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Research As An Aid To Optimum Pricing – Part 2 of 2

The inadequacies of historical knowledge to show the effect of price on sales volume, can be offset by using market research. Three different research techniques could be employed – each with the same objective, of showing the price sensitivity of a product. These are:

Exploring the actions of buyers following a price increase.

Forecasting reactions to a suggested price increase.

Analysing the factors motivating the buying decision.

1. Researching the effects of a past price increase. As long as the price increase is within the recent past it is possible to question a “buyer” to determine the reaction. Was less product purchased? Did the price increase jolt him into obtaining competitive quotes? (It is surprising how many professional buyers regularly deal with only one supplier and lose touch with competitors’ prices). What proportion of purchases were switched to a cheaper supplier? Was the increase believed to be justified ? Was it passed on ?

2. Predictions based on a hypothetical price increase. This is the “what if?” approach. The buyer is asked what reactions would be to a specific price change. The obvious problem with this type of research is the credence which can be given to the answers, since at best they may simply not know how and at worst may attempt to mislead. Prompts could be:

“The supplier increases delivery from 2 weeks to 4 weeks”

“The supplier on one out of three occasions delivers three days late”

“The supplier reduces the guarantee period from one year to six months”

“The supplier cuts the thickness of paint finish by a half”

“The supplier raises his prices by I5 per cent.”

Though all the individual prompts are leading, taken together they place price in context and provide the researcher with a benchmark against which the response can be judged. Another method of questioning is to present the buyer with a list of suppliers to the market and a set of prices against each. The buyer is then asked to apportion the requirement between the companies, having been told that deliveries, product quality, and sales service are all the same.

3. Trade-off questions. An extension of the “what if” method is to study the buying decision in general and then move on to focus on price specifically. How many people influence the buying decision? Who are they? What role do they play?, what specifically does each look for? There may, for example, be three people involved in the decision – the works manager could be the key decision maker and be interested in a quality product; the safety officer may be concerned with toxicity while the purchasing manager is interested in price and delivery. The more stringent the specification of the works manager and the safety officer, the less the buyer’s opportunity to play the field in a search for bargain prices. This price research must take into consideration who is involved in the decision and what they look for.

Another type of trade-off questions seek to show the value of each element of the package which is for sale. The buyer is given a list of the features and benefits of the product and asked to rank them in order of importance or to attribute a weight (say a percentage) to indicate their relative value to him. The result can be used to show the price that buyers are prepared to pay for each feature/benefit of the package. Thus the research becomes a tool which can be used to manipulate the price of the product. If, for example, a particular product feature is expensive to manufacture and research shows that it commands a low value in the buyer’s mind, value engineering could be instructed to modify that part and reduce the costs without the necessity of lowering the price.

The following example has a list which is read out and pushes the limits of people’s memories. Most respondents coped with the question but, in an ideal world, the list would have been half the length.

Q. I will now read out a list of factors which some people have said are important in influencing their choice of supplier of electric motors. To measure how important you think they are I would like you to allocate 10 points across the different factors. The more important a factor, the more points you should give it. But the more points you give to one factor, the less there are to give to the others. First I will read out the list. read list. rotate order. tick start. total must add to 10. Now, how would you like to spend your 10 points?

Using conjoint analysis, it is possible to obtain an indication of how much people will pay for different features in a product. Take a simple product such as an envelope which has three different attributes each with two variations.

It is possible to devise eight different types of envelope concepts from these variations, viz:

Each of these concepts could be presented to a respondent who would be asked to classify them into piles, correspondent to `very interesting’ through to `not particularly interesting’. Having done this, the respondent is then asked to rank the concepts in each pile to show which is most appealing and least appealing. This type of questioning can work with products which have a relatively small number of concepts but it becomes extremely tedious for the respondent if there are many attributes and therefore many concepts. Twenty five to thirty concepts is about the maximum that should be attempted.

Q. I would like you to look through these cards on which you will see different styles of envelope. Place the cards into three piles which illustrate whether you think that for your company the envelopes would be:

Interesting

Maybe interesting

Not interesting at all.

Now would you take each pile in turn and sort them into an order so that the card on the top is the envelope style you think is best for your company and that on the bottom is the one you think is worst.

Conjoint analysis is suitable for testing products that have distinguishable features of service levels that can be clearly identified. Reliability in the result requires at least 100 interviews and, since respondents have to shuffle cards, they demand face to face interviews. This means they can be prohibitively expensive in many business to business situations.

This entry was posted on Wednesday, November 15th, 2006 at 8:00 am and is filed under Market Assesment, Market Research, Pricing Strategy, Qualitative Research, Quantitative Research. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.