Millennium Marketing Research®

Tom Schori DBA Millennium Marketing Research®, 808 Ironwood, Normal IL 61761, 309-532-8466

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Pricing often done by using seat of the pants approach.

By Thomas R. Schori, Ph.D., and Michael L. Garee, Principals,  Millennium Marketing Research, 808 E. Ironwood, Normal, IL 61761-5239. 

We attended a recent American Marketing Association meeting near the University of Illinois, where Kent Monroe, a professor at the university, whose specialty is "pricing," had some interesting things to say about how companies, large and small, go about setting prices. We think you will find them equally interesting.

Contrary to what seems to be popular opinion, Professor Monroe said, the approach currently used by significant numbers of companies in pricing their products and services can hardly be referred to as an exact science. In fact, a surprising number of companies literally operate "from the seat of their pants" when it comes to setting prices. The price actually set for a product or service seems to be more a function of who (or what department) is responsible for setting prices than of any rational, deliberate thought processes, or realistic relationship to comparable products and services in the marketplace or perceived value.

For example, if the "bean counters" of an organization are primarily responsible for setting prices, they likely will look at two key factors: costs involved in producing the goods and/or services (overhead); and, percent of profit "needed," from an accounting standpoint. At the other end of the organizational continuum, if the sales types are making the pricing decisions, they usually try and get the price at the lowest possible amount, vis-à-vis the competition, because they instinctively know such positioning often proves to be the fastest route to early adoption. Obviously, both approaches are somewhat shortsighted and usually ill-advised.

"Price only has genuine meaning insofar as it relates to the prices for comparable products and services in the marketplace," Professor Monroe said. (The sole exception, of course, would be in the unlikely¾ and probably short-lived¾ event that a product or service happened to be in a category all by itself, i.e., it had no competition.)

In other words, if the price for a product or service is either significantly above, or significantly below, prices for comparable products or services to be found in the marketplace, then problems are sure to ensue with the successful marketing of those products or services. Price too high, and, absent significant points of differentiation (either perceived or real), and the product or The article also concluded that Burger KingÒ could most enhance their share by opening more stores, and that Wendy'sÒ could most enhance their share through better staff training.

As it turned out, one of our senior consulting partners had also collected comparable data, from 250 consumers, about the soft drink industry. It occurred to us that more marketing practitioners could be made aware of the Optimal Brand Position Model’s potential if we were to publish the results in Marketing Corner. Consequently, we decided to do just that with our soft drink industry data.

Keep two things in mind as we describe our soft drink industry effort:

• The attributes we used simply came out of our heads. They would have been much more suited to the soft drink industry had we conducted the study in conjunction with one of the players in the soft drink industry;
• The respondents were upper divisional university students in one of the author's marketing classes and, thus, in no way representative of what would have constituted the target market for some player in the soft drink industry.

Now let's look at what we did!

Just as had been the case with the fast food industry study, each of the 250 respondents:

• Indicated the relative importance of 15 soft drink attributes;
• Expressed his or her beliefs (on a 5-point scale) as to how Coca-ColaÒ , Pepsi-ColaÒ , and Seven-UpÒ , and his or her preferred soft drink (if not one of those mentioned) performed on those 15 attributes, plus how his or her ideal soft drink would perform.

We then exercised the Optimal Brand Positioning Model from the perspective of each of soft drink industry players considered. In simple terms, this means that we evaluated the impact that small changes in beliefs, one attribute at a time, would have on that brand's market share. To be more specific, we increased, then later decreased, each individual's belief about that brand by one point (if not already at the maximum or minimum) and observed the potential impact on market share. This we did one attribute at a time, one brand at a time.

Here's the actual share of preference exhibited by the 250 respondents:

Clearly, among these 250 upper divisional university students, Pepsi-ColaÒ led the pack for preference. However, nearly 50% preferred some soft drink other than Coca-ColaÒ , Pepsi-ColaÒ , or Seven-UpÒ .

Given the fact that we'd only changed beliefs on one attribute at a time, slightly up or slightly down, this means that we looked at 30 positioning changes for each brand. Here are the potential market share consequences of these positioning changes:

• For Coca-ColaÒ , 26 of those positioning changes would mean increased share of preference; three would mean share decreases. Among these 250 respondents, share of preference for Coca-ColaÒ has the potential of a seven share point increase in preference (i.e., a 50% increase in preference) by ever so slightly changing beliefs on the "low calorie" attribute¾ six share points of which would come at Pepsi-ColaÒ 's expense. On the other hand, they have the potential for dropping three share points (two points of which they'd donate to Seven-UpÒ ) by positioning themselves as more frequently "on sale." Interestingly enough, they could also hurt their share somewhat by being perceived as somewhat more "sweet." If memory serves us correctly, that’s just what they did some years ago with the introduction of New CokeÒ .

• Just the opposite of Coca-ColaÒ , most of the changed positionings would hurt Pepsi-ColaÒ 's share of preference. In fact 28 of the 30 possible changes would hurt their share. Only one would improve Pepsi-ColaÒ ’s share¾ by just one point if Pepsi-ColaÒ were to be perceived as performing slightly less well on the "low calorie" attribute. Perplexing, but the respondents were university students. Like Coca-ColaÒ , the worst changed positioning would be for the market to believe Pepsi-ColaÒ to be more frequently "on sale." This would cost Pepsi-ColaÒ eight share points, with six share points going to Coca-ColaÒ and the remainder going to Seven-UpÒ . Undoubtedly, being "on sale" cheapens the Pepsi-ColaÒ image, and makes it less attractive to the market.

• While being "on sale" more frequently would hurt share most for both Coca-ColaÒ and Pepsi-ColaÒ , it has the potential of enhancing Seven-UpÒ 's share the most, from 7 share points to 11 share points, or an increase in share of more than 50%¾ share which would come at the expense of "other" brands. How intriguing! While we have no way of knowing, it may mean that Seven-UpÒ is rarely perceived as being sold at sale prices and that putting it on sale more frequently could help build its share. A total of 22 of the possible positioning changes would result in share increase for Seven-UpÒ . None of the other eight changes would result in share decreases¾ which means that "switchers-in" would counter the effect of "switchers-out," resulting in net changes in share of zero.

Assuming that the attributes used in the soft drink effort did reflect that which soft drink experts would consider the right ones, and that the respondents in this study were representative of the soft drink industry's target market, what actions the various players should take would be obvious. But, of course, the attributes used are not the "right" ones and the respondents were not representative of the industry's target market. The findings do demonstrate, however, that a marketer can use consumer inputs to identify that position which has the potential of maximize his or her share. Likewise, a marketer can identify positioning that can harm or even devastate share. Or, at least they can do so by using our Optimal Brand Position Model, which, as was mentioned above, has previously been fully described in the literature and is readily available to anyone willing to take the time and make the effort to investigate.