Key to the new product’s success, pricing warrants careful attention to marketing as well as financial considerations.
It is a marketing decision that relates to the brand’s positioning and marketing strategy. And in crafting that strategy, the brand manager must have a good understanding of the trade-off between price and sales of the product, and how that impacts on the brand’s profits.
Techniques discussed so far are not suitable for revealing the relationship between price and volume for new products. Van Westendorp’s Price Sensitivity Meter, which works for new products where no obvious benchmarks or competitor equivalents exist, provides a framework for determining the acceptable price range for such products. It does not, however, reveal the price-volume relationship.
Importantly, for FMCG products where repeat purchase is the norm, we need assessment not only of the trial purchases, but also the repeat purchases.
For consumer durables, we need to account for the perceived risk in buying an unknown product. (Since FMCG products cost less, the fear for later regret is less pronounced. Moreover it can be alleviated by launching smaller packs or by offering free samples).
Some of the abovementioned complexities can be addressed through simulated test markets (STM). These techniques described in Chapter Product Validation, if adapted, are better suited to capturing the relationship between price and volume for new FMCG products.
In a typical STM, the price is set prior to the study and included in the concept board. This is not of much use for price testing where we need responses over a price range.
One adaptation, adopted by BASES Price Advisor, exposes consumers to the new concept without the selling price, and asks them to suggest the price at which the product would be “very good value”, “average value”, and “somewhat poor value”.
Consumers are then interviewed on the BASES measures for each of these volunteered price points. Their response at each price point is modelled into a single volume-based measure at the respondent level, and aggregated across all price points to yield the relationship between price and volume.
This is expensive because a major portion of the STM exercise is repeated over three price points. Moreover, a larger sample would be required to ensure accuracy, especially if the price points vary substantially across respondent.
From a pricing research perspective, the approach is relatively weak in that the competing products are not taken into context.
An alternative approach could be a blend of STM and DCM. More specifically:
Note: This approach has yet to be tried and tested. The advantage is that DCM is a rigorous, proven pricing test. However, it is likely to be expensive because this is essentially a two-in-one study.
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