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Exploring pricing
Pricing scope, sensitivity and the elasticity of demand
All organisations, cultural attractions and the wider visitor attraction sector included, have an increasing need to understand price sensitivity in the modern environment. A clear and competitive pricing strategy is a vital component of marketing and will inform clarity in customer communications and contribute to optimization of revenues.
In this handy guide from A Different View's Head of Research, Geoffrey Dixon, we shed light on the importance of price elasticity, the necessity of testing, and the impact it can have in real life scenarios.
Evalutating pricing opportunities
• Pricing scope: e.g. what is the field of opportunity? This will usually be a mix of economic modelling and analysis of the competitive environment to arrive at a range of price points to test in primary research
• Price sensitivity/price elasticity of demand: e.g. what is the impact of lowering and increasing prices on demand and revenues and the potential impacts of dynamic pricing strategies
• Targeting prices: e.g. how can we use price differentiation to increase visits on less popular days or to provide premium opportunities and experiences
• Price bundling: e.g. selling a season of visits or grouped activities
• Memberships/subscriptions pricing e.g. opportunities for incentivizing customers to become members/subscribers.
A Different View price testing
Typically, we will explore pricing scope, sensitivity/elasticity through primary research with target customers.
Price sensitivity or ‘the price elasticity of demand’ analysis is very important and will inform management of the impact of increasing or reducing prices. For some attractions, an increase in entry cost of say 10% may have little or no effect on demand; for others it could be a dangerous maneuver; reducing visitors and reducing revenues.
In some cases, reducing prices may reduce revenue and in others cases reducing prices may increase revenues by increasing the number of visitors by such a level to compensate. It is important to know the likely impact before pricing decisions are implemented. The assumption is made that by reducing the price more people will come but it does not necessarily mean more revenue or profit, nor, of course, that more people will come.
Formative pricing studies
When we are conducting formative research for the development of a new attraction or product our pricing research will normally contribute to feasibility studies that can justify planned investments. Often this will be done with a range of pricing options that have been developed through secondary data analysis and analysis of the competitive space. We also initiate pricing scope research using qualitative research focus groups or depth interviews.
Summative pricing studies
In addition to pricing analysis that is contributing to project feasibility, we also review current pricing policies and opportunities, usually as a component in a summative evaluation of an established or developing attraction. In this way we can identify revenue development opportunities or identify the potential impact of price reductions in increasing visitors or dealing with a competitive space issue.
Price testing research
Once the ‘pricing scope’ has been established we will normally conduct pricing tests through quantitative research, usually e-surveys, and depending on the complexity of the environment we are working in we will sometimes use Alpha, Beta and Gamma testing of different price ranges and different scales of options within them.
Case study
In the example below, we can see how responsive potential customers are to different Child price points. The illustration is fictitious but similar to a pricing project for an attraction in the Kingdom of Saudi Arabia we conducted in 2018.
The key elements of the pricing analysis were:
• Age of respondents
• Gender of respondents
• Monthly salary of respondents
• Location of the respondents focusing on Riyadh, Jeddah and elsewhere
First of all, we can look at the overall reaction to the child price points: In the chart below our target price was SAR56 a price point derived from detailed competitive pricing and economics analysis and in most cases was shown to be the price point that optimized likely revenues. The price of entry for Children 6 and over for the four price points were inelastic in that as the price point increased or decreased from the ‘target’ price the revenue did not increase above that achieved at SAR56.
When we look at the price points by the age of the respondents we can see variations.
With the exception of the ‘23 and under’ group the target price of SAR56 is the optimum price point and the price is inelastic within the boundaries of the test. The ‘23 and under’ segment revenue optimizes at SAR50 and so the price demand relationship for this segment is elastic between the target price points of SAR56 and SAR50. The Price Elasticity of Demand (PED) is -1.65.
When we look at the price points by monthly take home salary we can see remarkable similarity with the exception of the lowest salary level.
With the exception of the ‘up to SAR6,000 per month’ salary segment the target price is the optimum price point producing most revenue and the price is inelastic within the boundaries of the test. The ‘up to SAR6,000 per month’ segment, revenue optimizes at SAR50 and so the price demand relationship for this segment is elastic between the target price point of SAR56 and SAR50. The PED is -1.16. in this case.
Finally, we can look at the impact of different pricing points based on the location of the respondents, an important consideration in Saudi Arabia.
With the exception of the ‘other KSA segment’, the target price is the optimum price point producing the most revenue and the price is inelastic within the boundaries of the test.
For the ‘other KSA segment’ revenue optimizes at SAR50 and so the price to demand relationship for this segment is elastic between the target price point of SAR56 and SAR50. The PED is -1.09.
Bucket price testing
In the example, we tested four price points but in fact the lowest of SAR35 was not realistic and would not have been economically viable. A low ‘bucket price’ is often added to a survey because in some markets we have no idea if the concept would be acceptable to a the projected audience. If the concept is rejected at a very low price point we would know that it would not work at all. This pricing research example was based on a project feasibility study research and the expectation would be that another similar pricing study would be undertaken before the opening to examine contemporary pricing sensitivity and elasticity to arrive at optimized price points.
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