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Behavioural economics: the key to pricing research

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Ever wanted to know what people would REALLY pay for your product?

 

Everyone in market research knows the challenges of getting consumers to accurately express their attitudes, feelings or awareness of brands and products. Indeed, having the skills to do this is the whole purpose of the market research industry. And good researchers do this as well as they can, within the limitations of the information they can extract from consumers.

 

But academic research in psychology and behavioural economics is showing more and more conclusively that consumers are simply unable to accurately describe, or predict, the purchase decisions that they will make in reality. Part of this is due to "predictable irrationality", where people make inconsistent decisions according to the context they are in. Part of it is because consumer preferences do not exist in a vacuum, and are not formed until the consumer actually has to make the purchase decision. A consumer in a focus group, or answering a survey, cannot honestly tell you what they would do in the supermarket because they do not know.

 

But there is a way to more accurately predict consumer behaviour. By designing behavioural experiments which simulate aspects of the actual purchase decision itself, it is possible to put consumers through the same thought process that will occur in-store. Behavioural economics and decision theory give insight into what is happening inside the consumer's mind, therefore allowing us to isolate the key factors which can be tested in advance - so that we can identify the levers that make a difference to purchase, without having to expensively simulate the entire purchase environment. This allow marketers, product designers and retailers to put those levers in the optimal position before launch.

 

Inon is applying these experimental techniques to one of the toughest domains in market research: pricing. Founder and lead researcher Leigh Caldwell brings expertise in academic economics and psychology research to the market research world.

 

Pricing brings all the challenges of research to a peak. It's hard to get respondents to honestly give their opinions on pricing, because they treat research as a negotiation game. The typical respondent claims a low willingness-to-pay because they think it will reduce what the supplier ends up charging for the product. Even when respondents try to be honest, they are hopeless at accurately estimating the price they would really pay for a product. There are so many contextual factors including product positioning, novelty and learning effects, income effects, time-of-day and time-of-month, and substitution effects - none of which an untrained consumer knows how to take into account.

 

Econometric methods and conjoint analysis appear to be more scientific, but mostly rely on a "rational" view of human behaviour, assuming that people know and can state their preferences, and that those preferences are consistent and stable over time. One need only talk to any of the 6.9 billion consumers who do not come from the planet Vulcan to find out this is not true.

 

So what's our method? We use behavioural experiments - either face-to-face or online - to examine the real decision-making process of a consumer when faced with a product and price choice. Extensive research in behavioural economics has given us a general framework and cognitive model for consumer decisions. For any given product, we then set up experiments and run them on appropriate respondents to determine what price they would really pay, what factors would influence them to pay more, and what mix of product variations, sizes or channels will maximise revenue. We combine this with our research on pricing psychology and the different cognitive techniques which influence willingness-to-pay (see our new book, The Psychology Of Price, for more insight into this!) We then produce pricing recommendations to achieve the customer's strategy: maximum profit, market penetration, repeat purchase or other business goals.

 

After pricing, we expect to develop these tools to provide insight into wider aspects of consumer behaviour. Behavioural experiments provide a powerful third tool to enhance the effectiveness of both qual and quant research.

 

If we win, the $20,000 will enable us to further develop the online platform - turning it into a turnkey product which researchers and clients can use to determine the optimal price point for new products or services, in either the consumer or business-to-business world. If you vote for us, tell us (via @leighblue or leigh@inon.com) and we'll be happy to offer you free early access to the platform!

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Inon is a behavioural economics and pricing consultancy based in London. We work with agencies within the research industry as well as directly with commercial, government and charity clients.

 

Client-wise, we are especially strong in professional services, media and public services; in terms of methodology we bring together experimentation, face-to-face and online research according to client and project needs.

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