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  • Writer's pictureNihit Ningthoujam

Scientific Approach to Effective Pricing Strategy

Updated: Jan 11

Pricing is the most important element of the marketing mix. It is the only element of the marketing mix that influences all components of the profit function.


According to a study by IE Business School and Simon Kucher & Partners, pricing is perceived as an essential yet highly underrated business topic.


"I believe Pricing is a key topic that is starting to raise interest

among companies, which currently are strongly worried about

costs."


"Pricing is crucial, in fact, we are not making all the money we

could because of this issue."


"I believe people in general should know that fixing prices is not

only about costs+margins. There are many other facts to take

into account."


Link to the study by IE Business School and Simon Kucher & Partners


Hence, I claim that a scientific approach to pricing strategy is imperative for any business. The five pricing strategies used by businesses and consultants are:

  • Cost-oriented pricing

  • Competitive-oriented pricing

  • Demand-oriented pricing

  • Value-based pricing

  • Price discrimination


Moreover, price elasticity (or sensitivity) is the key fundamental to scientifically adopt these pricing strategies (except "cost plus margin" method). For any given product or service, price elasticity can be measured using the techniques indicated below on the chart.


Reference: Malik Rajan, Le Club du Pricing français



I have leveraged my 5 years of experience as a consultant in customer strategy and worked with the French Pricing Club (Le Club du Pricing français) to compare these techniques across key criteria on the chart below.



Among these techniques to measure price elasticity, I find Conjoint Analysis as the most powerful tool because of five key reasons:

  1. Conjoint Analysis incorporates competitive products into measurement of price elasticity.

  2. Conjoint Analysis enables optimization and innovation of product features which in turn facilitates maximization of product value and optimal price.

  3. In addition to price optimization, Conjoint Analysis enables to optimize overall product portfolio by optimizing total revenue (or profit) of the portfolio. The cannibalization resulting from change in prices and/or introduction of new products is factored into the mechanism.

  4. Conjoint Analysis enables to evaluate "What if?" scenarios such as "effect of price reduction and new product introduction by competitions"

  5. Unlike techniques such as Gabor Granger and Van Westendorp, the measurement of price elasticity using Conjoint Analysis is least biased towards price because other key product attributes are incorporated in the choice evaluation process. This results into high accuracy of price elasticity.


In nutshell, Conjoint Analysis is a survey-based technique that replicates real life purchase decisions to simulate dynamics among competitors with the objective of optimizing product features and price. Conjoint Analysis can be complemented with sales data and cost data to formulate highly effective pricing strategy for any business.


I would like to illustrate the power of Conjoint Analysis using some of my recent consulting projects in automotive and CPG sectors.



Optimization of Price and Electric Mileage of a New Electric Car using Conjoint Analysis



In December 2018, I partnered with an European market research consultancy specializing in international automotive research to formulate launch strategy of an electric car by a Japanese car manufacturer. One of my responsibilities was to optimize price and electric mileage (range) of this new car to cater premium car segment in UK and Germany. In order to evaluate trade-offs between Price, Electric Mileage, Acceleration and Design, I used Adaptive Choice-Based Conjoint Analysis. Based on this trade-off analysis, optimal price and electric mileage was defined to maximize revenue as illustrated on the chart below.


Furthermore, the approach also enabled the client to simulate the volume movement across brands as they increase the price of their new electric car.



Pricing and Product Development across 8 frozen food categories using Conjoint Analysis



In April 2019, I was approached by a boutique consulting firm (with offices in London, Paris, Rome and Turin) for my support to execute their first project involving Conjoint Analysis. Their client, a French manufacturer of frozen pastries and appetizers, wanted to switch to "value-based" pricing from "cost plus margin" pricing while innovating new products across 8 product categories. The Conjoint Analysis technique enabled our team to effectively optimize the prices of their existing products. Moreover, this approach further guided the R&D team of the client to innovate new characteristics of frozen pastries and appetizers as illustrated on the chart below.


An Excel-based market simulator based on Conjoint Analysis result enabled our team to optimize the product offerings (illustrated on chart below).



Conjoint Analysis also enabled the client to prioritize key product characteristics as illustrated on the chart below.




Conclusion



In conclusion, pricing is a critical profit lever which is often under-estimated by professionals. A scientific approach is imperative to formulate pricing strategy, and scientific measurement of price elasticity is key to optimize prices. Among all the techniques to measure price elasticity, Conjoint Analysis is the most powerful technique because this technique is based on replication of real-life purchase mechanism where customers evaluate trade-offs among price and other product features. Conjoint Analysis can be complemented with sales data and cost data to further enhance its effectiveness. In addition to accurate price optimization, other applications of Conjoint Analysis are:

  • Optimization of product offerings

  • Development of new products

  • Optimization of product portfolio

  • Risk evaluation of prospective price and product responses by competitors

  • Formulation of brand architecture


 

About Me



I am a pricing consultant. I have helped more than 30 businesses realise their monetisation potential by quantifying product value based on internal intelligence, historical data and customer insights. Although 60% of my clients are in SaaS sector (B2B & B2C), I have also delivered projects across CPG, pharmaceuticals and automotive sectors.


Very frequently renowned global consulting, private equity and marketing research firms also collaborate with me to bridge expertise gaps. Some of these firms are Pricing Solutions, MG Pricing, Le Club du Pricing français, Movens Advisory, 3H Partners and Ingear Research.

I pursued Grande Ecole MSc in Management from ESSEC Business School, Paris and Bachelor in Engineering Physics from Indian Institute of Technology, Delhi.


Contact: Nihit@pricingstratz.com


 

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