When developing the optimum pricing strategy in business-to-business (B2B) markets, it’s essential to have insights into how the market is likely to react when a product or service is sold at different price points. That’s where market research comes in. It informs pricing strategy by revealing likely levels of demand, revenue and profitability under different pricing scenarios.
There are four main techniques used in pricing research and I’ll explore them all in this and my next blog post (all in plain English, with real-life examples you’ll be pleased to hear). This week I take a look at the Gabor-Granger and Brand Price Trade Off (BPTO) techniques.
The Gabor-Granger technique seeks to identify levels of demand at different price points. To do so, survey respondents are shown the product at an initial price point and asked how likely they would be to buy it. The price is then dynamically raised (if they indicated that they would buy at the previous price point) or lowered (if they wouldn’t) and the question repeated. This continues until the highest price they are willing to pay is reached. By pooling data from all respondents, a demand curve can then be formed which shows the percentage of customers that would be likely to buy the product at different price points. For example, in a study for a supplier of telecoms management services we uncovered the following pattern:
As would be expected, this chart shows that as price increases, demand decreases (purple line). More interesting though is the revenue curve (blue line) which is calculated by multiplying each price point by the number of people likely to buy at that point. This shows that the optimum price for this service would be £75 as this would maximise revenue.
Brand Price Trade Off (BPTO)
In some situations, products are very similar and the brand is the primary determinant of the price people are willing to pay. Here the Brand Price Trade Off (BPTO) technique is more appropriate than Gabor-Grainger as it looks specifically at the price premium a brand commands rather than the price a certain set of product features justifies. BPTO also has an advantage over Gabor-Grainger as looks at the price of one product relative to competitors just as buyers would do in real life.
To do so, BPTO presents the survey respondent with brands which they might consider and attaches a price to each (these prices could start off at the same point for each product or they could be set in line with market reality). The respondent then indicates which brand they would be most likely purchase. The same brands are then presented again, but this time the price attached to the brand chosen first time around is increased with the others remaining as they were. These incremental increases continue until a different brand is chosen. The price of this second brand is then increased until a different brand is chosen and so on until all brands have been selected. If the ‘none’ option is chosen before all brands have been selected, then the price of any remaining brands are lowered until they’re selected (or can be lowered no further).
The major advantage of using techniques like BPTO or Gabor-Granger is simplicity. However, there are a number of downsides:
- The choice may be over-simplified and no longer reflect real-life decision scenarios which can be complex and based on a series of conscious and unconscious trade-offs
- With the linear raising or lowering of prices, respondents can easily guess what the researcher is doing and may be tempted to ‘game’ the result
- Prompting respondents with an initial price point will frame their subsequent responses and thus under- or over-estimate the true price they’d be willing to pay
- Only allowing a binary ‘would buy/wouldn’t buy’ response doesn’t capture important shades in between where people start to become more or less comfortable with a particular price point
Two other pricing strategy techniques – Van Westendorp Price Sensitivity Meter and Conjoint Analysis – overcome these issues and it is to them which I’ll turn next week.
Learn more about Circle’s approach to business-to-business (B2B) pricing strategy research here.