Price sensitivity research is an extremely important tool in your business arsenal. Especially in times of economic uncertainty – like 2009 where we saw deflationary pressure, a volatile exchange rate, rising debt and stagnant wages.

One of the best ways to manage pricing is to regularly assess the price sensitivity of your target market and adjust accordingly.

Pricing research is considered a challenge by many companies.  They are not sure how to do it and whether the results will be effective.  But there are a few tools for doing reliable – and powerfully useful – pricing research.  The traditional approach has long been Van Westendorp’s price sensitivity meter, which starts with four basic questions: 

1. At what price would you consider this product so expensive that you would not consider buying it? (Too expensive)
2. At what price would you consider the price of this product so low that you’d question its quality? (Too cheap)
3. At what price would you consider the product starting to get expensive – not out of the question, but you’d need to give some thought to buying it? (Expensive)
4. At what price would you consider the product to be a bargain – a great buy for the money? (Inexpensive).

The answers are then plotted on a graph and analyzed. More info on the process can be found here. 

There are also newer tools that enable managers to test various price / product scenarios in a very cost effective way. These methods employ conjoint analysis, which presents various options to buyers and gathers input on their price sensitivities and preferences.  Much has been written on conjoint analysis, and it’s a tool we use whenever possible to get insight on price sensitivity – here’s a quick primer on conjoint analysis from one of the few companies who build software to deploy conjoint analysis : http://www.sawtoothsoftware.com/download/techpap/undca15.pdf

These two tools are useful ways to gain cost effective and actionable insight on pricing strategies, for lean times and for good times.

Roger Martin, Dean of the Rotman School of Management at the U of T, wrote about the growing malaise about big business in a blog at Harvard Business Review.

His message is that the modern corporate environment, in which shareholders who have no real ties to the companies they own but do control all the actions of those companies, exerts a negative influence on the companies, their employees and their communities.  It creates an environment that forces managers within those companies to lead inauthentic lives, which causes them to lose their moral compass, which leads them in turn to behave ever more inauthentically.

It’s a complex argument, but Martin lays it out well.  And his message is that this situation is totally unsustainable because it ultimately leads to decreases in shareholder value.

What’s missing from the article, though, is the solution.  How do large organizations remedy this problem?  How can large, public businesses serve their communities and their employees as well as their shareholders?

I think one solution lies in the business model of employees as shareholders – like WestJet.  This ensures alignment between the corporation’s financial returns and those who generate them.  It reduces one of the complexities of a model in which there are 3 primary stakeholders – customers, employees and shareholders.  Ie, it reduces the model to customers / company.

There are other ways – what have you seen that’s working?

Last week I read a short, interesting eBook on pricing.  Pricing is one of the most challenging and talked about issues in marketing, so I was keen to see what it offered. Those of you who have read Chris Anderson’s “Free“ won’t find too much new in it – but those who haven’t will, and to the eBook’s credit, it’s a much quicker read.

Here are a few of the key points:

• The more we do business, the less it costs to do it. Essentially, all things remaining equal, operating costs tend to drop over time.
• Of all the levers available to senior management, price has the greatest effect on the bottom-line. An example: in November of last year, Nokia earned $1.1 billion on 35% global market share, while Apple earned $1.6 billion on 2.5% market share.  An incredible difference that their premium price (and brand, and product, etc) allows.  (Fixed To Flexible – Page 14.)
• Economic models that describe how small and medium businesses ‘should’ act in order to maximize their margins have little bearing in the real world.
• Companies have to choose between offering convenience on one hand and fidelity on the other. Eg Wal-mart offers high convenience, low fidelity. Harvard Business School offers low convenience, high fidelity. Starbucks is given as an example of a company which has moved away from its high-fidelity roots, but has yet to embrace its current status as a seller of convenience.
• If you’re a seller of convenience, the price of your product or service will drop over time. Operate accordingly – bring your costs down, constantly reinvent your offering to provide new value, and experiment with pricing strategies when you can. (eg “freemium”, “pay what you can”, and similar innovative approaches)
• If you’re a seller of fidelity, employ price-discrimination strategies to increase your volume, boost your margins, and shrink the market for pirates and copycats.

The book is a good quick read and will give you some insight to the evolving science of price, which has been getting more and more attention lately.

For a good part of the 90s I lived overseas. Half a year in France, a year in the UK, and then 3 in Japan. And I travelled extensively – in more than 30 countries by the year 2000. I came back from that experience a changed person. Before living overseas, Canada was just the place I was born and grew up. After living overseas, it was the place I chose to be. I knew what other countries offered and what we had here. I realized we have something great.

Ever since then I’ve been working to take more of Canada to the world.  Canadian businesses are so often great at what they do, but not great at telling others about it.  So I (and Mezzanine) spend my time marketing those great companies to the world, and at home.  We shout their praises from the highest mountain tops so that others know about them and how great they are.  These companies deserve to be recognized as world leaders for what they do – and to enjoy the financial rewards of their innovation, initiative and hard work.

I’m enjoying watching the Olympics and seeing Canada pursue an aggressive goal and achieve it.  This is an exciting time.  I hope it’s the start for all of Canada – not just the sports world but the business world too – to pursue their rightful positions as global leaders.  We have every reason to do so.

Great businesses are very open to input and feedback. They seek it out through formal and informal mechanisms like:

• Quantitative Market Research (statistics-based customer satisfaction assessment; many respondents, little depth.)
  • Surveys and Questionnaires
• Qualitative Market Research (insight-based customer satisfaction assessment; narrow but deep.)
  • Focus Groups
  • Customer Interviews
• Competitive Analysis

What’s emerging now is the opportunity for companies to use Social Media as an additional customer satisfaction assessment tool, and also a way to inform innovation in products and services.  Social media provides tremendous opportunities for direct interaction between a company and its customers.  Many companies are using it to drive innovation.  For example, Starbucks realizes that  its customers know better than anyone else what they want  - so they created a platform to engage customers at: http://mystarbucksidea.force.com. It’s a great website and shows a true commitment to customers – and the recognition that it’s a cost-effective innovation catalyst.

Here’s a great tool that lets you search internet forums for comments about your business: Boardtracker (link to: www.boardtracker.com). Forums, though they’ve been around forever, represent a huge part of the internet — and are an area that many services, including Google, often do not search. Posts which reference your company can contain insight and information just as valuable as that from focus-groups.

One caveat – social media is a mecca for B2C companies to get feedback – its usefulness for B2B companies is still evolving.  But it will only grow.  How does your company use social media to track customer satisfaction?