‘Can learning competitor pricing do what an expensive price sensitivity testing does?’

Q: We have something similar to the reader whose question you answered last Friday. But in our case, we’re the research agency and our problem concerns one of our clients who requested us for a market price sensitivity research.

We are a boutique-size research agency. I founded this agency three years ago after deciding to take up my multinational research agency employer’s offer of early retirement.

That was when its US head office mandated a “downsizing.” When we started, my research managers and I attended your research-based “Price Strategy and Tactics Seminar.” We drew from your seminar’s price sensitivity testing model what we proposed to our client.

Here is our client’s response: “We know that most other FMCG [fast moving consumer goods] companies do consumer price sensitivity testing. But in this company, we don’t anymore because we learned we don’t need to. We now base the pricing of each of our brands first on cost and profit considerations. Then, if we have to consider market price sensitivity, we take care of that by adjusting our pricing according to our closest competitors’ pricing. So please give us an inexpensive research proposal just gathering and analyzing data on our competitors’ pricing and price changes. Our experience with market price sensitivity testing is that it’s too expensive for what adjusting to competitors’ pricing and price changes will do.”

So there’s our problem. May we ask this? When is it the case that just by learning and then adjusting to competitors’ pricing will do what an expensive market price sensitivity testing does?

A: Here’s what you should quickly check to get just as quick an answer to your question even though it’s only a “first aid” answer.

Ask: “Are your client’s competitors, especially the leading ones, doing their own market price sensitivity testing when they change pricing?” If they are and it’s an established fact that they are, then their pricing and price changes should be able to capture and reflect the market’s price sensitivity. So, in such a case, the cost-effective way to base pricing according to market price sensitivity is to do competitive pricing.

However, if this happens to be not the case, then it follows that competitive pricing won’t approximate market price sensitivity.

We said that the answer we gave is a mere “first aid” answer. That’s because there’s need to verify three critical aspects in that answer.  The first of these relates to the question: “Which competitors? Which closest competitors?”

The Senior MRx-er’s 2012 Segmenting book differentiates between “marketer-defined competitors” and “consumer-defined.” When these two converge, there’s no problem. But when they differ from each other, it should be clear what competitive pricing you should research. And that’s the consumer-defined competitors’ because the market price sensitivity relates there.

The consumer-defined competition is a growing, emerging market phenomenon. For example, in our research on remittances (both international and domestic), we found that while Smart Padala and Globe’s GCash consider each other as the competition, most remitting customers define Padala’s and GCash’s competitors as the banks, door-to-door remitting agencies, Western Union and large pawnshops. In the FMCG, for the longest time, Coca-Cola and Pepsi-Cola defined each other as competitors. When C2 entered the beverage market, it persuaded a good segment of the beverage consumers that it was a tastier and healthier substitute to Coke as well as Pepsi. And so, consumers counted C2 as Coke and Pepsi’s competitors. Implication? You have to be alert to the presence of this phenomenon because it’s the set of competitors that your competitive pricing must consider.

What’s the second critical aspect to verify? That’s with regard to what kind of price sensitivity testing is in question. There are several kinds with differing purposes and methodology. The kind that you learned from our Pricing Strategy and Tactics Seminar has two purposes. The first is to identify the consumers’ ceiling price above which further increase in price will reduce total revenue. The second purpose is to learn how many and what price segments prevail in the market.

Other price sensitivity models serve different purposes as in the case of TNS’ model. Or they may apply a different testing method as in PSRC’s price sensitivity testing where four questions are asked to measure pricing sensitivity in contrast with just one question in our own model. You can read the details of these other models and methodology in the chapter on price sensitivity testing of the Senior MRx-er’s 3rd edition User-Friendly Marketing Research.

The third critical aspect for verifying is your client’s assumption that price sensitivity testing is expensive. You should be able to challenge this assumption and show how to be cost-effective in any research. There are several ways. In our two preceding Friday columns, we explained two of such ways. This was via a DIY (Do-It-Yourself) research set-up and/or via doing the research through SWS’ omnibus survey service where you have the twin benefit of enjoying a large respondent sample base while paying very affordable survey subscription rate.

It may be worthwhile rereading the previous two MRx columns for the details of these two ways to do quick but clean and cost-effective market research.

Keep your questions coming. Send them to us at [email protected] or [email protected]. God bless!