…and leaving money on the table?
I was asked recently about the range of research I had been involved in over the last 30 years and realized that in fact that range was impressive in terms of both brands and methodology. But one thing that struck home was how few projects were focused on pricing strategy. I have done my share of choice-based and conjoint modelling, used Van Westendorp’s Price Sensitivity model, developed a methodology for dealing with cultural over claiming tendencies IN Asia and other related tools, so it was not anything to do with capability. As an economist in a past life I knew all about price elasticities and marginal utilities. So how come pricing research was not a big part of the research that clients focused on?
Every student of Marketing 101 knows the famous “4P’s” – product, place, price and promotion. If you think about it, a lot of attention is given to researching promotion (basically all communications) and product (everything from sensory evaluation to packaging research), but less so on place (distribution, retail, logistics, etc..) and very little on price. I even recall once sneaking in a simple conjoint exercise into a client’s study on a new fruit juice drink because I felt they could look at more premium pricing. I was right as it turned out. The client used the data with no recognition that they had not requested the research.
And here is another example where some pricing insights came from the researcher not the client. When Hong Kong’s third undersea tunnel joining Hong Kong and the Kowloon peninsula was near to finalization, the PR company working with the operators requested a study on attitudes to the new tunnel. I argued strongly for the inclusion of a choice-based inclusion and the PR company, not the client agreed to the inclusion. The original toll fee they were proposing was extremely high by comparison with other tunnels. The model very clearly indicated they could charge a premium but not at the levels they were intending. Traffic in the first year of launch was dismal – as the model predicted.
What is it about pricing that makes it an often ignored area in brand strategy focus?
There are a number of reasons that I can think of. Primarily pricing is often treated as a strategic area that can be dealt with internally – no need to run this past some consumer evaluation.
I think this is because most markets seem to settle into clear price ranges that brands seem to accept as industry “norms”. Cigarettes were a classic example. When this category was once one of the most heavily marketed areas in media and in research focus, almost every company has a large board showing all brands in the market structured by price points. To these marketer’s price was a key, but simple variable, with it being assumed that the price point said a lot about the brand. If you look at any category that has multiple brands competing in the supermarket nowadays it is clear that price points are quite well established. We just completed a large study of the urban breakfast cereals market in China and the price structuring within category looked like it had been mandated by law. There was hardly a 5% difference across brands within categories and same pack sizes!
Second, talking to some marketers, there is another internal consideration that overrides consumer perspectives, and that is cost-based accounting systems. Every brand goes through analysis of its costs based on ingredients and material costs, media support budgets, overhead recovery contribution and target profit margins. These target prices are compared against those market norms I mention above and adjustments are often made to the product to make sure it fits within the category norms at retail. Now if you think about it, this does sounds a bit like the tail wagging the dog.
If you think about the problems with this purely internal focus, you have to ask one question. Are marketers “leaving money on the table” because of their set-in-stone internal systems that ignore just what customers might actually be willing to pay”.
I was reminded of this by a recent study reported by the Massachusetts Institute of Technology, titled “The Price of Regret”. The conclusion of the paper was that marketers were missing out on potential incremental profits of 7-10% through poor pricing strategies.
Now hang on there, surely there is little in the marketer’s tool kit that can deliver those kinds of profit improvements. Looks like marketers are definitely “leaving money of the table”. Okay, this paper did focus on fashion so it may not be generally applicable in the CPG area where “regret” is likely to be a lower level of concern for shoppers.
Looking more widely I found a wealth of information on strategic pricing and in particular this link to a blog entitled “Integrity Pricing: Manufacturing Trust”.
The article lists common symptoms of poor pricing integrity in industrial and service markets. I would ask all brand and sales managers in these sectors to consider how many of these are typical in their organization?
Providing discounts and allowances to many, if not all, of your accounts;
Favourable pricing to customers who have not earned it through volume, a profitable sales mix, or loyalty to the relationship
Fluctuating pricing strategy that favours price-sensitive buyers who will “jump ship” given a new opportunity from your competitor;
Compromising the best interests of the existing customer base in favour of new accounts with undefined loyalty;
A frustrated sales team looking for definitions of what constitutes a fair price for the value offered; and
Starting the distributor conversation on the topic of price, or a price concession
In fact, the biggest criticism from SPMG of the approach to pricing taken by business is that it’s basically “part-timed” and this often means companies are indeed leaving money on the table. In their view, pricing, as a key part of marketing, touches everybody in an organization and need to be the top priority for any innovating and marketing aggressive company.
Based on the results of a large scale global survey on current pricing strategy, SPMG report some fairly dismal findings. For example, most companies are clearly failing to recognize the gains to be made from a more customer segment focused approach, or pricing based on what price differentials your brand could carry with certain market segments. In addition, many of the companies recognize in the survey that they are failing to launch their new products in the market to meet their price targets. They also recognized that over a half of all new product launches had flopped. Now whilst this is a cost in time and money the potential real damage is from putting these company’s brand equity and profitability at risk. This problem was seen by SPMG to be “largely self-inflicted”!
The question for marketers is simple – should not you be studying pricing from a customer perspective, and most critically from a customers perceived value perspective – or what the industry calls Value-Based Pricing Strategy.
How does value-based pricing work?
At its most basic research is designed to identify market segments that are both targetable (by specific outlet types or media), that have specific brand choice drivers and indicate, through pricing sensitivity studies, that they are willing to pay a premium for your brand.
The obvious benefit from using value-based pricing is of course enhanced profitability. There are other longer term benefits as well. One obvious benefit is your brand positioning starts to have more differentiation and clarity to the consumer, who ideally responds with enhanced customer loyalty. Studies have also shown that value-based pricing tends to be more resistant to economic downturn.
There may not be much of a choice for brand marketers going forward. The development of social media, the ability to target to the individuals and communities – and through data analytics – to direct real time offers makes this an even more exciting strategy. For example, Amazon’s ability to offer related books and bundles of these similar books is a classic example of value-based pricing in action. As a buyer you immediately see the value in the offer and often the bundled price is less subject to in-depth price consideration by buyers.
Ask yourself – are you someone who likes to have a window or aisle seat on a flight? Do you like to be up the front or not particularly fussed? If like me, that up-front, aisle seat appeals, how much are you willing to pay extra for that advantage? 2% more? 3%?, 5%?
That’s an answer that value-based pricing research can provide!
Footnote: So you think you know pricing strategy and the importance of a customer perspective in pricing strategy. Follow this link to a Pricing Competency Questionnaire. Be embarrassed like me!
About Chris Robinson
Chris Robinson probably wrote the book on quantitative research in Asia and is now providing his strong quantitative background to pricing strategy and consultancy with SPMG in Asia.
Chris has lived in the Asian region since 1980 and has managed research and consulting operations “hands on” in Singapore, Indonesia, Thailand, Vietnam, the Philippines, Malaysia, Taiwan, Hong Kong and China. He is now based in Shanghai, China as the Managing Partner of Anovax – and as SPMG’s Global Leadership resource in the Greater China region – China, Hong Kong and Taiwan,
Chris has extensive experience in pricing consulting, in particular where quantitative applications are required. He is an expert on choice-based and conjoint modeling and a range of price sensitivity tools such as Gabor-Grainger and the Van Westendorp Price Sensitivity system. Uniquely he was involved in developing a new product pricing methodology that corrected for cultural tendencies towards overclaiming in some parts of Asia. He is also an Econometrician with skills in price elasticity, structural equation and marginal utility modeling.
His recent interest has been in pricing research in the consumer goods sector where he has been developing online research capability in two areas – qualitative pricing insights based on video and text analysis, plus neuroscience applications, especially implicit technology such as eye tracking and eye gaze measurement and emotions recognition around price-based decisions.
For highest quality project design in pricing research and consultancy, Chris a one-stop shop of knowledge and insights into the China and wider Asian market. He has an excellent reputation for professional project operationalization and first class consulting and reporting.