GfK HealthCare June 2011
	Getting the Price Right (Part I): Willingness-to-Pay Research Using Direct Price Questioning Techniques By Marco Rauland, Ph.D. Head of Pricing & Market Access There is no question: Conjoint/discrete choice methodologies are the gold standard in pricing/willingness-to-pay research since the presentation of several products with different attributes (where just one is price) most realistically reflects the real-life choice situation. Furthermore, as multi-attribute trade-off exercises do not exclusively focus on price (with the exception of pure brand/price trade-offs), respondents are not aware that the research is primarily designed to establish a price and thus they are not “playing a price game” when conducting the choice tasks. Nevertheless, there are situations where a conjoint/discrete choice design may not be feasible (budget limitations, time constraints, e.g., for a due-diligence; too complex for a specific target group, e.g., patients). In these instances and, ideally, to flank a multi-attribute trade-off exercise, direct price questioning techniques are used to assess the pricing opportunities of a product. (The word “direct” refers to the fact that the related questions are focusing on price exclusively.) In principle there are two ways to ask directly about the price acceptance of a product: With the aid of predefined price points or without prestated prices. This article will deal with the price questioning techniques using predefined price points. Part II of this article, which will appear in the August issue of Pipeline, will discuss the methodologies without any aid on price points. Some general aspects to be considered A general issue with willingness-to-pay/pricing research is that in some indications respondents are not aware of the actual prices of the competitive products on the market. This, of course, can have a major impact on the price acceptance for the test product. Therefore, it is imperative to check price awareness and perception in the target indication either in a qualitative prephase and/or in the course of the quantitative pricing survey. This information on price awareness and price perception serves as a first and very simple indicator for price sensitivity in the target indication: The less respondents know the (correct) prices, the lower is the price sensitivity. In case of a low price awareness, a list with the actual prices of the competitive products can be presented prior to the pricing opportunity assessment. However, one downside of creating such price transparency is that respondents become aware of the therapy costs, which you may want to avoid in markets with a low price awareness. All direct price questioning techniques are designed to test willingness-to-pay for a fixed product profile. Hence, it is not possible to identify the product features that have a positive impact on price acceptance as with a multi-attribute trade-off design. Furthermore, these methodologies normally do not offer a choice between different products and, thus, the competitive environment is only considered implicitly. In addition, when presenting multiple prices there are some potential effects that can bias the results: The order the prices are presented The number of prices presented The range of the prices presented Several studies have shown that a higher price acceptance is observed when prices are presented in a descending as opposed to ascending order. It has been suggested that when prices are presented in descending order, the initial higher price serves as an anchor point that enhances the perception of the other prices, and as a result, the average price respondents are willing to pay is higher than if the list was presented in ascending order. This “order effect” can be limited by a randomized presentation of the prices. Other validation research indicates that with multiple price testing, respondents who are shown a higher price are more likely to pick a lower price than those who are just shown the lower price (reference price effect). In addition, the higher the number of test prices the more price-sensitive the respondents can become and finally, a large difference between the highest and lowest price can negatively affect the perception of value1. The very simple questions Independent of the specific methodology, the question(s) asked to assess willingness-to-pay using predefined price points are very simple and the same for all techniques. The only distinction is the wording for different target groups: Patients: “Would you buy this product for a price of X?” or alternatively: “How likely would you buy this product at a price of X?” Physicians: “Would you prescribe the product at a price of X?” “To how many of your patients?” or alternatively: “How likely would you prescribe this product at a price of X?” “To how many of your patients?” Payer: “Would you reimburse/list the product at price of X?” “With/without restrictions?” or alternatively: “How likely would you reimburse/list the product at price of X?” “With/without restrictions?” Technique 1: Monadic Price Testing Apart from conjoint methodologies, one approach that hides from respondents the fact that the research is about establishing a price is monadic price testing. In a monadic design the sample is split into different cells (as many as price points need to be tested) and respondents within one cell only see one price as part of the product description. Another advantage of the monadic price testing is that it avoids the previously discussed potential bias due to presentation of multiple prices. On the other hand, it is obvious that a monadic approach needs a comparably large sample size, which increases with the price points to be tested and can therefore make a monadic study approach quite expensive. Thus, monadic testing is the method of choice in countries where obtaining the required sample size is not an issue and/or the cost per interview is modest, e.g., for patient willingness-to-pay research in emerging markets. Monadic Price Testing Strengths A strict monadic price test hides the fact that pricing is being tested No order, no number of prices, no price range effects Simple to write and administer Weaknesses Monadic price tests require a large sample size with the associated cost implication With some medical specialties it is not possible to reach the required sample size Competitive environment is only considered implicitly Technique 2: Gabor-Granger Approach If budget is limited or the target group is relatively small, quite often Gabor-Granger price testing is used instead of a monadic design. In a Gabor-Granger design, each respondent is shown multiple prices after the product description. In contrast to a monadic approach, the respondents are asked about their willingness-to-pay for each of the test prices. To (partly) avoid the potential biases of testing multiple price points with one respondent, the prices in a Gabor-Granger exercise are presented in a randomized order. Furthermore, the tested price points should not be presented altogether. After completion of the Gabor-Granger exercise, a potential bias due to the questioning of multiple price points with one respondent should be analyzed. As an example, in case four price points have been tested with 100 respondents in a Gabor-Granger exercise, 25 respondents have seen one of these price points at the first place, which is exactly the same as in a monadic approach. By simply comparing the willingness-to-pay for the price if questioned at first or other places, it can be verified if the testing of several price points has caused a bias. Gabor-Granger Strengths Needs a comparably lower sample size than monadic testing and thus is less costly Simple to write and administer Weaknesses Respondents are aware of the fact that the interviewer wants to establish a price after the first price point has been presented, causing a risk of bias Potential reference price, number of prices and price range effect Competitive environment is only considered implicitly Technique 3: Price-Laddering The price-laddering approach is a routed questioning of willingness-to-pay for multiple predefined price points. Using the price-ladder approach, at first the price that lies in the middle of the test prices is presented to the respondent, and the respondent is asked: “Would you buy this product for the price of X?” If the respondent is willing to buy the product for this price, the next higher price is presented and the willingness-to-pay is asked again. This is reiterated until the highest price point has been tested or the respondent has stated that he/she won’t buy the product for a stated price point (see Chart 1 below). Accordingly – but in the other direction – the questioning is routed if the respondent states he/she won’t buy the product for the “middle” starting price. In this case, the next lower price point below the starting price is shown and willingness-to-pay is asked again. If the respondent is willing to buy the product for this (lower) price, the exercise is terminated. If the respondent won’t buy the product for this price, the next lower price point is presented. The questioning is terminated when the respondent states that he/she would buy the product for a presented price or the lowest price point has been reached. Using this approach it is possible to determine the individual, maximum price acceptance for each respondent. The price-laddering technique is an alternative to the Gabor-Granger test with the advantage that a lower number of prices needs to be tested (with still the opportunity to get information on willingness-to-pay for all price points of interest). In addition, a potential bias due to a potential reference price effect is limited. Chart 1: Illustrative example of the price-laddering questioning technique Price-Laddering Strengths Needs a comparably lower sample size than monadic testing and thus is less costly More price points can be tested as with Gabor-Granger /monadic approaches Limited or no reference price effect Weaknesses Respondents are aware of the fact that the interviewer wants to establish a price after the first price point has been presented, causing a risk of bias Potential price range effect (if too many prices are tested), potential order effect Competitive environment is only considered implicitly The outcome of all discussed willingness-to-pay methodologies is a price-demand function and a revenue/profit curve that helps in determining the optimal price for the test product. Direct price questioning techniques are an essential component of pricing research, but before choosing such a methodology one should be aware of the strengths and weaknesses of the different methodologies in order to decide which technique to use and when to use it. Watch for Part II of this article, covering willingness-to-pay research using direct price questioning techniques without using predefined prices, in the August issue of Pipeline. References: Psychological aspects of price: An empirical test of order and range effect. Marketing Bulletin 14, Research note 1 (2003). Want to learn more on this topic? Please contact:

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