Inflation rates around 10% were considered “extinct” in our regions, and I recall that about two years ago, there were a series of articles by highly esteemed professors explaining why high inflation could no longer occur. A major misconception.

In reality, prices in certain product categories are increasing by 20 – 30% annually, potentially leading to a doubling of prices within two to three years. This has dramatic implications for marketing. In marketing, it’s not about determining the price based on cost considerations; it’s about how the price is perceived by the customer: Does the price align with my positioning? Is it perceived as fair? Is the price still recognizable at all?

In fact, consumers are facing a significant challenge now. Unconsciously, individuals store a multitude of prices for everyday products in supermarkets, services like haircuts or internet plans, as well as benchmarks for car purchases, televisions, or package holidays. This wealth of price knowledge is, from the consumer’s perspective, painfully devalued, undergoing a process of relearning and being unconsciously repositioned within mental frameworks. Prices that were once considered luxury now fall into the middle class. Entry-level prices have shifted upwards, and these changes are sometimes dramatic, while in other cases, they are not evident at all.

Before introducing two tools that you need right now to assess your pricing competitiveness, let’s briefly discuss your scope for action:

Variant 1: Do Not Change Prices

This sounds fair and enticing if you can afford it due to a high margin or minimal cost pressure, or if volume increases compensate for the lower contribution margin. However, its feasibility cannot be determined without additional data. Lower prices are often associated with lower quality, and if the price changes in the opposite direction for the product group, you may alter your positioning, potentially shifting from a premium to an undesired middle positioning.

Variant 2: Keep Prices the Same – Reduce Quantity
This strategy also assumes that customers do not want change. It shares the same disadvantages as Variant 1, with the additional risk that reduced quantity may lead to a loss of trust. This strategy is known as “Shrinkflation”, and being a pioneer in this trend is generally not advisable.

Variant 3: Increase Prices – But by How Much?
In reality, this is the question for 90% of companies. There are often limited opportunities and constraints, both contractually and practically, to change prices. The adjustment must be such that the contribution margin does not decline in the medium term. This can only succeed if customers accept the new price without delaying purchases or switching to competitors.

Every strategy is doomed to fail if you don’t know two things:

• What price will be accepted?
• For which features are customers willing to pay more?

For this, there are two excellent tools:

Which price will be accepted?

For pricing market research, it is generally acknowledged that naive queries like “What is the maximum acceptable price?” or “Would you buy the product at this price?” are a waste of resources, as they often yield meaningless and inaccurate responses. Surprisingly, many institutes still recommend these approaches in practice, often selling them under the guise of a method. In reality, meaningful insights into price behaviour are obtained through implicit methods, where the respondent does not recognize the objective of the questioning.

The classical implicit method is the Implicit Association Test (IAT), which has recently been highly successful in pricing and has shown excellent results for many products. The method is quickly explained:

Reaction time measurement is a proven tool for capturing automatic, unreflective attitudes and associations of consumers. This computer-based method dictates specific association tasks, through which a range of attributes, such as expensive or affordable, are assigned to a product. Participants assess the price of a product within a very short time frame, ensuring a quick, unreflective, spontaneous response. This method helps avoid response distortions due to social desirability or a tendency to choose the middle option.

In practice, the use of reaction time measurement in product pricing adds value, as it enables the determination of the ideal product price on an implicit level without cognitive distortion.  With the IAT, you can quickly and at relatively low costs test whether your product is considered price-worthy compared to the competition.

For which features are customers willing to pay more?

The price always represents a sum for a bundle of product features, which customers often do not perceive separately. The brand alone embodies a bundle of trust and quality promises, alongside considerations like packaging sizes, delivery times, etc.

To determine the actual importance of individual product features from the customer’s perspective and, more importantly, their contribution to customer willingness to purchase, you can employ Choice-Based Conjoint Analysis. Traditional market research tools quickly reach their limits when it comes to identifying which features customers are willing to pay more for. Direct questions about the importance of product features using rating scales, rankings, etc., often yield limited answers. Responses frequently indicate that everything is important. Direct questions about price willingness are also prone to failure as they fail to provide valid data. Modern, innovative, and preferably implicit methods are needed to achieve reliable results, and that’s precisely where Choice-Based Conjoint Analysis comes into play. It simulates real purchase decisions by repeatedly asking respondents to choose between various product bundles, encompassing the examined product features, especially brand and price.

The results, the relevance of individual features, their impact on price willingness, and ultimately the optimal price, are not derived from direct inquiries. Instead, they are calculated based on product selection decisions. Additionally, the tool allows market simulations, providing insights into the percentage of buyers choosing your product, how much your market share changes when altering your product and/or price, and the contribution of individual product features to price willingness. It also reveals the potential upward price flexibility compared to competitors. Ultimately, Choice-Based Conjoint Analysis represents the state-of-the-art method for measuring buyer preferences and optimizing prices. It offers insights into customer behaviour with a level of validity and depth unmatched by any other market research tool.

Author: Dr. Frederik Lehner

01/11/2023

Copyright: Interconnection, Publication free of charge for coverage regarding the study and InterConnection Consulting.