How Do We Know Whether Pricing Research Translates Accurately to the Real World
The fact that research from McKinsey Consulting has indicated that as much as 90% of all new products are underpriced (https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/pricing-new-products) has helped to drive the growth of a global pricing research industry as motivated companies strive to identify the optimal price point its prospective customers are willing to pay.
The significance of this niche research is augmented by additional research by McKinsey that shows that just a 3% increase in price can on average increase operating profit by almost 25%. Indeed of the three ways to increase profitability including increased unit volume, cost cutting, and higher unit revenue, the latter is by far the most significant profit lever.
But how can we be confident that pricing research in the absence of the actual exchange of currency, can accurately translate to the real world. The truth is there is no 100% guarantee of real world accuracy for pricing research or any kind of marketing research given how many variables there are in the real world including the passage of time, whether the transaction was online versus retail, and share of marketing voice among other things. However, there are a number of anecdotal elements that speak to very solid directional accuracy for pricing research. A strong case can be made that pricing research findings are more translatable to the real world because most survey respondents are innately curious and engaged with pricing issues, and the relative value of things given the relevance to one’s own financial well-being.
Perhaps the most telling element that pricing research translates to the real world is the fact that so many clients of pricing research companies do regular encore pricing studies. In the case of my company Atenga Insights, more than half of all clients do follow-up pricing projects whether for additional product queries or new products and often it’s larger in scope. It’s almost unheard-of for any client to come back to us and say we upped our price (i.e. usually the case) and it was a disaster. And we hear similar feedback from our colleagues at competitive pricing research companies.
In my own experience I believe most companies have a strong sense their products are underpriced, often a result of pressure from a dynamic sales team that typically is focused first and foremost on unit volume. The agnostic input from an independent third party suggesting that unit pricing could be increased by 3, 5 or without impacting volume gives leverage to CFOs and CMOs and others to make their case for an optimal price/volume equilibrium. Those internal epiphanies correspond with the knowledge that because of things like price plateaus and price walls, pricing and unit volume do not always exist in a perfect inverse relationship. Pricing plateaus can mean that an item selling anywhere between $15 and $19 per unit can often generate similar unit volumes but of course much different gross margins.
One of the variables that can impact real world translation of pricing research findings is the amount of time between the actual survey and its implementation in the field. It used to take as long as four to six months to execute a pricing research study. Nowadays with readily available massive online databases along with artificial intelligence that both improves interpolation accuracy and saves time, we can complete a survey in a matter of weeks.
More and more companies especially with the shorter response times, lower costs and positive experiences are making willingness to pay pricing surveys a staple of their overall planning processes.
Even if you don’t have a clear understanding whether pricing research is right for your company, I urge you to take a closer look today. It’s proven to be low risk with significant returns, time after time.
CEO, Atenga Insights