Of the traditional four "P's" of marketing, pricing is the most often overlooked in constructing a successful marketing strategy. Many marketing organizations devote extensive resources to product, promotion, and distribution efforts, leaving pricing as a last-minute decision, all too often made for the wrong reasons or by the wrong people, or without adequate consideration and analysis.

However, an intelligent, well-conceived pricing strategy-driven by insightful pricing research is often the key to achieving profitability for even the most brilliant marketing efforts. Too often, organizations set their prices in overly simplistic ways, either by simply matching or slightly undercutting the competition's prices, or by applying a simple cost-plus formula to manufacturing costs. Even when they do employ pricing research to take account of customers' price sensitivity and willingness to pay, they may simply set prices in such a way to meet a pre-determined market share objective.

The key to successful price determination is understanding your customers' elasticity of demand. Technically, elasticity of demand is the amount of change in demand for your product or service that is associated with a given change in its price. In practical terms, understanding elasticity means understanding the relationship between prices, sales volume, revenue, and profit. While lower prices generally lead to greater sales volume, they also mean less money with each sale that is made, and potentially lower overall revenue and profitability.

The point at which demand or volume is maximized is often not the same as the point at which revenue is maximized.

A successful pricing strategy must be driven by what we at Burke call the "Three C's" of pricing strategy: Customers, Competitors, and Costs.

Customers' interest in purchasing your product or service at different prices must form the foundation of any pricing strategy, because without customers buying your product, nothing else matters. Talking to customers and potential customers, through survey research, is a necessary ingredient to understanding elasticity of demand. Skillfully-conducted marketing research can determine not only customers' current price expectations, but the true value of a product to customers, what determines that value, and how it can be changed.

If the other components of your marketing program have successfully differentiated your product as having superior value to your customers, you want a pricing strategy which captures that value for your bottom line. Thus pricing strategies must be set in the context of your entire marketing plan.

Competitors and the prices they charge must be considered as well, in order to understand elasticity of demand. Elasticity and demand for your product are not static, but change whenever any element of the marketplace-such as a competitor's price--changes. Competitors will respond to any pricing action you implement. You need a pricing model and strategy that takes account of and even predicts these responses, in order to avoid descending into a price war or a commodity market, which benefits no one.

Costs of manufacture and delivery must of course be covered by the prices you charge. However, per-unit costs change with volume since there is a substantial fixed-cost component in almost any business. Your pricing strategy should include financial models that are driven by elasticity of demand.

Burke offers a series of tools for pricing research. These tools produce models of elasticity of demand which simultaneously take into account Customers, Competitors and Costs.

PRIMAR^® is a proprietary price modeling procedure offered by Burke that is used to estimate share of consumer preference and revenue for different competitors at different prices. Burke uses a creative data-collection technique to obtain rank order preferences of brand-price combinations from consumers. Our technique is adaptable to many methodologies including in-person interviewing, telephone-mail combinations, kiosk, and Internet-based surveys. PRIMAR is also adaptable to almost any product category, and has been used successfully for products as far ranging as automobiles, industrial chemicals, and salty snacks.

The analysis Burke employs with PRIMAR data is creative and unique as well. In the fifteen-plus years that we have been using the PRIMAR approach, we have found that price elasticity functions often contain interesting non-linearities, including thresholds, greater elasticity at higher prices than lower, and interactions between brands and prices. For instance, consumers might prefer a particular brand of orange juice enough to pay 50 cents more for it than a competitive product. They may consistently choose it over the cheaper competitor as long as the 50-cent differential is maintained, even as overall prices in the market go up or down. However, there may be some upper threshold, perhaps $5.00, which consumers simply consider too high to pay for orange juice. Thus when the prices of the two products are $5.25 and $4.75, preference may shift to the lower-priced product.

These types of non-linearities and interactions represent "error" in most traditional linear models of price sensitivity, such as those employed with conjoint techniques and in analysis of scanner data. This "error" is considered a bad thing, (it drives down "r-squared" values), and is "smoothed away" by the models to produce well-behaved demand functions. In contrast, PRIMAR contains no underlying linear model (and has no "r-squared" value). It is designed expressly to detect and reproduce these very real types of patterns in elasticity functions.

PRIMAR can be much more than a survey research and analysis technique. We often combine information such as current market shares, product distribution strategies, and our clients' manufacturing cost information-information from sources other than customer surveys-with the PRIMAR survey data to create truly sophisticated pricing tools.

These tools, provided to our clients in the form of easy-to-use software-based simulators, model pricing scenarios for an entire set of competitive products or services. They show how pricing inputs are related to important outputs such as market shares, revenue, and profit levels. Rather than simply providing consumer survey data about pricing to our clients, we form a consultative relationship with them, helping them to form profitable pricing strategies based on information from all three "C's", just one of which (consumers) is obtained through survey research.

The simulators produced in PRIMAR studies can answer a series of vital types of pricing questions relating to customers, competitors, and costs. Below is a list of the types of questions our clients have used PRIMAR simulators to answer:

• At what price is my product's market share maximized?
• At what price is my product's revenue maximized?
• At what price is my product's profit margin maximized?
• If my product's share increases due to a price reduction, from which competitors does it gain the most share?
• What will happen to my share/revenue/profit if one or more competitors match my price reduction? if they exceed it?
• To which competitors is my product most vulnerable to losing share, should that competitor initiate a unilateral price reduction?

PricePoint is a proprietary modeling and analysis procedure from Burke that is generally recommended for revolutionary, new-to-the-world products that do not yet have an established set of competitors. Often, these products are technological breakthroughs in industries such as electronics, communications, or pharmaceuticals, but PricePoint is not limited to these types of products.

Like PRIMAR, the primary output of a PricePoint study is elasticity of demand information that leads to the optimization of demand, revenue, and/or profit.

However, PricePoint is recommended for products which are still early in the product-development cycle, when there is not even enough pricing knowledge available to guide what range of prices should be tested in research. The final product formulation, features, or benefits may not yet have been determined, so it is difficult to provide prototypes for consumer research. However, some initial demand information is often necessary, to establish tentative pricing and determine whether the product is viable and whether to move forward with its development. In fact, knowing the price at which it may ultimately be most profitable may inform that product development, guiding just how many features and benefits can be included. PricePoint can be accurately thought of as a new-product concept test conducted at an infinite number of different prices.

Because PricePoint is designed for use early in product development, we recognize research budgets may be limited. PricePoint is quick and relatively inexpensive to conduct. The typical research questioning sequence consists of only five or six questions. For this reason, PricePoint can often be conducted for multiple new product ideas within a single survey, or PricePoint can be "piggy-backed" onto other research efforts with objectives unrelated to pricing or demand estimation.

In addition to PRIMAR and PricePoint, Burke also offers other customized approaches to conducting marketing research with pricing objectives. Depending on the nature of the product category and the research questions, we may recommend a preference structure modeling approach, generally a discrete choice model, such as CHOICES™.

As a custom research firm, it is Burke's philosophy never to push our clients into a "black box" or any one approach. We seldom employ exactly the same technique in exactly the same way twice. As with all of Burke's research tools, we believe in choosing the right product for the situation, or customizing or inventing one just for you.

A Fortune 100 manufacturer of chemical products was faced with a pending price decrease by a major competitive brand. Brand management's first inclination was to match the competitor's new lower prices. Burke was retained to conduct research and build a model to predict the likely changes in market share among major brands under varying price scenarios. Burke applied its PRIMAR^® pricing model. Burke's final recommendation was for the client to hold to their current price because PRIMAR predicted minimal loss in share if the competitor decreased price. The client followed the recommendation, and one year later held almost exactly the same share of the market, but had saved millions of dollars in what would have otherwise been forgone profit.

A leading communications company wanted to know consumer demand for a video telephone service across a range of prices if offered at various levels of picture quality.

By using PricePoint, from Burke, the client discovered that even though the concept of a video telephone service was welcomed, most consumers would not tolerate a picture with inferior quality at any price.

With PricePoint, Burke was able to provide critical product guidance by showing that consumers were willing to wait until such a service could be offered at an acceptable level of picture quality even if it meant paying higher prices.