This action might not be possible to undo. Are you sure you want to continue?
(KFK International Marketing)
Univ.-Prof. Dr. Adamantios Diamantopoulos Chair of International Marketing
Gözdem Becerik (0205453) Iana Berova (9852317) Katrin Moser (0205161) Jürgen Skopal (0201210) Maida Spahic (0108762)
2.1 Measuring Value 4 5 5.2 Adequate Methods 3.2.1 5.1 The Concept 3.1.2 Adequate Methods 3.2 CONCLUSION APPENDIX Case 1 – Polaroid’s I-Zone Instant Camera Case 2 – Medical Surgery Appliance 12 13 13 13 6 RESOURCES 15 II .3 Value 3.3.1 The Concept 3.Table of Contents 1 2 3 INTRODUCTION PRICING RESEARCH TECHNIQUES VARIABLES 3 4 4 4 4 5 6 6 7 10 11 3.1 Consumers’ Willingness to Pay 3.2 Price Sensitivity 3.1.
Determining a specific price for a product or service involves a dynamic trade-off among certain key factors. Then we will examine the different types of pricing objectives and the role they play in pricing decisions. Price plays a major role in the economy. The basic rule is that as the price of an item increases. it has many definitions and can take many forms. and the related methods to measure them. in our opinion. For visualizing them. Price is not just a simple concept. which we want to develop through our report. The first step we will take is to define “price” and discuss its importance in marketing. firms have to be very careful. we have to add the importance of the analysis of demand. the most important variables influencing the pricing decision. Briefly touching the theory of pricing. To show the degree to which consumers respond to changes in prices we use the “price elasticity of demand” which is defined as the percentage change in quantity demanded relative to the percentage change made in price. we have picked up. Price is therefore “the value that one has to put on the utility that one receives for goods and services”. the demand for that item will decrease. guide us to the pricing research techniques.1 Introduction To bring the issue of pricing nearer. One reason why demand is important when setting prices is that it allows forecasting the revenue that will be generated for the firm at various prices. 3 . how it changes with various prices. we have to describe basic concepts that underlie pricing decisions. Keeping the definition of price in mind. When setting prices. It is the fact that something is received in return that clarifies the pricing relationship. questions concerning how pricing decisions are made. and has a direct impact on consumers.
Therefore we will concentrate on different pricing variables. researchers have to come to terms of what they want to measure to base their prices on. to come to a useful result. 3 Variables As there are as many different variables to be determined and measured in pricing research as there are articles about this research field. this construct defines the price that a consumer is willing to pay at most for a given quantity of a certain product or service (Wertenbroch and Skiera. states. contingent valuation and various others. 4 . also known as reservation price. 2002.2 Pricing Research Techniques There are various pricing research techniques mentioned in the literature but according to Blamires (1997) all of them can be categorized as either direct or indirect method.1. To asses this value we have to distinguish between methods which offer an incentive to state one’s WTP or not. we decided to concentrate on three different variables: consumers’ willingness to pay. But still. Smith and Nagle 2002). These techniques include such well known procedures as the Conjoint analysis. Therefore WTP is a very important determinant to assess the demand of customers.1 Consumers’ Willingness to Pay 3. their concept and which methods would fit best to measure them. 3. price sensitivity and value.1 The Concept As the term willingness to pay (WTP). where direct measures try to “replicate the in-store situation itself” and indirect measures seek to gain information about “price-related behaviour”. the Van Westendrop’s price sensitivity meter. and if WTP is assessed at the point-of-purchase.
In this system participants get the opportunity to purchase real products from competitive choice sets with altered price points. concept testing or non-market public goods.2 Survey Data Survey data. that it can be used for newly developed products. as the term says. Commonly used methods in this area are the Conjoint analysis.1 Transaction Data To get an estimation of the demand in a specific market. 3.1. and external validity is also ensured.1. So we can only say that the consumers WTP is at least as high as the stated price but we do not know exactly how much it is. An advantage of survey data compared to transaction data is. limitations lie within the fact that only external behavior can be observed and not the internal motivations. Wertenbroch and Skiera (2002) present AC Nielsen’s BASES system as a possibility to obtain test market data.1.3. These data can be obtained for instance by scanner data or simulated test market data. 5 . and the contingent valuation approach. As with any observation method. One of the benefits of analyzing transaction data is. To avoid biased responses participants either receive a participation fee or can spend the money on the products which prices they evaluated. decision makers can use observed data of transactions.2 Adequate Methods 3. This procedure prevents them to understate their actual demand. collects data on behavior related to price in an artificial test environment. that the actual preferences of consumers are revealed. as actual purchase behavior is examined.2.2. which we will explain during the next chapter.
3. that it does not hold a motivation for participants to state their true WTP as responses are very hypothetical in their nature. The close-ended approach focuses on the display of products and the statement of the participant whether he would buy it at the given price. more systematic approaches relying on formal processes of market inquiry would be needed. During the open-ended contingent valuation the respondent is asked to state his WTP for whole products or for changes in different attributes of the product.2. 1995. Urban and Hauser.3 Contingent Valuation Contingent valuation can be divided into two approaches: 1) open-ended and 2) close-ended contingent valuation. 1993). 1990. Therefore. This in combination with the possibility of a different reference frame for the observed preferences than the stated preferences (Hoffman et al.1.2 Price Sensitivity 3. A problem occurring with contingent valuation may be the fact. leads to biased results.2.1 The Concept Clearly an intuition-based approach to new product pricing may not accurately represent the product's true price potential. Nagle and Holden. These approaches take on both qualitative and quantitative forms (Monroe. 6 . Hence price sensitivity measures the extent of how responsive consumers are or will be when prices are changed. 3. 1993).
(Case Study on Conjoint Analysis: see Appendix 5. by viewing prices). Therefore Conjoint analysis tends to indicate low levels of price sensitivity. the higher the price.2 Adequate Methods 3. not only for one product or brand but for several competitors.2. Generally this means that consumers are expected to pay a much higher price than in the real market for each added attribute.2. Despite being only one of many attributes evaluated. The most intriguing aspect of this method is the possibility to measure the response of participants. implying that the higher the quality. which conceals the true purpose of the survey to the participant. These normally differ in their main characteristics such as price.1) The Conjoint analysis is a member of the trade-off methods family. price is only one of many aspects evaluated during a Conjoint analysis.2. therefore minimizing response based bias and participants are asked to rank or rate them. This can also occur by the fact that many of the Conjoint analysis may be rather hypothetical and therefore participants try to assess quality in another way (e.3. resulting in a reversed price curve which indicates that the findings are irrelevant. quality etc.g. About 20% or more of the respondents tend to evaluate their utility only via the price.. it also has an influence during the research implementation that price assists as a factor to assess a products quality and respondents tend to understate the importance of price if quality is explicitly displayed. size. Still as Lyon (2002) and Tull and Hawkins (1990) point out. It is also possible to create and analyze different pricing scenarios in comparison to the Monadic tests which are limited to only one product. This can be avoided by trying to construct the analysis as close to reality as possible.1 Conjoint Analysis During the course of the Conjoint analysis respondents are presented with either real or hypothetical products. 7 ..
3. as it is normally only one of many attributes which are observed in a Conjoint analysis. 8 . Researchers also can be sure that the differences seen by the consumer between two price points are unfeigned. but as past research has shown this bias is not substantial enough to pose a problem. that bias related to price would not occur.2. 3. Here only the price is changed during the survey in a static set of product choices.2 Discrete Choice Modeling Likely the most important and also basic discrete choice modeling method would be the priceonly discrete choice design (Lyon. Now one may assume that this would produce bias – as it is obvious which attribute is the main focus of the research – in favor of understating the price one wants to pay for the product. If the Monadic test is carried out carefully respondents are not likely to find out which goal underlies the survey and results may only be slightly biased concerning the price sensitivity outcome.2. Then the respondent has to state which product he would like to purchase the most under the given circumstances for each set. This may be now due to the fact that for discrete choice modeling real products are used as reference objects. To become more familiar with the procedure of conducting Monadic tests Lyon (2002) recommends Eric Marder’s “The Laws of Choice: Predicting Customer Behaviour” (The Free Press. 2002). displayed in a line-up of scenarios. the survey data is split into separate cells. 1997).As the method suggests it would be reasonable to assume.2.2. This approach enables the researcher to compute the utilities for each different price as well as to test which price level would be appropriate in relation to competition.3 Monadic Tests First. followed by a buy-response question for a product with a different price for each cell. and participants therefore can assess the quality independently of the price.
showing that sampling errors are sparsely taken into consideration. Monadic tests can be problematic when it comes to accuracy.4 Van Westendrop’s PSM Another way to assess the price sensitivity of a consumer is Van Westendrop’s price sensitivity meter (PSM). The task begins with a description of the new product being given to the consumer. often referred to as the price sensitivity meter (Monroe. which almost certainly lead to an unreliable foundation for pricing decisions. Van Westendrop. “expensive price”. Often it also occurs that researches simply use a multitude of buy-response questions for one product with different prices. 3. The consumer is then asked to respond to the series of four specific questions. During this method the participant is shown a product sample or product description and then asked four direct questions. which are linked with the sampling variance. 1990. This derives from the independent samples for each price point. “overpriced/too expensive”. which imposes the bias problem more seriously. To overcome this problem larger sample cell sizes could help or the usage of cell matching with post-hoc weighing or upfront quotas. 1976): • At what price would you consider the product to be so inexpensive that you would have doubts about its quality? • At what price would you still feel the product was inexpensive yet have no doubts as to its quality? • At what price would you begin to feel this product is expensive but still worth buying? 9 .2.2. or the actual presentation of a prototype. Still in recent research cell sizes of less than 100 are common. their simple conduction and defensibility. 1971. and “inexpensive/too cheap”).Despite of their frequent application. According to Lyon (2002) these questions try to assess the price for four different categories (“right price”.
and at times. Still one has to bear in mind the possible response bias possible by the direct type of questions.3 Value Smith and Nagle (2002) define value as “the objective worth to a customer of satisfying the benefits they seek from a product or service”. the consumers' elicited responses may not necessarily represent their actual response behavior when faced with real purchase decisions. and to determine the most favorable price point for launching the product (Monroe.g. The most promising approach tries to determine the prices for as many as possible respondents between their “too cheap” and “right price” price points. It is also easily conducted and rather directly answers researchers the questions.• At what price would you feel that the product is so expensive that regardless of its quality it is not worth buying? It is believed that the distribution of these consumer responses is reflective of market demand and quality inferences made for the product at various price points. It is important to note that despite its simplicity. Lyon (2002) estimates that up to 20% of respondents may deliver this response error. A frequent problem occurring in this type of research is that of the inconsequently stated price preferences of the participants (e.. they want to know about price. the “too cheap” price lies above the “right price”). 3. the use of the price sensitivity meter is known for certain response biases. As it might be a hard task to quantify this benefit in the consumer market it is more applicable in the business-to-business (B2B) 10 . So the best field to use PSM is the preliminary analysis of the market when it is unclear which price range would be the most appropriate for the product or service. the cumulative distribution of consumer responses to the above four questions is used in order to plot the range of prices most consumers would consider acceptable. 1990).
as subjective. is the most useful to later on set a price for the product.1 Measuring Value Exploratory methods such as depth interviews are usually effective for understanding and measuring value. how they deal with problems. This arises because for buyers in business markets. The task of quantifying the worth of the benefits may require complex large samples and estimates of probabilities. An objective of value research is to identify the value creation 11 . 2. how your products or services could address these problems. the people who recommend and execute the purchase have little connection with the product users. subjective value to the gain perceived and experiential value to the value buyers perceive. Value can be classified as objective. and as experiential. depth interviews enable the interviewer to probe customer needs: unique problems. Focus groups can be another useful method for gathering value data. 4. Small and infrequent purchases let prospective buyers don't expect the payoff from search. For example. 3.3. WTP and value are rarely equivalent for various reasons: 1. In B2B markets. Measuring value is concerned with determining the integration of a new product or service into the buyer's business. Objective value refers to the worth actually gained. An innovative product or service that potential buyers haven't experienced let buyers tend to not know the value of the benefits they're likely to receive.market. the increase of worth which is actually gained by the purchased product. According to Smith and Nagle (2002) economic value. customers' experiences. Especially in the B2B market value and willingness to pay (WTP) are not necessarily the same. 3.
1990). the associated cost and timeframe.system of which your product or service is a part of the system of benefits. 1998. According to the results of our research. through using the methods which are appropriate. While traditional methods of setting prices have been used for decades. 12 . price constitutes an important factor in judgment and choice. Nelson. seeks out low prices. on the other hand. are revolutionizing the process of pricing research.. A priceconscious consumer is more concerned with price. it is extremely important to make a successful decision on pricing. While traditional pricing research methods provide valuable information. (Aaker et al. they place limits on the reactive abilities of new product developers. the emergence of new information-based technologies has enabled new approaches to the fundamental aspect of new product development. profitable. "A shopper who is relatively less price conscious may be willing to pay more for a product in a fashionable store or for a product whose features are appealing" (Monroe. and according to the budget.2) 4 Conclusion For a price-conscious consumer. 1990). One of the fundamental decisions which helps determine the success of a product is the correct pricing of the product on market introduction. and sees such a search as worthwhile (Monroe. 2001. 1998). digitizing consumer and price research means utilizing e-mail surveys and online focus groups to measure consumer reactions to new products. such as consumer preferences. In such a fast changing environment of our time. Cortese and Stepanek. Web-based technologies. (Case Study on Value Research: see Appendix 5. To justify the price that should reflect the value it is necessary to understand the benefits of the features to the customer. for many companies.
in order to secure parental permission for the research. respondents participated via the Web. Polaroid employed Web based Conjoint analysis with target respondents aged 13-18. or leave the i-Zone at a target cost of $17. hospital operating rooms are usually run on rigid 13 . in this market. al. Whiting. in order to determine whether to add more features to the product (and increase the price of i-Zone from $17 to $25). a company that some analysts considered to have stagnated in its new product development initiatives (Wasserman. A counter displayed increases or decreases in the price of the camera as features were manipulated.5 Appendix 5. freeing up valuable time in capacity-constrained operating rooms.“ (Bergstein et. and asking respondents to add features from given list. Each feature was verbally described and visually presented as it was added. which features should be added and which left out? Polaroid. rather than a feature-heavy model. created a Web site to collect the required data. with the help of MIT. 2001). While recruiting was performed through mall intercept techniques. The analysis was performed by displaying a model of the camera.1 Case 1 – Polaroid’s I-Zone Instant Camera “An example of the use of online Conjoint analysis in new product pricing is the initial development of the I-Zone instant camera by Polaroid. The company therefore determined the optimal price position to be at the lower end of the spectrum. helping respondents decide what was worth the additional cost. 2001. The results concluded that targeted teens wanted a "cool" camera. But our value researchers also found that. An additional question was that if they were to add features.2 Case 2 – Medical Surgery Appliance “A medical products company developed a product that was used in surgery. 2002) 5. Value research found that the new product could reduce the length of a particular surgery from 55 minutes to 40 minutes.
where operating procedures are scheduled on the half hour. but also specified changes that needed to occur in the surrounding environment where the new product would become critical-a process re-engineering plan to help the new product achieve its incremental value potential.” (Smith and Nagle. To actually realize the benefits of the new product.schedules. In the end. 2002) 14 . we not only estimated the value of the new product. the hospital would have to schedule procedures more tightly.
T. Marketing Research. Lyon. pages 612-621 Smith. (2002): The Price Is Right (or is it?). D. Winter. pages 318-338. (2002): A survey of emerging technologies for pricing new-to-theworld products. 15 . pages 303-318 Blamires. Hoffman. J. pages 460-464. pages 8-13. Monroe. pages 85-107. Ch.6 Resources Bergstein. and Nagle. (1997): Pricing research techniques: a review and a new approach. New York. (1993): Using Laboratory Experimental Auctions in Marketing Research: A Case Study of New Packaging for Fresh Beef. Monroe. 11 (4/5). 30 (4). pages 20-25. Marketing Science. (2004): Reexamining Latitude of Price Acceptability and Price Thresholds: Predicting Basic Consumer Reaction to Price. T. and Whipple. D. NY. K. H. E. 12(3). Ch. K. 39 (1). Winter. (2002): How Much Are Customers Willing to Pay?.B. Chakravarti. G. Menkhaus. G. Estelami. Journal of Product and Brand Management.B. Ofir. Marketing Research.. Field.. R. A.. Journal of Marketing Research. (1990): Pricing: Making Profitable Decisions. Journal of Market Research Society. McGraw-Hill. Journal of Consumer Research.. E. D. D.W. 8 (November).. (1971): Measuring Price Thresholds by Psychophysics and Latitude of Acceptance. H.
B. S. Van Westendrop. pages 228-241. (2002): Measuring Consumer’s Willingness to Pay at the Point of Purchase. Journal of Marketing Research. and Hawkins. New York.Tull. and Skiera. D. 6th Ed. L.a new approach to study consumer perceptions of price. ESOMAR Venice Congress Proceedings. (1976): NSS price sensitivity meter . (1993): Marketing Research .Measurement & Method. May. P. D.E. K.. Macmillan. pages 140-66. Wertenbroch. 16 .