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New Product Research

Pricing Research in Context

Posted by on in New Product Research

My last blog about pricing research was still fresh in my mind when I read an excerpt of Craig LaBan’s recent online chat. LaBan is the Philadelphia Inquirer’s restaurant critic and offers insightful reviews and information for foodies in the region. I was intrigued by the discussion of how Federal Donuts charges different prices at the ballpark than in their stand-alone restaurant locations.

Our clients typically look for answers to how to price their products either alone or bundled. But I personally have yet to have a client ask me how to price a product differently based on the situation or context. There is good information to be had on this topic: in “Contextual Pricing: The Death of List Price and the New Market Reality” the authors point out that the pricing scheme for Coca Cola includes air temperature at the point of sale. But what tools are available to the market researcher for exploring situation-based pricing?

At its simplest level, we can ask consumers what they’d be willing to pay given a certain situation (such as in an airport or on an airplane). By using a monadic design in which similar groups of respondents are asked about a single price point, we can compare across the groups to see what the various “take-rates” would be.

Discrete choice could be employed to vary both the context and the pricing – in that way multiple situations could be tested along with multiple price points. (My colleague, Rajan Sambandam will be speaking about Behavioral Conjoint at the Insight Innovation Exchange NA event in Philadelphia in June.)

I’m not sure how Federal Donuts arrived at their pricing decision – it could very well be that the ballpark charges more rent and that factor alone determined their pricing. But when all other factors are equal, determining how much to charge can have important financial consequences.

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I was in a meeting last week about pricing research and we talked about how far it's come from the days of simply asking people what they'd pay for something. From laddering to Van Westendorp's Price Sensitivity Meter to Discrete Choice modeling, the research industry has grown in sophistication in addressing this very crucial aspect of product development and marketing.

I started thinking back over some of the pricing research I've been involved with over the years, and I realized that at times our clients come to us without the information they'll need to make the project a success. That's not to say they're not doing their job -- but pricing research does have a few requisites. Here are 3 keys to effective pricing research:

  • Know what it costs to produce. This can be tricky for a start-up service or for a physical product that hasn't been manufactured yet. But we need a basic understanding of what the minimum price should be -- anything below that would be unprofitable, so there's no sense including extremely low price points. The sky's the limit on the maximum, but we need the minimum in order to anchor the study design in reality.
  • Know the competition. Speaking of reality, we can design pricing research with or without factoring in competitive products. But if you're going to include your competitors, we need an understanding of what their products are and how they're priced. We want to construct choices that are as close to reality as possible. Premium-priced brands should reflect premium prices, or your results could skew in a strange direction.  
  • Know your pricing objective. What are you trying to maximize: unit sales? revenue? profit? Of course, everyone wants all of these. But in laying out a pricing strategy, it helps to understand how the trade-offs will impact your bottom line: is it more desirable to sell more units at a lower price or fewer units at a higher price?  

This list is by no means exhaustive -- I welcome your additions!

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For years now, my colleague Jessica would solicit donations to the American Cancer Societythrough its annual Daffodil Days® campaign. Each year I'd give Jessica my donation and a few weeks later I'd receive 10 daffodil buds. I'd arrange them in a vase in my office and watch as they opened up into beautiful blooms over the course of a few days. And in doing so I'd be reminded that my donation is being used to find ways to eradicate cancer and help people in need.

It was announced that this year would be the final year for Daffodil Days®.

product optimization daffodils

I have to admit, my first thought was not, "how will I donate to ACS now?" My first thought was that something was being taken away from me! Which, of course, irritated me. My second thought was that I'll have to look for another way to get daffodil buds next spring. And then it dawned on me that by cancelling the daffodils promotion, the ACS could be losing a long-time supporter.

Businesses are faced with product optimization decisions all the time – what will happen if I remove a product, service or distribution channel from the market? Will customers be lost? What will the short- and long-term effects be?

environmentProtecting the environment is in our collective best interest. Certainly, that’s a given, but people individually don’t always act in their long-term best interests (as behavioral economists posit) so why do we think companies would do so?

Turns out, employers are doing a lot to conserve and protect the environment and natural resources – at least according to TRC’s online panelists we surveyed this spring.

Nearly three-quarters of our panelists who are employed full or part-time told us their employer was actively doing at least one of five activities related to conservation and energy preservation. The larger the employer, the greater the participation. While we can't project our findings to corporate America as a whole, this is certainly encouraging news for our planet.

Over the past couple years there have been few topics as hot as “bank fees”. The financial collapse of 2008 started a chain reaction that included lots of consumer outcry and intense regulatory scrutiny. As a result, banks got squeezed…hard. Whether they deserved it or not is a debate for others who are smarter and better informed than I am, but what even I can figure out is that when a business starts to lose money and has its revenue streams cut, it has to identify ways to stop the bleeding. In bank-speak, that means raising fees.

As a consumer, I don't like fees any more than anybody else does, but I also recognize that a business is in business to make money. Rather than curse the fates, or fees in this case, I did what I do best...I researched the issue.

Recent comment in this post - Show all comments
  • Ed Olesky
    Ed Olesky says #
    This was an excellent read Bob. I feel that the consumer should be heard and research is the way to make change happen. Reading yo

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