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How pricing research can aid you in this inflation crisis

From the iconic NY dollar-slice pizza that is facing an existential crisis to the bitter taste of the cost of an espresso in Italy… the inflation is not sparing anyone. Just when we thought we could draw a thick line under the wobbly days that characterized the past two years, a new crisis hits us. From Australia to Italy, from Norway to South Africa, from Japan to the US, the cost of living is reaching new highs and is likely to continue doing so for the months to come. With that, marketers and businesses have a cumbersome task on their hands: re-evaluating their pricing models.

Pricing and inflation

Pricing, the fourth P of Kotler’s marketing mix, is what Chris Burggraeve called “an area marketing ceded over to sales long agoin a recent article in Marketing Week. And while pricing might have moved to the background in past years, it is now – due to the inflation – a key agenda point, beyond sales or finance.

Simply raising prices – thus enforcing the issue onto customers – to counter the rapidly rising costs may seem an intuitive option, yet it is also one that could damage sales and customer relationships. It is therefore important for brands to re-engage with the power of price and how it corresponds to the relative value of their brands products and services.

Chris Burggraeve

“It all starts with companies rediscovering the P of pricing today, and especially the drivers of pricing power tomorrow. For senior marketers, this is really the time to take back control. Ensure you understand how pricing works in your company. Ensure you sit at the table where pricing decisions are made. Ensure they reflect the relative strength of the brand today. Bring in some realism about what is possible and what is not. Build over time as needed.”

Chris Burggraeve in Marketing Week

The role of pricing research

All of the capital, time and energy spent identifying unmet consumer needs, finding spaces to play and positioning will come to nothing if the price of the final product is higher than consumers are ultimately willing to pay. It’s also worth remembering that pricing is (in the vast majority of cases), the strongest determinant of profitability – much more so than costs.

This is where consumer-led pricing research comes in;

  • To discover the price consumers are willing to pay for your carefully designed product or service
  • To help manage consumers’ perceived value of your brand (brand equity)
  • To determine the optimal price point to maximize revenues
  • To determine the optimal price relative to the competitor set and simulate the effects on market share
  • To understand the level of consumer’s sensitivity to price
  • To optimize the importance of price in relation to different configurations of product/service attributes
Pricing research when to use which research technique

When to use which pricing research technique

Depending on the focus of the different objectives listed above, there are different pricing research techniques available. Which technique to use depends on two factors, namely the stage within the innovation and product development funnel, and (linked to that) the extent to which a competitive set is taken into account within the price determination.

Van Westendorp’s Price Sensitivity Meter (PSM) aims to identify the acceptable price range for a product/service by asking a series of 4 questions relating to its perceived quality and therefore overall value. This technique lends itself more to developing new products within an existing market, where consumers already have a ‘mental framework’ as to what products of this type typically cost.

Gabor-Granger looks to identify the likelihood of consumers buying a product or service at different price points, thus enabling us to calculate the elasticity of demand (i.e. the effect of raising or lowering prices on the consumer’s propensity to buy). As a result, an ‘optimal price point’ can be identified, also enabling profitability levels to be calculated. Note however that the participant is not explicitly asked to rate or consider the price of the product in relation to competing brands. For this reason, it is often used when setting prices for new rather than existing products, and is arguably more suited to new product categories.

In Conjoint Analysis, customers trade off price against various configurations of other product features. The output enables us to measure the relative importance of each attribute (price being one of them) and then the strength of different price levels on how attractive this makes the proposition to the consumer. Knowing the combination of other product attributes (along with price) then enables the client to identify the most profitable combination of features. The limitation of conjoint analysis is that the competitive set is again not considered, so this approach tends to be used when the price relative to competitors is less important, and/or the number of competitors is too large to be reasonably assessed anyway.

Discrete Choice Modelling (DCM) takes a different spin to conjoint by asking participants to simultaneously consider a number of product profiles (with price being one of the attributes) and to make a choice. The rationale is that this better represents the ‘real world’ of consumer decision making; DCM is this well suited to measuring the effects of different price points of existing brands in existing markets and creating what-if simulations. DCM is typically considered the ‘gold standard’ of pricing research because it most accurately reveals the relationship between brand choice, share and price levels.

Discrete Choice Modelling (DCM) case study

Consider the following example of a beer brand, Brand G, that wanted to test the scenario of introducing a 30cl bottle with a 10% price increase. This decreased bottle size with a 10% price increase would have a 0.85% positive impact on Brand G’s volume. The introduction of this 30cl bottle cannibalizes the 33cl offering in the market. Consumers of the 33cl bottle thus replace it with the new 30cl bottle.

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