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Pricing - PSM

The assumption underlying PSM is that respondents are capable of envisioning a pricing landscape and that price is an intrinsic measure of value or utility. Participants in a PSM exercise are asked to identify price points at which they can infer a particular value to the product or service under study. PSM claims to capture the extent to which a product has an inherent value denoted by price. The traditional PSM approach asks four price-related questions, which are then evaluated as a series of four cumulative distributions, one distribution for each question. The standard question formats can vary, but generally take the following form:

At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)

At what price would you consider the product to be priced so low that you would feel the quality couldn¨t be very good? (Too cheap)

At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)

At what price would you consider the product to be a bargain！a great buy for the money? (Cheap/Good Value)
　

Pricing - Gabor Grange

Gabor-Granger pricing research is named after the economists who invented it in the 1960s. Customers are asked to complete a survey where they are asked to say if they would buy a product at a particular price. The price is changed and respondents again say if they would buy or not. From the results we can work out what the optimum price is for each individual. By taking a sample of customers we can work out what levels of demand would be expected at each price point across the market as a whole (the demand curve in the following graph). Using this estimate of demand, the price elasticity (or expected revenue) can be calculated and so the optimum price-point in the market established. Note that a revenue optimum may be different from a profit optimum. The ability to model dynamically is extremely valuable in pricing studies.

A weakness of Gabor Granger is that customers may understate the price they will pay (there are also circumstances in which they will overstate the price). Consequently the phrasing of the "would you buy" question is extremely important as are other contextual questions to place the customer in the buying frame of mind. Typically, Gabor Granger is only used when considering on product in isolation, whereas in real life they would face a choice about which product to buy.

Pricing - BPTO

For brand specific studies measures of brand equity and category management Brand Price Trade-off Studies (BPTO) can be used. Here customers evaluate a range of products and prices are adjusted until customers stop purchasing.

For some markets where prices are very visible, or where there is a large amount of internal pricing data, it is possible to use econometric methods to examine the impact of price and to understand price elasticity. Using pricing tests, discounts and advanced statistical analysis the impact of price can be assessed live in the real world.

The most common approach to pricing research is to rely on market intelligence and follow-my-leader type pricing using a competitor as a benchmark. However a me-too approach leads to high levels of competition, and it is important to consider the strategic impact of pricing as well as the short tem sales impact.

Some caution is needed when conducting pricing studies. Statistically speaking, where you are looking to optimize prices where you are looking at relatively small price changes of 5-10%, you will need larger than normal sample sizes to get the statistical accuracy you need. For many companies this can make pricing research expensive, unless combined with a range of other measurement.