By Andrew Dalglish - 7th December 2016
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:
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.
Andrew has specialised in B2B research for over a decade and co-founded Circle Research in 2006. He is a columnist for B2B Marketing Magazine, a regular contributor to Research Live and frequent speaker at leading events such as the B2B Leaders Forum, Customer Experience Live and the Social Media World Forum. Andrew is a Chartered Member of the MRS, teaches the MRS B2B research course and holds an MA in Psychology from Aberdeen University alongside an MSc in Marketing from Strathclyde University.