows revenue as the green line). The optimal price generates the highest revenue (circled in the chart). The optimal price is contained within the optimal price range. Price elasticity is calculated and interpreted. (The example price elasticity of -1.1 indicates that there is some sensitivity to price increases; to maximize demand, the product should be priced at the lower end of the range.)

Gabor-Granger Pricing Method Example

Good Or Good Enough?

Companies innovate, test, and price products for market launch at lightspeed. As client partners, market researchers need to be sensitive to these pressures. Choice modeling techniques--the “good” pricing methods--should be recommended first to assess product pricing. When clients are budget-strapped and time-pressed though, “good enough” methods, such as the Gabor-Granger analysis, can provide sufficient guidance for the product’s place on the price spectrum.

About the Author

Elizabeth Horn (ehorn@decisionanalyst.com) is Senior Vice President, Advanced Analytics at Decision Analyst. She may be reached at 1-800-262-5974 or 1-817-640-6166.

 

Copyright © 2017 by Decision Analyst, Inc.
This posting may not be copied, published, or used in any way without written permission of Decision Analyst.

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