Price optimisation in convenience retail: a price sensitivity measurement
A leading convenience store retailer turned to PMR to assist with optimising pricing in its stores. We conducted a large study that measured consumer price perceptions across three store chains.
Objective of project
Making sure prices are optimally set is vital for retailers, especially when it comes to products with a long life cycle. Most of the things that a typical convenience store offers are of this kind. It was important for our client to find out about people’s reactions to price changes.
Project details
The price optimisation was based on actual customer behaviour. It was also verified using the price sensitivity measurement (PSM) model. Price sensitivity measurement are an important part of managing a product or service. They allow companies to set the prices of new products – or modify existing prices – in such a way as to maximise sales and profits.
Picking the right research technique is vital when testing prices. A key consideration is whether the product is already on the market, and what the competitive environment is. We make our suggestions, but the final choice is always made together with the client, to ensure the best possible data are collected to support decision-making.
In this case, a technique called price sensitivity measurement (PSM) was employed as the primary analytical framework. It is about establishing the range of acceptable prices for a product and – within that range – the optimum price point. As part of the project, we interviewed 1,000 consumers in selected retail stores belonging to three chains, using the paper-and-pencil interviewing (PAPI) method. The respondents were asked four questions about each of the products we were interested in:
- At what price would you begin to think this product is too expensive to consider buying it?
- At what price would you begin to think this product is too cheap to consider buying it?
- At what price would you think this product is expensive, but would still consider buying it?
- At what price would you consider this product a bargain?
Project results
The PMR team delivered a report that contained all the relevant price-perception information about each of the products, including:
- Indifference Price Point (IPP)
- Optimum Price Point (OPP)
- Point of Marginal Cheapness (PMC)
- Point of Marginal Expensiveness (PME)
- Range of Acceptable Pricing (RAI)
The minimum and maximum prices that customers would accept were calculated for each product. This is particularly important for convenience stores, which by definition charge a premium for convenient location and opening hours. A socio-demographic dimension was incorporated into the findings, too. Armed with our research findings and recommendations, the client was able to verify and optimise price points in its chains, depending on location types.
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Market Analysis Director