Pricing

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Key points

Different pricing models

There are many ways of setting your prices, including:

• "cost plus" - this is one of the most common ways. How much does it cost you to make the product or run the service? Add on a margin, and that is your price
• profit-based pricing - this is where you estimate how much of the product/service you will sell, the breakeven point, and the level of profit you wish to make - and price accordingly
• competitive pricing - pricing your product/service in line with the current market structure
• market pricing - charging what your customers are willing to pay. This is the appropriate model for brand-based pricing

Basics of brand pricing

Setting the prices for products/services within a brand is both:

• a major determinant of the profitability of the brand
• a marker to the customer of the quality of the brand

The key is to build the value of the brand through intimacy & trust among your focus customer segments so that you can choose to benefit from this value in either increased sales, or increased profits, or a combination of the two.

It is also important to understand that the perceived value of your brand is not fixed or unitary - it is relative to each individual customer & to competitor pricing within the category of products/services in which you operate. You can increase your prices & see an increase in your sales & profits, or you can increase your prices & see a decline in your sales & profits - it depends on how many people accord you what level of premium, & what the competition is doing.

Generally speaking, pricing levels within a market are set by the brand leader, who also benefits from the lower costs associated with selling the highest volume. With the globalisation of competition & the corporate focus on increased productivity through global economies of scale, there will naturally be a tendency towards price deflation. Unless the major brands work at creating differentiation in the market place, products/services will become a commodity with transparent competitive pricing, & prices will spiral down, so that everyone ends up working harder & harder for less & less reward.

Simple pricing research

So how much are your customers willing to pay?

There are some simple ways of asking them. You can say "If this product costs $30, how likely are you to buy it?":

• Very likely
• Likely
• Not sure
• Not very likely
• Not at all likely

You then rotate a series of prices, asking the same question.

Or you could ask "If this product costs $30, would you consider it.....?"

• Very good value for money
• Good value for money
• About right
• Too expensive
• Far too expensive

However, simple pricing research is rather "ball park", and therefore of limited use.

Complex pricing research

The best pricing research is complex and expensive, but far more accurate.

There are two main techniques:

• Brand/price trade-off research
• Conjoint analysis

Brand/price trade-off research

Brand/price trade-off research works by mocking up a typical "shelf" of products/services so that the customer can choose the brand & format s/he prefers within a given repertoire at pre-specified starting prices. Each time the customer chooses a brand, the price of that brand is increased by, say, 5%, & the customer is asked to choose again.

There are many areas of complexity within this type of research:

1. Number of "facings" - the number of "facings" each brand is given will influence the purchasing decision. Brands with more "facings" will tend to be chosen more often. Conversely, brands with less "facings" than they would normally be granted in the real world will be undervalued
2. Formats - each format within the customer's repertoire needs to be represented. This can exponentially increase the number of products/services that need to be on offer
3. Outlets - each retailer/distributor will give a different number of "facings" to each brand & offer different combinations of brand & format, so the "shelf" needs to reflect different customer buying opportunities

Conjoint analysis

Conjoint analysis research works by calculating the "utility value" of each component of a product/service. The greater the "utility value" of the product/service, the more it is worth.

Like brand/price trade-off, conjoint analysis seeks to replicate a typical purchasing environment. Unlike brand/price trade-off, conjoint analysis does not seek to represent the choices by physical products/services. Rather, the customer is offered a series of "paired comparisons" or "multiple comparisons", usually in the form of cards or options on a computer screen.

Conjoint analysis is especially useful for calculating the value of individual components of a total package (e.g. the different accessories in a car).

There are at least three different versions of conjoint analysis:

1. single paired comparisons - where the respondent is asked to select between two attributes
2. fixed set of attributes - here the customer is asked to select between two different offers, each of which contains, say, 5 attributes for each product/service, e.g. brand, price, size, colour, design
3. variable set of attributes - here the customer is asked to select between two different offers, each of which contains, say, 5 attributes for each product/service, but this time each package can contain a different 5 attributes

Some models of conjoint analysis also include a "disjoint analysis", where the respondent can refuse to choose any of the options.

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