We often get asked if we can research the price customers will be prepared to pay for a product or service. What clients expect is someone with a clipboard asking questions. We tend to upset clients who insist on this approach by telling them that is not what we do.

Whilst we do employ market research techniques in our work it is almost never in the way people think.

Over the years market researchers have been struggling to find a methodology that will provide insight on pricing. The problem is that when confronted with a question about the appropriate price for a product, a respondent is sorely tempted not to give an honest opinion for obvious reasons. Research companies have devised all sorts of question structures to try to avoid this outcome… conjoint analysis, value maps, sequential monadic, relative positioning…. the list is almost endless.

Sadly they all have fundamental flaw. Real decisions about price are not usually made talking to a nice smiley person with a clipboard, they are made with a screaming toddler trying to climb out of the trolley, under pressure from a slick salesman trying to close a deal or scanning pages of online catalogues trying to work out which site is most likely to ship you the goods on time and in one piece.

… in other words context and presentation are everything. All too often companies see price the way it appears in profit calculations; as a variable in isolation, when in fact its one of a blizzard of variables presented to the customer at the point of purchase that will include varying numbers of competitors, alternatives products, the marketing department’s lovely USPs and all the subtleties of branding and packaging….and of course the option of spending their money on something else altogether.

The other problem with asking about price in the sanctified surroundings of a market research interview is that respondents tend to engage what Nobel prize-wining psychologist Daniel Kahneman would call ‘System 2′. This is the part of the brain that thinks logically rather than instinctively. Decisions around price, even in B2B sales, are often made by ‘System 1‘ ..the part of the brain that uses well worn rules of thumb to make judgements. Ever heard the expression ‘Too good to be true’ ?… ever heard it said about a price?… that’s System 1 at work.

On those occasions when we do employ market researchers, these are the rules we tend to follow:

Try to replicate the purchase environment – if you make most of your sales online, use a mock up page with the same choice architecture and sit the respondent in front of it. Alternatively capture the respondents as close to the actual point of sale as you can. We famously set up a qualitative research operation for National Trust in a medieval jousting tent in the bailey of Corfe Castle to capture visitors decision-making criteria just as they came across the drawbridge.

Don’t ask directly about price – this sets off a flurry of thinking in the respondent trying to work out what to say to make their next purchase cheaper. It is much better to beat around the bush and lose the price issue in other stuff about their views on the product and competition.

Listen hard to the language – Quantitative research is really bad at this… online survey monkeys and the like are even worse. I want to hear how people talk about price “it’s about five quid isn’t it?” is not the same as a box ticked saying £5…. it means ‘I would be expecting to pay anywhere between £4.45 and £5.65’ (the latter would give you a 13% higher price than the £5 result from the quant survey).

Listen hard for benchmarks – If a respondent says “That sounds expensive” ask “What makes you say that?”. Their answer will often tell you what they are comparing your price to. You will be surprised how infrequently this is your actual competition.

Better still, forget the research and…

Watch behaviour rather than ask about it – People have a habit of post-rationalising decisions made instinctively to avoid the embarrassment of not being seen to apply logic. In our book what people do always trumps what people say they do. Simple market tests and a careful look at sales history will always give a more reliable answer.

I am afraid that much of the market research industry is trying to mathemtise human behaviour so that accountants and economists can claim to have a definitive answer to underpin decisions. Rather joyfully the human race does not think in scales of one to ten.. (one being completely dissatisfied).

On more than one occasion we have declined requests to provide market research data on pricing. We suspect that the client was trying to gain evidence to support a decision they had already made.

After all if all of human decision-making could be reduced to a set of cross-tab tables and price elasticity graph, life would not only be boring but the levers we could pull in our commercial endeavours would be limited to changing one number.

It is a bit of a common theme… about a third of new clients come to us and ask us to measure their price elasticity of demand… the amount their volume would drop or increase if they changed their price.

Bless them, they don’t know any better. It is the only thing they remember about price from their economics GCSE. But it is the wrong question to ask. Sure, if you put your price up some customers would probably (but not always) go away. The right question is ‘which would stay?’

I am afraid I struggle with neo-classical economics. Our experience of customer behaviour is never as simple as they would make out. Decisions are seldom based on all available information; seldom logical, rational or driven by utility value. If they were, vast swathes of the economy would have to shut down overnight.

Nobody would buy a Dolce and Gabana handbag, you would see the womenfolk of Knightsbridge carrying their belongings in 5p Tesco carrier bags.

Households would switch their electricity and gas suppliers every four to six weeks and British Gas would be on its knees.

Everyone employed in marketing or sales would find themselves on the dole and Apple would not be the most successful brand in the world.

The other problem with this request is that it requires at least three data points to plot from empirical data in order to draw a curve (two would be a straight line). Although some high volume online businesses can flex their price on a daily basis, for most firms this is simply not possible…. the number transactions is too small or you would simply annoy customers by moving the price all the time.

Our advice is to start from the other end of the thought process and ask the question how far can we move price without losing any customers. Then look at the type of customers you think would be first to go and price them separately…. and keep doing this until you have segmented you customer base.

Keep in mind our motto at Burgin Associates:

Some of your customers would have been perfectly happy to pay higher prices… the trick is to know which ones!

We will offer a modest reward and some online kudos to anyone who can accurately translate this into Latin for our coat of arms.

Often clients come to us determined to enforce some sort of central pricing discipline on their overseas subsidiaries, convinced that they are leaving money on the table. Anyone who has ever run an international group (that’s what I was doing ten years ago before I set up Burgin Associates), knows that controlling policy on anything is like keeping a gang of frogs in a wheelbarrow.

A client with just such ambitions approached us the other day and I put together a short paper for them offering advice on the potential pitfalls. I thought you might like to see it.

Autonomy and Profit Centres: You expect General Managers to deliver profit. Price is one of their key levers although often badly used. Simply taking responsibility for pricing away from them back to the centre would stir howls of dissent if they are worth their salt as managers. Bringing them alongside the process and helping them understand how it works and what it can deliver for them is the key. Initiatives in the first instance should be advisory rather than mandatory. Any subsequent shortfall in their profit performance can then be used to drive the policy in place …”If you had done what we suggested on price in the first place….”.

“It is different here”: At least one overseas operation will tell you that their market is fundamentally different in some way. All markets are slightly different and the central marketing function ignores this at its peril. We have seen product launch initiatives fail because the sub-pack size did not work with the peculiar conditions in retail in a territory. However, more often than not this is a political signal to ‘stay out of my business’. A subtle, more advisory approach, often lower down the subsidiary’s organisation will overcome this so long as the General Manager is kept in the loop.

KPIs and Incentives: We have seen the way that salespeople and management are measured completely undermine pricing initiatives. The obvious toxic combination is; discretion to set price but measured on sales volume or value. Aligning KPIs with profit objectives combined with modelling the effect price has on profit performance is a key driver of appropriate behaviour…. “Look how much money you can make if you get it right…”

Cognitive Bias: There is an inherent cognitive bias relating to pricing that hampers almost all organisations. There is a belief that the market is more price-sensitive than it actually is. The primary reason for this is nobody tells you when you are too cheap, so the groundswell of anecdotal feedback from the market is that you are price positioned higher than you should be. This leads to a belief that the market is more price elastic and that a cut in price will drive volume. For a variety of reasons this is nearly always wrong. For instance it assumes that competitors will not cut price in response (see Sweezy’s kinked duopoly model 1939). Price is the leading excuse for poor sales performance and the desperation manifests itself in calls for cost to be stripped out of the upstream operations. This is exacerbated by a panic at senior level about sales volumes.

Rule of Thumb and No Science: Price setting in smaller organisations like local profit-centres is seen as a black art only based on experience. We seldom see subsidiaries deploying market tests or careful measurement to determine accurate price positions. Some will avidly collect competitor price information but forget that the consumer does not see this level of detail. If you have 15 competitors in a territory but stockists only stock one manufacturer’s range, then the share decision is not made by the consumer (unless they choose a store based on the product in question). In this instance a higher RRP makes the retailer or distributor more money.

The Retailer or Distributor as the Customer: Smaller operations particularly with a limited share of retail presence, will regard the retailer as the customer rather than the channel to the customer. As you know, the mindset of a brand is that they own the consumer and this strength should make retailers hungry to stock their wares. Limited marketing budgets in smaller territories mean that building brand awareness is a luxury they cannot afford. Support from the centre, a strong brand-driven culture will help change this perspective.

Footnote: Strong brands, no matter how nice their people are, will always be considered as arrogant by retailers and distributors. This is simply an expression of their limited power to negotiate with you. Calling the shots on RRPs (in a legal way) is sometimes seen as arrogance. This has to be assuaged by demonstrating the superior profit opportunity it offers.

The moral of the story is: Tread carefully lest you give your subsidiaries the very best of excuses for not selling enough.