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Pricing research tips

X25_1_price_tips_9601.jpg Pricing research is a combination of economics, finance, psychology, understanding customer needs and business negotiation. Concepts like anchoring and priming can change price perceptions, and customers will often mask the price they will pay for negotiation.

Even within a business, price can be talked about in terms of product positioning by marketing people, but as about income, profits and return on investment for finance directors, and about sales, discounts and promotions among sales directors. Consequently price works at multiple levels, with multiple meanings.

Can qualitative research be used to understand pricing?

Individual's feelings and perceptions towards prices can be explored in a qualitative research setting in order to establish a basic sense of what customer's think is fair and to look at views of different mechanisms for pricing to frame the pricing picture. But for the most part qualitative research is not a good way to study pricing.

The purpose of pricing research is to optimise the price to the market. For some customers the price will be too high and they will say so, but for optimisation, the key question is how many will actually pay. In general, for most products, qualitative research will show customers do not like higher prices, prefer simpler over more complex pricing, and like bigger discounts and offers. Views of pricing from qualitative research thus tend to be relatively predictable, but qualitative will not give the hard measures of demand needed to assess what buying rate would happen at each price point.


Revenue or profit optimisation?

Optimising prices to maximise revenue (eg looking at price elasticity) is not necessarily the same as looking to optimise prices according to profitability. They can be the same, but often there is a difference between the revenue optimisation point and the profit optimisation point. The profit optimisation point is almost always a higher price.

To give a trivial illustration, it is easy to maximise revenue by selling $5 bills at $4.99. To make a profit, the sales price has to be higher than the costs. Consequently, when setting prices, it is very important to try to include costs when modelling - both fixed and variable costs. A revenue maximising price, might not be profitable.

Secondly, there are situations where revenue or profit optimisation are not the right target. A business looking to gain market share, or to seed a market where the value comes later - such as selling ink-jet printers - may choose a different pricing target. For instance, using a value-based proposition to maximise capacity use, or using low lead-in pricing in order to capture a long term income stream.


Frequency and volume effects

Most consumer research looks at counting the number of buyers, so demand is measured in terms of number of heads. This implicitly assumes that each individual buys the same volume in a given time but this isn't necessarily the case.

If prices increase, it is possible that the individuals mitigate the price rise by choosing to purchase less volume, or to buy less often. For instance if the price of newspapers rise, readers may decide not to buy every issue, or for a restaurant, to eat out less frequently.

In business markets, a single customer who stops buying because of the price, can lead to a large drop in revenue if the customer is a large buyer.  This is one reason why business markets are much more negotiable and open than consumer markets and setting prices needs to consider strategic value. Care is therefore needed to estimate the impact of price changes on volume where possible.


Competitive versus uncompetitive pricing

Some of the simple methods for carrying out pricing research or to estimate willingness to pay (Gabor Granger and van Westendorp) do not include any competition. They simply ask for views of certain prices or price points.

Although these types of research will suggest an optimum price point, in practice, the ability to set that price depends on how the competition will react. In a market for A4 paper for instance where there is little differentiation, there might be an optimum price available at $15.00, but if competitors are offering the product at $10.00 it doesn't matter if customers would pay more unless the business can find a way of sealing in that value, such as via better brand-differentiation.

Ideally, price research needs to be as realistic as possible in order to reflect real purchase decisions. If competition is part of those decisions, then the pricing research should include competition.


Bundled versus unbundled pricing

Pricing can get complicated - with items sold in a bundle or pack or in a multi-buy, or sold through a uplift journey, or sold as a mix of base plus subscription or ongoing feed.

Designing for more complex pricing models requires thought and careful design. How to set what should be bundled, and what should be left out, and how to balance entry price to ongoing subscription prices. Not every item added to a bundle is worth its cost. But also, adding more and more items, tends to devalue the parts.

Designing pricing studies with multiple elements has to consider that 'more' may lead to diminishing returns, and to help estimate both pricing optimum, but also the most applicable range of bundles to meet demand in a market.


Yield management

In transport economics, yield management refers to the division of journeys into different ticketing groups - for instance tickets for those who book a long way in advance are often cheaper than tickets for those who book on the day. Yield management relies on modelling against the demand curve to make the optimum set of pricing 'buckets' - a few cheaper seats for the fastest bookings, to very expensive seats for those with no travel flexibility.


Real price testing

One of the things that can be seen in real prices is that the product itself is not the only source of price differential. A can of soda-pop may have many differing price points in a small geographic area - different in a small shop to a supermarket, or different in a bar compared to a restaurant - even varying by a factor of 4 or 5 times the lowest available price. Some components of price are therefore impossible to test except in the real world (the value of convenience in this case).

In general, wherever possible, real price testing is also required. Surveys and what people say they will do are one thing, but what they actually do in practice when there is real money involved is another. Companies often have clues as to price sensitivity through the offers and promotions that they run, or by observing local price behaviour - for instance where different retailers set prices at different levels.

Pricing, and understanding the pricing landscape for a product or service, issues of negotiation, anchoring, presentation and price structure all require thorough research design, testing and modelling, and then validation.

For help and advice on carrying out pricing research and setting pricing strategies contact

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