Price models and market models
A key benefit of surveys that involve trade-offs such as conjoint analysis, Brand price trade-off research and pricing research is the ability to create dynamic market models to forecast and explore the economic impact of pricing research. To understand what price should be set you need to understand the shape of the demand curve. Higher prices are disliked (in general), but higher prices will also generate a greater margin for the business. Understanding the trade-off between volume of sales and value of sales across a market allows prices to be tuned.
What is a pricing model?
A pricing model can be as simple as a demand curve. To get a demand curve, you plot the price against the cumulative demand - that is you assume that if someone will pay $50, they would also pay $40 and $30 and so on. The use of cumulative measure gives a demand 'curve' (often it's a straightish line). This can then be converted into a revenue curve by multiplying the demand by the price. Commonly the revenue curve has a maximum point where a higher price causes a drop in willingness-to-pay so reducing revenue. This then suggests the revenue maximisation point. However, in most cases revenue is not profit, and it may be worth including fixed and variable costs to estimate a profit curve - at low prices or very high prices this may be negative. This starts to define potential optimum points, but the pricing strategy may be more sophisticated - for instance 'skimming' - setting high prices for early buyers (cf Apple) or 'penetration' type pricing - setting value prices to win market share. In most cases the pricing specialist will want to look at more than one curve; for instance for significant market segments or to investigate potential for promotional or discounts to target different groups, or in the most sophisticated models, to look at dynamic pricing where early buyers might pay a lower price and late buyers a higher price in order to optimise yield.
Benefits of market models
In most market research, information is presented in the form of a static display of statistics and charts. For those who first come to trade-off and pricing research, the ability to model, that is to represent the decision making of the market under different scenarios, and to see what the likely impact of decisions would be, and then to be able to change the model and see what changes is an extremely strong benefit. Not sure what pack sizes to offer and how to price across different pack sizes? Then a dynamic model allows different business decisions and scenarios to be evaluated using real information about customers preferences. This allows for a more sophisticated use of price within a market and when planning a market entry strategy, or evaluating price competition.
Example Conjoint model
Conjoint analysis is the most sophisticated means of estimating demand for products and services with differing prices and features. There are many flavours of conjoint analysis, but all conjoint analysis leads to a market model where prices and features can be varied and so the impact of product or price changes can be assessed to understand different business options prior to going to market.
Our demonstration conjoint analysis model allows different product values to be selected and then their impact calculated on market preference. The normal use of these types of model is to understand the potential ROI on different features or projects and to see what would be optimised market positioning, or optimised return to the business.
Example Brand Price Trade-Offs (BPTO) model
In Brand Price Trade-Off studies, customers choose from a range of brands or product variants at different prices. The prices are varied systematically to understand how people would change their decision making where products are priced differently and so how they change their decision making when the favourite product is not available.
For a demonstration we have a downloadable demonstration of what a BPTO market model looks like. The demonstration model is created in Visual Basic and runs as a .exe file. You will need to unzip the whole directory to run the demonstration as it will not run straight from the zip file.
Pricing research models and other models
One area to be aware of is that pricing research and pricing models are excellent tools for forecasting prices, in a competitive market the dynamics of price change and need to be monitored against real sales and real customer behaviour. In the same way that models can be drawn from market research data, they can also be built from database and promotional data. It is possible for instance, for a company to use promotions to test price sensitivity, or to use split pricing tests to investigate real reactions to price so long as this is done with modelling in mind.
Download the BPTO model (85KB) (Windows only)
For help and advice on carrying out and custom designed Conjoint Analysis, BPTO or brand equity measurement contact firstname.lastname@example.org