Pricing Research Methods

Exhibit 16.3   Pricing research methods.

Pricing research is a relatively young and evolving field of market research. Interest on the subject grew in the 1960s, initially within FMCG, and has since spread across other sectors.

Exhibit 16.3 Exhibit 16.3 categorizes several well-known pricing research methods. Some of the earliest organized studies on pricing were conducted in the UK during the 1950s to examine the influence of price on consumer behaviour for FMCG products. In the 1960s, economists Andre Gabor and Clive Granger conducted a small-scale survey on price consciousness and developed of the “Buy Response” curve or demand curve. Later, in 1976, Dutch economist Peter van Westendorp introduced the price sensitivity meter (PSM), a technique for determining the acceptable price range for new products.

Indirect Approach

Gabor–Granger’s buy response curve and the price sensitivity meter (PSM) are examples of the indirect or psychological approaches to pricing research where respondents are presented with a product or service at different price points and asked their likelihood to purchase at those prices. These methods are better suited for inferring price-related behaviour of new categories where direct comparison of alternatives at point-of-decision is not realistic.

Direct Approach

In contrast to indirect methods, the direct (or representational) approach presents a “purchase scenario” to respondents, complete with competitive products and their prices. It reflects a more realistic scenario for most consumer goods, where products are displayed alongside each other at retail outlets. Direct approach methods include brand price trade-off (BPTO), conjoint analysis and discrete choice modelling.

Conjoint analysis was developed by Paul Green at the Wharton School in the 1970s. It is a predictive technique that may be used to determine customers’ preferences for the different products at different price points. Brand price trade-off, which is a simpler, easy to implement, predictive technique, was developed around the same time.

In the 1980s Richard Johnson (founder of Sawtooth Software) developed adaptive conjoint analysis, and Jordan Louviere (University of Iowa) developed choice-based approaches to conjoint analysis. Choice-based conjoint or discrete choice models gained popularity in the 1990s.

Econometrics

In addition to ad hoc survey based methods, market response modelling techniques are extensively used for accurately determining price elasticities in situations where historical data (e.g., scan data or consumer/loyalty panel data) is readily available. Chapter Marketing mix Modelling covers these methods in some detail.

Because econometrics relies on historical data it is not possible to use it to test new products, or to test for price points that significantly differ from historical levels.

Simulated Test Markets

Typically used for new product launch validation, simulated test markets (STMs), provide sales estimates of a new product prior to their launch. These methods are used by management to make the “go/no-go” decision at the end of the new product development process. They allow marketers to fine-tuning elements of the mix including price.