Economic Insight
Insight:Benefitsofcontrolledpricingexperiments
Weird science
Do your products and services have the right price level and
structure? Have you presented your offer in the right way? This
Insight discusses how controlled pricing experiments can help
answer these questions and help increase sales and profits.
Choices, choices
Thelevel,structureandpresentationofthepricesforconsumerproductsandservicestendtobe
decidedinoneofthreeways.
» Thepuntmethod.About1in10companiesusethismethod.Itismostfrequentlyusedwhen
thereisnotasimilarproductorserviceavailableinthemarket;andsothereislittletogoon.
Intuitionandrules‐of‐thumbbased,perhaps,ontypicalmark‐upsovercost,aretheorderofthe
day.Thepricingstrategyis,inevitably,abittrial‐and‐errororiterativeinitsnature.
» Theeducatedguessmethod.About7in10companiesusethismethod,whichisbyfarthemost
common.Thereissomethingtogoon.Asimilarproductorservicesoldinthepast,orina
relatedmarket,providesaguidetowhattherightpricingstrategyislikelytobe.Oftenseenin
relationtoconsumerproductssuchasmusicandbookpublishing,consumerelectronicsand
FMCG.
» Thescientific(or‘weirdscience’)method.About2in10companiesusethismethod.It
involvesmakinglike‐for‐likecomparisonsbetweenproductsandservicestounderstandhow
differentpricingstrategiesaffectsalesandprofits.Itisthecommercialequivalentofaclinical
trial,whereatreatmentgroup(takingapill)iscomparedtoacontrolgroup(takingaplacebo).
Theweirdsciencemethodcomesinthethreeflavoursillustratedinthefollowingfigure.
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Economic Insight
Insight:Benefitsofcontrolledpricingexperiments
Figure1:Flavoursofweirdscience
Eachofthethreeapproachestopricingstrategyhavetheirownprosandcons.Thepuntmethodis
undoubtedlytheleastcostwayand,insomecases,maybetheonlymethodavailable.But,of
course,itcarriesthehighestriskofbeingcommerciallyunsatisfactoryandbeingopento
shareholderandstakeholderchallenge.Theeducatedguessmethodislikelytobeaboutright80
outof100times,andpricingstrategiesthatdonotchimewiththeeducatedguessmethod(also
knownasfailingthesnifftest)areunlikelytogetmuchtraction,eveniftheyarebasedontheweird
sciencemethod(whichweratherlike,seebelow).
Theremainderofthisnoteexplorestheweirdsciencemethodfurther,andsetsouthowitcanbe
usedalongsidethepuntandeducatedguessapproachestomakebetterpricingstrategydecisions.
Experimentation
Themainadvantageoftheweirdsciencemethodisthatitprovidesarobustbasisformaking
pricingstrategydecisions.Itwon’tberightallofthetime;butonaverageitwillbeattheeducated
guessmethodfortworeasons.
» First,thisapproachtypicallydrawsonabiggerandbetterinformationsetthantheother
methods–thisisnotcontentious(thereismoredebateregardinghowoneshouldusethe
varioustechniquesassociatedwiththeapproachefficientlyandeffectively,discussedbelow).
» Second,theprocessofdesigningandimplementingthemethodencouragesfreshthinkingabout
theproductsandservicestheysell.1Ourexperienceisthatthisbenefitexists,butisrarely
discussedorexplicitlyvaluedwhenconsideringpursuingweirdsciencemethodsina
commercialenvironment(although,interestingly,itisoneofthemainreasonsquotedfor
applyingsuchtechniquesinaresearchcontext).Putsimply,themethodhelpsstimulatethe
naturalcuriosityincommercialteams,whichcanleadto‘why’and‘whatif’questionsthatin
turnneedtobeanswered.Theoldrules‐of‐thumb,whichmaybeinaccurateoroutdated,orjust
plainwrong,getchallenged.Forexample,acceptedwisdomsuchas:“wecan’tincreaseourprices
becausecustomerswillswitchtoX…”starttobequestioned:“butwhatiftheyhavealready
switched?Aren’twethenleftwithlesspricesensitivecustomersthanbefore?”
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Perhaps this explains why ‘geek’ and ‘nerd’ is now a positive term? See http://www.bbc.co.uk/news/magazine‐20325517. 2
Economic Insight
Insight:Benefitsofcontrolledpricingexperiments
Weliketheweirdsciencemethodforthesereasons.Butwhenisitused?Usuallywhenonlyfact
andinformationwillhelpmakeadecision.Forexample,when:
» Theothermethodsaren’tworkingsowellanymore.Yoursalesandprofitsarefallingoryour
performanceisnotuptoscratchcomparedtoyourrivals.
» Itistoughtocallbetweendifferentoptions.Youarenotsurewhethertogo‘high’orgo‘low’.
Youdon’tknowwhethertopriceat£19.50or£19.99.Willofferingasubscriptionservicefore‐
booksincreasesales,orjustcannibaliseexistingones?
» Thingsarechanging.Themarketyouoperateinisexperiencingamajorstructuralchange.
Newtechnologymightputyouatamajorcompetitiveadvantageordisadvantage.
Thetrickisinknowinghowtousethemethodefficientlyandeffectively;andrelatedly,determining
whattypesofanalysis(econometrics,surveysandtrials)arebestindifferentcircumstances.
Picking a winner
Inourexperience,businessesgetthebestoutoftheweirdsciencemethodwhentheyfollowthe
followingtips.
» Tip1:Startintherightplace.Anchortheanalysestooneormore
commercialobjectives,andpreciselyidentifythecommercialquestionsthat
needtobeanswered.Thismeansthatthemethodistargetedandcost‐
effective,notageneraltrawlthatresultsinalarge,butultimately
uninteresting,‘factpack’.
» Tip2:Useactualsalesandprofitsdatawhereverpossible.Wethinkthat
“There are significant commercial benefits
associated with using weird science for
developing pricing strategies. Efficient and
effective analysis, supported by a
generous helping of commercial acumen,
can help businesses gain competitive
advantage.”
econometricssupportedbytrialsworkbest–thatis,anapproachwhichis
informedbyactual,ratherthanstated,consumerbehaviourandthentested
inthemarketofinterest.Itissimplylessreliantongettingaconsumer
surveyright.Thatsaid,therearesituationswheresurveyssupportedby
trialsarevaluable.Forexample,theproductorserviceinquestionmaybe
sufficientlydifferentfromthosesoldinthepastorinothermarkets,to
meanthatthereissimplynouseful‘actual’consumerbehaviourtolookat.
» Tip3:Forgettheweirdscienceforamoment.Attheendoftheprocess,
youshouldputthelessonsfromtheothermethods,thepuntandthe
educatedguess,togooduse.Iftheweirdsciencemethod,whichcanappear
more‘blackbox’thanotherapproaches,generatesanunexpectedanswer–
challengeit.Youshouldexpecttoreceiveacoherentsetofreasonsabout
whytheanswermakessense.Thisexchangeensuresthatthefullbenefitof
theworkisrealised.
Conclusion
Therearesignificantcommercialbenefitsassociatedwithusingweirdsciencefordeveloping
pricingstrategies.Efficientandeffectiveanalysis,supportedbyageneroushelpingofcommercial
acumen,canhelpbusinessesgaincompetitiveadvantage.
EconomicInsightprovidespricingstrategyadviceandanalysistoleadingorganisationsacrossa
rangeofindustries.
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Economic Insight
Insight:Benefitsofcontrolledpricingexperiments
Further information
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