Pricing Propheteer: Debunking a market research myth

As all leading companies know, when it comes to customers, what they say they will do (in market research), and what they actually do, are two completely different things. All too often, I see revenue forecasts or sales projections that fall into this trap. This week was no exception.

Apple recently announced the launch of the iPad mini. The next day I stumbled across some research (obviously completed in record time!) that suggested that 14% of respondents ‘would definitely buy’ the product, and 32% said they ‘probably would’. Add the two numbers together and you’ve got 46% take-up. Fantastic!

The Urban and Hauser scale tells us that of the 14% who said they would definitely buy, you can be reasonably sure that 90% of them will actually buy, while 40% of those who said they ‘probably would’ will actually make a purchase. Do the sums and your take-up forecast becomes 25.4%.

A few days ago I was discussing with a pricing manager the importance of having a decoy product. When asked if we could model the impact of a decoy product, I remembered some forecasts made in an experiment conducted by the behavioural economist, Dan Ariely.

In his talk at the London School of Economics in March 2008 (which is also described in his book, Predictably Irrational), professor Ariely described an experiment where 16% of participants would take up a digital-only subscription to The Economist at $US59, none would take up a print only subscription (the decoy) priced at $US125, but 84% would take up a print and digital subscription at $US125.

When the experiment was repeated without the decoy, the 16% became 68% and the 84% became 32%. A quick calculation, assuming one million subscribers at the aforementioned prices, reveals that revenue would be nearly 43% higher with the decoy product than without.

Following a quick search on Google, I discovered that The Economist (which doesn’t appear to report subscriber numbers) had digital-only circulation of 100,000, out of a total circulation of 1,574,803. This implies a digital-only circulation of 6.35% – significantly lower than professor Ariely’s number. Could this be another example of market research not catering for the difference between what customers say they will do, and what they actually do?

In a previous post (Are you Pricing Like Dennis Denuto?), I talked about why scenario analysis was one of the pricing traps companies often fall into (liking a set of number from one scenario without reality-checking the assumptions the scenario is built upon). Leading companies no longer have an excuse for falling into this trap awith their revenue or sales volume forecasts.