Pricing Research Methods Explained
Pricing research is imperative to any business, but it is important to carry out the most appropriate method of research. Each business is selling a different product in a different market, therefore pricing research needs will differ. There are four major techniques used for pricing research, Gabor-Granger, Van Westerndorp, Brand Price Trade Offs and Conjoint analysis.
The Gabor-Granger technique is one of the simplest forms of pricing research, conceptualised by two economists in the 1960’s. The process involves prospective customers of the target market completing a survey where they decide if they would buy a product at various prices. This data is used to calculate the optimum price point of each individual and the whole sample. This means that demand levels for each price point can be anticipated across the market. This method determines the price elasticity of demand which can be used for estimating and maximising revenue.
The Van Westerndorp technique is a more sophisticated approach to the Gabor-Granger method. Instead, customers rate the different prices of a product on a scale ranging from ‘too cheap’ to ‘too expensive.’ This method is used for the study of price positioning to establish pricing tactics.
Brand Price Trade Offs
A Brand Price Trade Off is a pricing research tool used for assessing the value of a brand. Branded products tend to have a premium price relative to unbranded products. Therefore, it is important to understand the effects of price changes to command the optimal price and market share. The study involves the showcasing of several brands of a particular type of product and the customers choose their preferred product. This is repeated for a range of prices. The results can be used to create a model relating various brands and the prices customers are prepared to pay with estimates of revenue and profitability. The BPTO method is most appropriate for consumer markets with little functionality difference. It is highly useful for companies with a range of products wanting to position each brand within the family at its optimal price point for profitability or market share.
Conjoint analysis is a highly complex and thorough market research technique developed in the 1970s. It goes deeper than pricing by aiming to uncover the hidden rules which customers use to make trade-offs between products and services and how much value they attribute to various features. The product or service is broken down into its constituent parts and various combinations of these parts are created into a product, called profiles. Each part, or feature, may have different levels (eg. the hard disk space for a laptop could be 200GB, 250GB or 300GB) and therefore each additional feature gives rise to another multiple of profiles. Once a set of profiles is created, respondents are asked to choose and compare between them. From these responses it is possible to give each individual feature and level a numerical valuation. Consequently statistical analysis can be used to understand how customers make decisions, which can then be modelled to determine the market impact of changes in products and the resulting change in market share. This effectively gives information on what to do for the greatest gain over your competitors. The market models evaluate the best return on investment by balancing customer value and company cost before deciding on the product line and it’s pricing. This is the most in depth method of pricing research because it goes to the core, product and service research, thereby giving the greatest long-term gain. There are dozens of different pricing strategies but they are all derived from the research methods discussed above. Pricing should factor in many issues and should not be considered in isolation. Good pricing should be an integral part of an overall marketing and company strategy. Furthermore, various pricing strategies should be implemented through the lifecycle of a product. For example, a promotional pricing strategy can be a valuable tool for winning market share and establishing a new product, but it can also erode a brands long-term value and for this reason pricing research is crucial to business success.