MEASURING PRICE SENSITIVITY (Chapter 13)

< Numerical estimates of price sensitivity (P.S.), when available,

aid the manager in making effective pricing decisions (higher
profit contributions)

< Numerical estimates of P.S. are best used as a supplement to

the managerial analysis of P.S. (See Chap. 4) -- when in doubt
use latter

< Several methodologies are available for generating numerical

estimates of P.S. -- each with certain advantages. We will
discuss some of these techniques
Exhibit 13.1 Techniques for measuring price sensitivity

Conditions of measurement
Variable measured Uncontrolled Experimentally controlled

Actual purchases Aggregate sales data In-store experiments

Store audit data Laboratory purchase
Consumer panel data experiments

Preferences and Direct questioning Simulated purchase surveys

intentions Buy-response surveys Tradeoff (conjoint) analysis

Comments
1. Controlled studies are preferable to uncontrolled ones
AT
2. Measuring actual purchases is better than measuring
ODDS
preferences and intentions
1. Uncontrolled studies of actual purchases
< Tend to use past/historical data on existing products
at existing price levels -- may not be useful for new
products or price levels

< Price sensitivity estimates are difficult to isolate when

using historical data -- often they are contaminated
with advertising sensitivity estimates

< Three types of data: aggregate sales, store audit, and

consumer panel

< Linear regression is often used to generate the P.S.

estimates when using historical data -- it has its own
problems (see an econometrics book)

< Useful under limited conditions

2. Experimentally controlled studies of actual purchases
< Tend to use current instead of historical data

< Can use: in-store experiments or laboratory purchase

experiments
In-store experiments
A. Realism for buyers
B. Costly
C. Extraneous influences
D. Require trade cooperation
E. Competitive exposure
F. Less sample control
G. Less bias
Lab. Purchase Experiments
A. Less realism
B. More bias (correctable)
C. Gains in terms of other factors listed above

< Useful under a variety of conditions

3. Uncontrolled studies of preferences and intentions
< Low cost and speedy means of estimating P.S.

< Widely used despite problems associated with methodology

< Two options available: direct questioning and buy-response surveys

Direct questioning
A. Little realism
B. Induces bargaining behavior
C. Unreliable estimates of P.S.

Buy-response surveys
A. More realism
B. Plausible estimates of P.S.
C. Bias (correctable)
D. Estimate of demand curve

< Useful under very limited conditions

NOTE: There is a difference between bias & reliability

4. Experimentally controlled studies of preferences and intentions
< Widely used, especially for new products or product
concepts

< Two options available: simulated purchase survey and

trade-off analysis

Simulated purchase survey

A. Low cost
B. Realism for buyers
C. Bias (correctable)
D. P.S. estimates need to be validated -- perhaps in conjunction
with lab. purchase experiments

Trade-off analysis
A. Low cost
B. Allows precise measurements of price/attribute trade-offs
C. Versatile & efficient in terms of data needs
D. Useful for strategy development
E. Links well with choice modeling
 TRADE-OFF ANALYSIS
The auto industry would like to know your desires and priorities in cars. In front of you is a stack of cards, each
with a description of two different cars. If you were buying a car and could choose between these two only, which
would you prefer?

Please indicate your preference by placing an X on the line beneath the description of the car you prefer. Then go
on to the next card.

Future car Future car

Miles per gallon Miles per gallon

34 28
Price Price
$8,950 $9,400
Maximum speed Maximum speed
70 mph 80 mph
Length Length
12 feet 14 feet
Roominess Roominess
5 passenger 6 passenger
Country of manufacture Country of manufacture
Germany United States
1 2
X

Green/Tull, Research for Marketing Decisions, c1978, p. 480. Adapted by permission of Prentice-Hall,
Englewood Cliffs, New Jersey.
Exhibit 13.9 A Conjoint Study: New Hotels Best Price and Attributes

TABLE A Importance, Utilities, and Value for Attribute Levels

Attribute
and Levels Importance Utility Valuea
Cost per Night 56
40a 1.86
60 0.28
80 -0.45
100 -1.99

Site 6
View -0.01 $-0.16
Harbor -0.19 -2.96
Mountains -0.07 -1.09
Beach 0.25 3.89

Town Center 7
Short Walk 0.05 $0.78
5 Minutes 0.21 3.27
20 Minutes -0.26 -4.05
a Values are in Australian dollars.
Exhibit 13.9 A Conjoint Study: New Hotels Best Price and Attributes

TABLE B Attribute Importance and Utilities for Different Segments

Convenience Basics Active Water Passive

Seekers Seekers Seekers Viewers
Attribute Impor- Impor- Impor- Impor-
and Levels tance Utility tance Utility tance Utility tance Utility
Cost per Night 31 73 14 41
40a 0.87 3.14 0.09 1.44
60 0.35 0.89 -0.05 0.64
80 0.15 -1.15 0.23 -0.12
100 -1.27 -3.89 -0.09 -2.17

Site 16 3 29 14
View 0.16 -0.04 -0.35 0.19
Harbor 0.01 -0.10 0.22 0.31
Mountains 0.37 0.07 -0.30 0.31
Beach 0.28 0.14 0.30 0.47

Town Center 18 1 3 9
Short Walk 0.15 0.01 0.04 -0.03
5 Minutes 0.39 0.04 -0.02 0.26
20 Minutes -0.74 -0.05 -0.02 -0.34
 Using Measurement Techniques Appropriately

< Numerical estimates of P.S. Should only supplement (and not

replace) the managerial analysis of P.S.

< Numerical estimates are concise -- but conciseness does not imply
preciseness (accuracy)

< Use managerial judgment to guide the estimation of P.S.,

particularly for

A. Sample control
B. Product description

< Choice of methodology partly depends on the products stage of

development

Product concept Buy-response surveys

Product prototype Trade-off analysis or description

Product Other methodologies