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Chapter 9 Research Methods for Pricing Decisions n Pricing Strategy and Pricing Research n General Pricing Research Approaches n Some Specific Price Research Techniques Pricing Strategy and Pricing Research n Three Basic Pricing Research Issues n will price sensitivity be tested for a single product or brand by itself or in the context of competing products? n will customers’ responses to the price be tested directly or indirectly? n will each person be asked to respond to one price or to several prices? General Pricing Research Approaches n Surveys n Experimentation n Statistical Methods and Models n Panels ●Survey Surveying requires administering a questionnaire through personal interviews, telephone interviews, or the mail. To elicit facts and opinion from respondents relating either to a prediction of the quantity they would be willing to buy at various prices. ●Survey Usually such questions over-estimate the degree to which buyers are sensitive to price and lead to pricing decisions that do not reflect what buyers really are willing to pay. A second problem is that survey typically elicit responses from people when they are not very interested in making a purchase of that type of product. ●Experimentation The advantage is the opportunity it provides to isolate and control various market factors that may affect market demand and then to observe buyer’s reactions to change in one or more of these factors. ●Experimentation The disadvantage is that the laboratory is not a natural shopping environment. The lack of control over other factors that affect sales ----- advertising, competition, weather. ●Statistical Methods and Models The advantage of using historical statistical analyses is that the researcher can test different scenarios in a form of “what if” simulations. ●Statistical Methods and Models First, it does not provide information on whether other prices would have led to higher sales levels or whether such prices would be better in the future. It may not be very useful for relatively new products. ●Panels The households that comprise the panel record their purchases by brand and price in a daily diary or a store’s checkout counter. The data are aggregated across the panel on a weekly or biweekly basis. ●Panels The advantage is that observations accumulate quickly to establish an adequate database to develop and test models. A disadvantage is that the panel is not likely to be representative of the general population. Another disadvantage is the possibility of errors. Some Specific Price Research Techniques n Estimating Price-Level Sensitivity (Absolute Price Thresholds) n Determining Willingness to Buy n Estimating Sensitivity to Price Differences Estimating Price-Level Sensitivity (Absolute Price Thresholds) Ø Direct Question Approach Ø Price Sensitivity Meter Ø Price Categorization Ø Magnitude Scaling ●Direct Question Approach Q1:What is the minimum price you would be willing to pay for (product and/or brand specified)? Q2:What is the maximum price you would be willing to pay (product and/or brand specified)? TABLE 9.1 Determining Price Limits Using the Direct Question Approach FIGURE 9.1 Scales for Determining Acceptable Prices ●Price Sensitivity Meter Q1:At what price would you consider this (product and/or brand) to be so inexpensive that you would have doubts about quality? Q2:At what price would you still feel this product was inexpensive yet have no doubts as to its quality? Q3:At what price would you begin to feel this product is expensive but still worth buying because of its quality? Q4:At what price would you feel that the product is so expensive that regardless of its quality it is not worth buying? Q5:What price would be the most acceptable price to pay? Table 9.2 Determining Price Limits Using the PSM Approach Figure 9.2 Determining Price Limits: PSM Approach ●Price Categorization To ask buyers to sort a set of prices for a product into smaller groups or categories according to how they perceive these prices to be similar or dissimilar to each other. To label any groups of prices that are unacceptable and indicate why the prices are unacceptable. To label the set of prices that is most acceptable to them. ●Price Categorization The analysis proceeds as described for the direct question approach for each of the price categories identified: unacceptable- low, acceptable-low, most acceptable, acceptable-high, and unacceptable-high. Using the median response, when 50 percent of the respondents indicate that a particular price might belong in a particular price category or the price category adjacent to it, then that price forms a category limit. ●Price Categorization The advantage is that it does not implicitly assume there is only one definable set of acceptable prices in the market. Using a wide range of prices and explicit evaluations of prices. Magnitude scaling Underlying the approach is the fundamental belief that people can provide meaningful information about the magnitude of their sensory experiences. The most widely used form of magnitude scaling is numeric estimation, where respondents are instructed to assign numbers to the stimulus product or price relative to a standard number for the reference product or price. Magnitude scaling The procedure of measuring the price-value judgments : 1.They are asked to assign the current or reference product an index value of 100. 2.Respondents are asked to judge the relative quality of the “new” product by assigning it a number above or below 100. 3.Next, respondents are asked to give the price they currently are paying a number of 100. Magnitude Scaling 4.Then, the same instructions given in step 2 are used to ask the respondents to indicate the price that would be acceptable for the new product---how much more or less they would be willing to pay for it. 5.If several product-price combinations are being evaluated, the procedure is repeated by asking the respondent to evaluate the next “new” product against the original reference product. Magnitude scaling By using several product-price combinations, a scale can be developed indicating the proportional perceived differences between price and different product attributes. Determining Willingness to Buy The Parker Pen Company applied magnitude scaling techniques along with attribute value analysis to determine the introductory price for a new pen. To test market this new pen, the company followed a five-step process beginning with target market identification(10 to 45 year old people, particularly European students and white collar professionals). Determining Willingness to Buy In the second step, they identified the desirable pen attribute including writing smoothness, smear resistance, style, and dependability. Consequently, the research team described the attribute “feel” as a composite of weight, barrel size and shape, balance, and tactile impression. Determining Willingness to Buy In the third step they estimated the ‘price’ of each attribute in the following regression equation: P=a+b1W+b2Size+b3S+b4B+b5T+b6R+b7C P=suggested retail price W=weight Size=circumference of the barrel S=geometric shape of the barrel B=whether the pen is balanced in the hand T=tactile feel of the material R=resistance–the amount of effort needed to write C=consistency of the ink flow TABLE 9.3 Estimated Value Prices for Pen Attributes Determining Willingness to Buy In step 4, a sample of consumers was given a pen to use as a standard of reference for the magnitude scaling exercise. Fifth step used regression analysis to calculate the respondents’ willingness to pay more or less for any particular attribute. Estimating Sensitivity to Price Differences n Sequential Preferences : Two Brands n Trade-off Analysis n Conjoint Analysis Sequential Preferences : Two Brands When the objective is to determine sensitivity to price differences for comparable brands, one approach is to ask respondents to indicate their brand preference as the price of brand is changed. FIGURE 9.5 Response Sheet for Sequential Preferences : Two Brands FIGURE 9.6 Sensitivity to Price Differences: Sequential Preferences Approach Trade-off Analysis The need to make trade-offs while simultaneously evaluation multiple alternatives with multiple attribute occurs. Trade-off analysis uses either what may be called a limited-profile approach or a full-profile approach. TABLE 9.4 Limited Profile Trade-Offs TABLE 9.5 Relative Attribute Contribution to Price Premium Conjoint Analysis Conjoint analysis has been designed to explore these buying complexities to determine the relative perceived value in different product attributes including price. Three terms commonly used when discussing conjoint analysis are important : factors, levels, and utility. Conjoint Analysis Factors are the product or service attributes that provide the relative benefit buyers derive from acquiring and using the product. Level refers to the number of different options available for a particular factor. Utility refers to the quantified degree of preference a person has for a particular factor. Conjoint Analysis Conjoint analysis is a technique for breaking down buyers’ overall preferences into utilities for each feature. TABLE 9.6 Hotel factor Description and Levels TABLE 9.7 Features and Utilities for a Hotel ~The End~ Thank you!!
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