Pricing research

Pricing is one of the more technical areas of market research. There are two main approaches, the Gabor-Granger technique and Conjoint Analysis. Many companies sell branded pricing research packages that are just a variation on one of these techniques, however selecting the right technique ultimately depends on what the problem is you are trying to solve. Additional information is on our help pages

Market context and positioning are also extremely important in setting prices. In technology markets, prices are typically falling over time. Historically the price of PCs has been dropping at about 2% per month. In business markets "value-in-use" or "total cost" may be more important than absolute price.

"I just wanted to say a big thank you for the pricing study work. The findings will certainly help shape our thinking in this area and we now have a view of pricing that far extends our knowledge in the market place."

Strategy Director, Macromedia 2005

Gabor-Granger pricing research is named after the economists who invented it in the 1960s. Customers are asked to complete a survey where they are asked to say if they would buy a product at a particular price. The price is changed and respondents again say if they would buy or not. From the results we can work out what the optimum price is for each individual. By taking a sample of customers we can work out what levels of demand would be expected at each price point across the market as a whole (the demand curve in the following graph). Using this estimate of demand, the price elasticity (or expected revenue) can be calculated and so the optimum price-point in the market established.

Gabor-Granger output


A weakness of Gabor Granger is that customers may understate the price they will pay (there are also circumstances in which they will overstate the price). Consequently the phrasing of the "would you buy" question is extremely important as are other contextual questions to place the customer in the buying frame of mind. Typically, Gabor Granger is only used when considering one product in isolation, whereas in real life they would face a choice about which product to buy.

A more sophisticated variation is called Van Westendorp pricing which uses rates each price on a scale from too cheap to too expensive. The resultant price "space" helps to determine the options - and so pricing tactics - available.

The main alternative technique is based on Conjoint Analysis and is more sophisticated and more reliable than other research techniques. Conjoint is excellent at looking at understanding how choices are made and consequently the importance of price. For some, conjoint analysis is the only way of carrying out pricing research. However, conjoint analysis is a more technical form of research and requires higher levels of design skills. If pricing is to be conducted it is often advantageous to include it as part of a broad conjoint study into product and service features. For brand specific studies measures of brand equity such as BPTO can be used.

For some markets where prices are very visible, or where there is a large amount of internal pricing data, it is possible to use econometric methods to examine the impact of price and to understand price elasticities. Using pricing tests, discounts and advanced statistical analysis the impact of price can be assessed live in the real world.

The most common approach to pricing research is to rely on market intelligence and follow-my-leader type pricing using a competitor as a benchmark. However a me-too approach leads to high levels of competition, and it is important to consider the strategic impact of pricing as well as the short term sales impact.

Some caution is needed when conducting pricing studies. Statistically speaking, where you are looking to optimise prices where you are looking at relatively small price changes of 5-10%, you will need larger than normal sample sizes to get the statistical accuracy you need. For many companies this can make pricing research expensive, unless combined with a range of other measurement.

For help and advice on carrying out pricing research and setting pricing strategies contact info@dobney.com