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What the Heck Should I Be Charging?

Date posted: 21 October 2011   |   Posted in: Marketing Research

Friends,

How to figure out what price to set is always a poser. Can marketing research help with this? Yes, it can, but not in a straightforward fashion. One of the tools I’ve used is called Conjoint Analysis, also called Trade-off Analysis. It’s called that because it forces people to make choices they may not otherwise make. If you ask people which of several possible prices they are willing to pay, they’ll naturally lean toward choosing prices at the lower end. Simple questions, simple answers.

Conjoint is deceptively simple, too. The first step is to list the factors at issue…the things you’re not sure how to position. These are things like price, level of quality, service level, amenities provided and so forth. The second step is to determine what levels of each factor you need to decide between, such as what levels of price should you charge. The next step is to develop cards, each of which includes all of the factors with one of the levels of each factor. Probably the best way to describe the method is to use a case history.

About ten years ago I did feasibility research on the Iowa Equestrian Center at Kirkwood Community College in Cedar Rapids. After doing a telephone survey of horse associations who stage horse shows and determining that the demand for a new equestrian center would be extremely strong, we followed up with a conjoint study to determine the best set of ingredients for the center. I can share this because as Kirkwood is a public institution, the study information is public also. There were a number of things at issue. These were the factors we listed:

Rental price for the facility
Price for a camper hookup
Horse stall rental price
How many wash racks to install
Where trailer parking should be
Whether the practice ring should be enclosed or open-air
Whether barn ventilation should be normal or high capacity

Levels of each factor were then determined to be:

Facility Rental – $300 a day or $500 for the weekend.
$400 a day or $700 for the weekend.

Camper Hookup – $30 a day.
$15 a day.

Horse Stall Rental – $20 a day
$10 a day

Horse Wash Rack – No horse wash racks at all.
A 10 foot by 20 foot horse wash rack in one of the barns.
A 10 foot by 20 foot horse wash rack in each of the three barns (three racks in total).

Trailer Parking – Trailer parking next to the horse barns
Trailer parking within a 5 minute walk of the barns.

Practice Ring – Open air practice ring
Enclosed practice ring

Barn Ventilation – Normal
High capacity

The factors and levels are then printed on a deck of cards. Each card has a different combination of levels and factors. Here is a sample of the cards used for the Equestrian Center.

Rental Price of $300 a day or $500 for the weekend.
Camper hookup rental of $30 a day.
Horse stall rental of $20 a day.
No horse wash rack.
Trailer parking next to horse barn.
Enclosed practice ring.
High capacity barn ventilation.
A

Rental Price of $300 a day or $500 for the weekend.
Camper hookup rental of $15 a day.
Horse stall rental of $10 a day.
10’ X 20’ horse wash rack in each of 3 barns.
Trailer parking next to horse barn.
Open air practice ring.
Normal barn ventilation.
B

Rental Price of $400 a day or $700 for the weekend.
Camper hookup rental of $15 a day.
Horse stall rental of $10 a day.
No horse wash rack.
Trailer parking next to horse barn.
Open air practice ring.
Normal barn ventilation.
C

Rental Price of $300 a day or $500 for the weekend.
Camper hookup rental of $15 a day.
Horse stall rental of $20 a day.
10’ X 20’ horse wash rack in each of 3 barns.
Trailer parking within a 5 minute walk.
Open air practice ring.
High capacity barn ventilation.

There were 16 cards in all to cover all the possible combinations. The deck of cards was mailed to those from the previous telephone survey who agreed to take part in the follow-up conjoint study. Included was a set of instructions. The instructions were simple as was the task they were asked to perform. First they were asked to simply sort the deck into their preference order using any method or reasoning they chose. Then to simply keep the deck by the phone for a phone call to obtain their results. When called back they were also asked some additional questions. The first question was “how likely is it that your organization would use the Kirkwood Equestrian Center if it were set up the way it is described in the material you received and as shown on your top card in the deck? Using a percentage that could range from 0% sure to 100% sure, what percentage would you say?” Then they were asked to answer the same question for the #8 card and the last card in their deck. The answers to these questions provide the ability to determine the importance of the differences between people’s choices. It’s important to know not just in what order people sort the cards, but whether they will take any action with their choices.

After obtaining all of this data, a statistical analysis was performed by Dr. Gary Mullet of Atlanta, Georgia. It yielded the following information.

First is the relative Importance of the factors measured. Here is how the Equestrian Center conjoint came out:

Importance of Factors

The most important things turned out to be the facility rental price and the number of wash racks. Barn ventilation was of least importance. Now we knew what really mattered to potential users of the Equestrian Center and what not so much. For promotion purposes, this identifies the hot buttons.

The second thing learned was the difference between levels for each factor. Here are graphs displaying that for the top two factors.

 
Price to rent the facility:

Facility Rental Price

There was a big difference in “utility value” between the two price levels. Utility values are relative numbers to enable comparison between all factors.

Here’s how the levels compare on the factor concerning number of horse racks.

Horse Wash Rack

Obviously it was important to have at least one wash rack, but there was a relatively small difference between having a rack in one barn and in all three barns.

Between the feasibility survey and the conjoint follow-up effort, Kirkwood Community College had the information needed to obtain funding and proceed with the project with confidence. The research indicated that prospects for success were very, very strong and that has turned out to be the case. I visited the Equestrian Center a few weeks ago and learned it had operated at capacity for over ten years. It’s very gratifying to do the research on something, predict its success and find that the prediction was on target.

A slick additional benefit of Conjoint Analysis is the ability to develop a mathematical model using the measures that lets you predict sales for various combinations of features and levels. More importantly the model can be expanded to include cost and revenue numbers resulting in the ability to predict profit as well.

So if you’re faced with a situation where you don’t know what pricing strategy to employ and don’t know how to handle other variable choices, remember that Conjoint Analysis may be helpful to you. Let me know if you are interested in learning more or want to give it a shot. Also let me know if you’d like additional detail on the Equestrian Center research. If you have trouble reading or opening the graphs I’ll be glad to send you the PowerPoint presentation with all the graphs.


Source: research

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