Pricing Research | Guessing vs. Knowing
Too often the crucial insights available through pricing research are neglected and organisations continue to base their pricing strategies on little more than management experience, intuition, and the rudimentary averages-based analysis of revenue, price-realisation, and profitability.
While this may have worked in the past increasing business complexity, expanding product ranges, increased customer sophistication, aggressive competitive tactics, price transparency, and complex pricing architectures mean that a more methodical and research-centric approach is required.
The end result of outdated approaches to the development and validation of pricing strategy is the loss of pricing power, lower margins, and alienated customers.
Pricing Research | Primary Objectives and Questions Answered
Pricing research has increasingly become the differentiator between superior margin realisation and erratic financial performance caused by ad-hoc pricing tactics.
Good pricing research provides precise and unambiguous answers to the questions so often asked by management including:
Willingness-to-pay (wtp). What is the true value of our products and services and how much is the market willing to pay?
Price Elasticity. What is the likely impact on our business of a price increase/decrease? Exactly how price sensitive is out market and its segments?
Optimal Price Points. What prices and/or combination of prices, rebates, discounts, and terms maximise revenues and profits? How can pricing research support our efforts in price optimisation?
Optimal Pricing Architecture. Does our current pricing architecture (i.e our charging and price metrics, price list architecture, discount and rebate structures, non-linear prices and break points, and business rules) actually align with customer expectations? Does our price architecture drive revenue?
Price Customisation. How do the various segments within the market differ on price sensitivity? How can we leverage these differences to drive share, revenue, and profitability?
Discount and Rebate Effectiveness. Which discounts and rebates actually deliver incremental revenues? What is the optimal form, structure, and depth?
Feature Value. What is the $-value of the specific features of our products and services? Which attributes and features are considered generic and which are drivers of price premiums?
Competitive Response. What is our optimal response to competitor pricing moves? What is the likely impact of one response vs another on share, revenue, profit?
Optimal Product Line Up. What optimal mix of products and services maximises revenue, profits, and share; while simultaneously reducing product line complexity?
Brand Equity. All things equal what power does our brand actually have to extract a price premium? Which segments value our brand most and how can we leverage this brand value?
Pricing Research | Value for B2B and B2C
One of the biggest misconceptions related to pricing research is that concepts such as willingness-to-pay, price elasticity, and price-segmentation are of less importance in B2B; and consequently B2B pricing research has little to offer.
This misconception is clearly untrue as it implies that B2B customers are willing to pay any price for any value proposition, that sales volume or the number of accounts won or lost by a B2B organisation is not determined by its pricing strategies, and that demand (including derived demand) is not affected by price.
What is true however is that more sophisticated methodologies, algorithms, and approaches are required for B2B pricing research; especially where this research is aimed at supporting price optimisation.
Pricing Research | What Works What Doesn’t and How to Tell
The accuracy, believability, and real-world effectiveness of pricing research is strongly dependent on the underlying methodology and supporting algorithms.
The most accurate results are obtained when the research methodology complies with the following three criteria:
1 Underpinned by Proven Theory. The pricing research approach must be underpinned by proven principles in statistics and mathematics, micro and behavioural economics, customer purchase behaviour and risk paradigms, and customer choice and decision making;
2 Emulates the Real World. The research and survey instruments must emulate, as closely as possible, the real world in relation to purchase behaviour, cognitive biases, and choice options; and
3 Identifies Questionable Responses. The analysis algorithms must be capable of identifying and eliminating poor-quality and dubious responses.
Pricing Research | A Word of Caution
The van Westendorp technique is frequently used in pricing research. This methodology starts by asking respondents at what price they would consider a product expensive, cheap, too expensive, and too cheap.
These approaches then construct various cumulative frequency curves where the intersections purport to show the optimal price point, the indifference price point, and the range of acceptable prices.
As rough-and-ready tools to scope a “feasible” price range these approaches may have some limited value.
As methodologies to precisely set optimal prices, estimate wtp and price elasticity, understand price segments, optimise price architecture, and so forth they are notoriously inaccurate.
As such van Westendorp, and similar direct-questioning techniques, should be used with extreme caution.
Pricing Research | Our Approach
Given these criteria the following methodologies underpin most of our Pricing Research.
Discrete Choice Conjoint
This methodology presents survey respondents with a range of competing products and/or services (showing features and price). It asks each respondent to choose the product or services they would purchase under a given set of circumstances. This is followed up with a reality-check question to determine if in the real-world they would actually go through with the purchase. Based on the choices made, the analysis algorithms accurately estimate the optimal price point for a given product/service including its individual features.
A key benefit of this technique is the ability to construct market simulators to test and explore the financial and competitive impact of various pricing strategies, product options, and product range mix.
This methodology constructs either a demand model (incorporating all key variables that impact demand including price) or a simpler price-response model (i.e. including only price). These models are estimated and calibrated utilising actual sales, pricing, cost, and other market data. These models are utilised in price optimisation studies to set price points that maximise specified objectives such as share, revenue, profit, and/or capacity utilisation.
Structured and Controlled Price Experiments
This approach utilises structured and controlled market experiments. Here a range of prices is deployed to gauge the impact on sales; and customer purchase behaviour and choices. Extreme care is taken to avoid any potential for customer dissatisfaction. The results of the experiments are fed back into an econometric model as described above. Web-analytics are often utilised to facilitate the experiment and provide real-time information.
Given the significant impact that poor pricing decisions have on revenues and profitability it makes sense to exercise extreme care in choosing a pricing research partner and methodology.
To explore how our Pricing Research capabilities can address your market knowledge gaps and maximise your price and revenue realisation please contact us.