Just recently, The Wall Street Journal featured three articles about grocery prices. Apparently, Nestlé, maker of Kit Kat and Purina, is offering discount promotions to lure disgruntled shoppers back to its portfolio of products. Along with this news, it seems as if the FTC is just waking up to the fact that marketers tend to use store checks and other information-acquiring activities to competitively adjust prices. And, P&G, maker of Tide, Crest, Swiffer and more, announced that there will be no backing down from high prices.
The situation is clear. Over the past four years, prices for everything, not merely groceries, have risen to heights that are moving shoppers to stores such as Aldi and Walmart. This is not surprising. Public statements from C-suite executives since the pandemic began have been about preserving margins, sending the cost of goods such as toilet paper into the stratosphere.
The CFOs and their C-suite partners should know better.
Sooner rather than later, customers reach an indifference point. Think of the indifference point as a price at which your customers start to think that it is better to switch brands because the expected experience will probably be the same as your brand but at a lower price. This indifference point affects brand-business loyalty and brand-business switching. Loyal customers are less price sensitive than deal loyal customers or infrequent customers.
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But, even for loyal customers, there is a price point when the loyal customer’s favorite brand has raised the price so high that the loyal customer becomes indifferent and now considers purchasing the same type of product from a competitor. Knowing the indifference point is a necessity in strategic pricing. Data show that loyal customers generally hit that indifference point at about a 10% difference between the favorite brand-business and their second choice.
One way to keep track of prices is regularly conducting price elasticity research. During and directly after the pandemic, companies said these price elasticity studies were ongoing. But, the actions companies took indicated that, if price elasticity research were being conducted, the results were being ignored.
Another critical piece of pricing research is conjoint analysis aka trade-off analysis or discrete choice analysis. Conjoint analysis is a statistical technique measuring the relative importance to customers of different product or service attributes. Conjoint studies help brands make data-driven decisions about products, pricing, and positioning; its part of our research offering at The Blake Project.
Conjoint analysis recognizes the complexities of decision-making regarding purchases. Customers are not asked to make decisions in a one-off situation, such as “Do you prefer this selection at this price?” Instead, they are asked to make relative decisions: “Do you choose selection A at this price or selection B at this price?” And, “Do you prefer selection A or prefer nothing?”
Conjoint analysis provides information on customer preferences by simulating IRL choices. What is the optimal combination of features and prices that create value? And, like price elasticity studies, analyses of conjoint data provide some information on price sensitivity. This means that there will be direction on which items at which prices are close to inelastic. That is, will there be wiggle room on raising the price or are customers not flexible (not elastic) when it comes to the price of this item.
Because conjoint analysis simulates real-world options, the decisions that respondents make during the research reflect both economic and psychological elements of decision-making. It is not realistic to perceive purchase decision-making as something that can be influenced solely by price alone. Our psyche gets in the way.
Economist Richard Thaler won a Nobel Prize for his contributions connecting economic and psychological analyses regarding decision-making. Professor Thaler noted the importance of an internal reference price on decision-making because customers integrate the current experience (what it costs now) with prior outcomes (what is used to cost).
Internal reference price is the customer’s perceived expected, just, fair price. Marketers must keep top-of-mind the fact that a customer’s internal reference price is the standard price against which customers evaluate the actual price of the product or service considered for purchase. Most people have a good idea of what a product or service costs especially because they may have purchased this product or service before. By tampering with customers’ internal reference prices, brand-businesses have meddled in a primal driver of customer value perceptions upsetting customers’ sense of normalcy. The long-running daytime show, The Price is Right, counts on contestants having a keen internal reference price for assorted goods.
Professor Thaler refers to price as acquisition value. Acquisition value is the actual money you spend to acquire a product or service. And, there is the transaction value. This is the customer-perceived worth attached to the product or service.
If the internal reference price is the same as the acquisition price, then the value of the transaction is zero. If the acquisition price is lower than the internal reference price, then the customer perceives a good value. If the acquisition price is higher than the internal reference price, the customer perceives poor value.
Understanding the value of your product or service is essential.
Understanding the value of the product or service is part of the learning from a conjoint study.
Leveraging Conjoint Analysis: KFC Case Study
A great example of a conjoint study is one I was part of as a brand consultant for KFC in 2011. At the time, KFC corporate created a $10 bucket of 10 pieces of chicken, “the ten-buck-bucket.” Franchisees were concerned that the ten-buck-bucket was not performing. The ten-buck-bucket was a financial drain for franchisee profitability. The ten-buck-bucket was a discount. This discount was believed to be damaging the KFC brand. The ten-buck-bucket was a promotion meant to drive traffic – transactions – at any cost. But, not all transactions are equally valuable. The ten-buck-bucket attracted deal-oriented customers who were only coming for the deal – not all customers are equally valuable. In fact, KFC data indicated that “Most $10 bucket buyers would not have even come to KFC without the offer.”
To generate additional, more loyal customer traffic, franchisees thought that bringing back a customer favorite bucket, a $20+ meal with chicken pieces, biscuits, gravy, sides and a dessert would be as compelling as it had been in the past. This was not the case. The $20+ dinner meal was not selling.
Franchisees understood that something had to happen ASAP. They understood that they needed more specific information to make more informed decisions in advance of putting an item on the menu board. And understood that they needed a thoughtful discipline for pricing and value. Franchisees agreed with us that a conjoint study would provide customer-perceived fair price information for meal bundles. The franchisees’ goal was to increase their odds of success. There was a real hue and cry for pricing strategies. The franchisees wanted to move away from the corporate-dictated deal-of-the-month strategy.
For KFC, the conjoint study was a tool to show which features have the highest appeal for the price. At KFC, customers buy bundles of features; customers buy a meal, not a series of disconnected items. The conjoint study provided data on how customers would respond to various combinations of items with price as one of the variables. Respondents viewed about a dozen screens with different items at a price. There was also a screen for None (of these). The conjoint study provided franchisees with the relative importance of each variable. Desserts and beverages did not define the meal, these are accessories, so these were not included.
The first key learning from the conjoint study was that there was a customer-perceived optimal value meal. The optimal bundle was a $15 meal with 8 pieces of chicken, 2 sides and 4 biscuits. What was fascinating, and critical, was that over half of the respondents preferred the optimal $15 meal to the $10 ten-piece bucket. In fact, the conjoint data showed that if the choice were between the $10 ten-piece bucket and nothing, more respondents chose nothing rather than the $10 ten-piece bucket. So much for the ten-buck-bucket being a great traffic driver!
The second key learning from the conjoint study was that as the number of people for a meal increased, the number of pieces of chicken became the more important decision driver. If a customer were buying for 3 people, price was the highest priority followed by pieces of chicken. But, as the number of people dining increased from 3 to 4 to 5 people, number of pieces of chicken was a more important decision-making criterion.
The third key learning, the research showed that as price increased, preference for the optimal 8-piece, 2 sides, 4 biscuits meal declined. The decline was noticeable at $16, $17 and by 10 percentage points at $18. In other words, $15 was optimal for this bundle. Charge more for this bundle at your peril. Over $18 would be very risky territory.
The conjoint analysis indicated that as the price increased, relative demand and relative profitability declined. This is standard econ learning. But, for KFC, if the price were to go to $18, there would be a steep decline in demand.
And, this was part of the problem with the old favorite $20+ large meal. Over time, KFC’s image and reputation changed. Competition changed. The curves from analyses of the conjoint data showed that the KFC brand’s value perception changed. The change was so steep that KFC’s price elasticity altered.
In 2011, customers did not perceive that KFC’s $20+ offering was a value that was worth the price. Five years earlier, it was a different story: the KFC brand could easily carry a $20+ price for the large family meal. Over time, as KFC’s robustness declined, KFC’s price sensitivity increased. KFC’s perceived brand value diminished in the eyes of its customers. Connecting the dots, it was clear that revitalizing the KFC brand experience would hopefully generate more loyal users who would be more profitable, generating more revenues.
Understanding the information of meal bundles at optimal value to customers changed franchisees’ approach to price management and strategy. And, this information altered the way KFC corporate looked at traffic-driving discounts.
High prices only work if the customer perceives the brand to be worth the cost. If price becomes too high relative to the total brand experience, damaging brand trust, then the brand is not perceived to be good value for the money. Vice versa, the more a brand offers discounts, the more it degrades and becomes a magnet for deal-loyal customers who love the deal rather than the brand.
It is important to know that price and value are two different ideas. Having data to show these differences is critical. Conjoint analysis is a tool that marketers should use to determine what optimal value looks like to users.
You cannot create sustainable value for your shareholders until you create enduring value for your customers. All cash flow has only one source—a customer exchanging money for your offer. For a sustainable increase in shareholder value, brand businesses must create enduring customer value.
Contributed to Branding Strategy Insider by: Joan Kiddon, Partner, The Blake Project, Author of The Paradox Planet: Creating Brand Experiences For The Age Of I
At The Blake Project, we help clients worldwide, in all stages of development, define or redefine and articulate what makes them competitive at critical moments of change, including leveraging conjoint analysis to understand what propels their businesses and brands forward. Please email us to learn how we can help you compete differently.
Branding Strategy Insider is a service of The Blake Project: A strategic brand consultancy specializing in Brand Research, Brand Strategy, Brand Growth and Brand Education
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