Market Research Methods Pros and Cons: Picking The Right Pricing Research Strategy 💭
Not too many consumers are aware that pricing isn’t as straightforward and rational as one might think. In fact, pricing is one of the most difficult yet crucial aspects a business must consider. Pricing too high or too low can deter consumers from purchasing your product. We believe pricing research and correct choice and use of strategy is key to a successful product. Learn about the different market research methods pros and cons and how to pick the right one to optimize your pricing strategy.
Market Research Methods Pros And Cons – What Is Pricing Research?
There is no one formula wherein you can simply plug in the production costs and add on a margin for mark-up. Consumer perception actually plays a large role in pricing products. Pricing is one of the most essential and technical areas of market research. We use a specific market research methodology to identify an optimum price point. This is what customers are willing to pay for a given product or set of products.
When setting a price, businesses must consider whether they want to maximize profit, revenue, or market shares. Market context, positioning, and strategy must also be considered. This will help build a structure for sales and value-based pricing.
Pricing research requires us to estimate demands, price sensitivity, and competitor responses. We can do this using price modelling and market models. In the simplest of contexts, a pricing model can be as straightforward as plotting a demand curve. Multiplying demand by price gives us a revenue curve. This, however, only paints a static picture for pricing research. For complex markets, full pricing models enable analysts to plan out sophisticated pricing and market entry strategies.
Pricing research commonly relies on market intelligence and the use of competitors as a benchmark. Some approaches yield high levels of competition, so it’s important to consider the strategic and short-term impacts of pricing. In order to create dynamic market models, four main techniques are used. It’s important, when choosing which method to use, to clearly understand the problems you want to solve. These are the different market research methods pros and cons:
Direct pricing is another name for this technique. Customers or respondents complete surveys that ask them to answer whether or not they would buy a product or service at a given price. A price range or pricing ladder is given to them. There is also a scale rating their likelihood of purchasing.
This way an optimum price point can be established and the price elasticity or expected revenue and profit effects can be established. The weakness of this method is that customers tend to overstate or understate what they would pay. This is why under the “likelihood of purchasing,” it’s extremely important to appropriately phrase “would you buy” in order to accurately contextualize the survey.
Gabor-Granger is ideally used when considering only one product in isolation. Real life consumers have to face the choice of which product and which brand to buy, so this method cannot accurately gauge competitive response.
Van Westendorp Price Monitor
The aim of this method is to establish price perceptions for a product in a market. This is what’s known as a price sensitivity monitor. Respondents are asked four questions; what is too cheap, where is a bargain, what is too expensive, and where is too expensive. The cumulative curves of their answers are plotted. The points of intersection are the “optimum” points, based on criteria, which allows a range of acceptable prices to be determined.
This is used more commonly for price positioning type studies rather than to determine optimum pricing. Like Gabor-Granger, there is no competitive element. This assumes that respondents know the market. Unlike Gabor-Granger, there is no “likelihood to buy” measure. Gabor-Granger and Van Westendorp are often combined in studies or used as a starting point for the succeeding methods.
Conjoint analysis is the recommended method for market research. This is also called discrete choice modelling or state preference analysis. This technique has a strong reputation for being more robust and reliable in assessing price sensitivity than other techniques. There are fewer biases than direct pricing. In fact, some specialists use conjoint analysis exclusively to conduct market and pricing research. This is also a common method for brands with a supermarket style layout.
This method requires a higher level of design skills as it is a more technical form of research. Conjoint analysis focuses on how choices are made given different sets of product specifications at different price points. This is how the importance of price and price elasticity is obtained. Consumers trade off price against other product features, and price against brand. Prices are adjusted according to a randomized statistical plan. The economic impact of price changes and balanced-value positions can be assessed by analysing how customers make decisions.
One of the key outputs of this method, besides determining price sensitivity, is that a market model can be used to determine an optimum price if no other factors change, as well as investigate competitor response, which the previous two methods lack. Dynamic models such as transportation and leisure markets use this form of analysis for time sensitive pricing.
Brand Price Trade Offs (BPTO)
This method is used for brand specific studies of brand equity and category management. Customers are made to evaluate products using only brand and price. Instead of a randomized statistical plan like those used in conjoint analysis, BPTO shows prices that are systematically adjusted to increase up to the point where customers stop buying. This makes it easier for respondents to follow, as they can see how prices are adjusted, however it also makes it easier for them to game the research.
BPTO requires more advanced levels of programming and higher survey design skills. Care must also be taken when analysing the outcome. Conjoint analysis and BPTO both produce a market model which allows for more optimization.
As mentioned above, pricing is not always dealt with in a rational manner. Behavioural economics paves a path to presenting and analysing consumer reactions and how they can be conditioned by factors both internal and external.
Choice is affects the structure of surveys and research methods, which should be considered when the tests are designed. Several things should be factored in due to their psychological effects. One is anchoring, which compares one price to others. The others are framing comparing relative prices between several different products. One example is that the first price that gets shown often influences consumer’s perceptions of what is acceptable or appropriate. This is true especially in markets where prices are not largely known.
Econometric methods can be used to understand price impact and elasticity, particularly for markets where prices are commonly known or visible or where large amounts of internal pricing data exists. Take caution when conducting studies to ensure sample sizes are large enough to provide accurate data. If you’re looking at small price changes, you will need larger than average groups. This can make research expensive if not combined with other ranges of measurement. Knowing the different market research methods pros and cons is the key to optimising your pricing.
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