Developing an Alternative and Cost Effective Model for Measuring Price Sensitivity
Background of Students:
• Avishek Chaudhuri, a Mechanical Engineer from IIT Kharagpur, has worked with The Associated Cement Companies Ltd. for two years as an Assistant Manager Maintenance. Currently, a second year student of the Post Graduate Program, 2004-2006 at IIM Ahmedabad, he did his summer internship with Lafarge Aluminates on business potential estimation through market research and survey.
• Debaditya Gangulee is an engineer in Information and Multimedia Technology (B. Tech) from Kalyani University, West Bengal. Currently a second year student of the Post Graduate Program, 2004-2006 at IIM Ahmedabad, he did his summer internship with ICICI Prudential LIC Ltd. on market penetration strategy in the high net income segment.
• Saugat Tripathy is a Computer Science Engineer from Delhi College of Engineering, and has worked Sapient Corporation for one year as an associate of technology. Currently, a second year student of the Post Graduate Program, 2004-2006 at IIM Ahmedabad, he did his summer internship with Star India Pvt. Limited on the feasibility of a separate channel / channel extension for rural India.
Area of Project:
• The project deals specifically with Pricing and hence, is under the Marketing Area.
Term in which project is credited:
• Term 5
• Prof. Arvind Sahay
Pricing is one of the most important variables in the entire marketing mix of any company. But it is rarely given the importance that it deserves. Most companies follow cost-plus pricing or competitive pricing techniques to price their products. These methods are not oriented to customer demands or the value that the customer may derive from the product. Hence, more often than not the product is either over-priced or under-priced. Reversing a pricing decision is very difficult to implement. Hence, in case of over-pricing the sales of the new product may fail to take-off and in case of under-pricing the consumer surplus is left on the table.
Most of the marketing mix variables are decided based on market research so that the entire process is customer oriented. To do the same for pricing, one needs to know the underlying price sensitivity of the target customer base. There are many ways to do find out the price sensitivity of demand. Some of the most popular ones are 1. Conjoint Analysis
2. Price Metering
3. Dynamic Pricing
All of these methods are very costly for most companies as discussed below.
Preliminary studies show that conjoint analysis requires two separate surveys. The first one is used to validate the attribute space. The second one is used to find out the preferences of people – i.e. comparison of the attributes. Moreover the sample size required for both the surveys is generally large to get a reliable result. The whole process takes time, money and qualified manpower. Therefore it is very resource intensive.
Price metering involves asking people their threshold prices. This is more complex than it sounds because very few people can decide what their threshold prices are. Therefore a large number of responses are required to arrive at aggregate threshold levels that have small deviation. Hence, this method although simple to administer, is not very reliable and is also costly.
Dynamic pricing is another method to find out price sensitivity curve. But this involves changing prices over time and space. Therefore it is essential that people being subjected to different prices are not allowed to communicate with each other. This is very difficult to ensure. If people come to know that they have been charged different prices then not only the brand but also the company (in case of a multi-brand company) and the retail store earns a bad reputation. Hence, this is a very...