Anatomy of a Very Successful Trade-Off Analysis

Sound planning and great teamwork often result in a very positive outcome – this goes double for research projects.  Timing also helps, as well as luck.  However, luck is not reliable and timing is often intertwined with luck – such is life!   When making pricing decisions, it is therefore absolutely critical to do everything you can to identify your optimal level reliably.

Enter Trade-Off methodology.    Which product features to include?  Which price to maximize profit?   A broad variety of factors can be considered using Trade-Off analyses, allowing the marketer to then bring or re-configure a product to the marketplace with an optimized chance for success.

We describe the general process for trade-off in A High Tech Crystal Ball:

Essentially, trade-off analysis allows the marketer to throw all of his or her options, such as various product features, a range of prices and even pricing structures, brand names, packages and who knows what else, into a carefully constructed questionnaire. Respondents are then asked a series of product purchase interest questions. The data are subjected to some very advanced statistical procedures, which create mathematical models out the other end. These models allow us to simulate the marketplace in great detail and, if we do our jobs right, with surprising accuracy.

 So, about that teamwork thing.   In the early 2000s I was working for a well-known online survey software firm in the custom research division.  The head of product approached me, he had a lead:

 “Hey, my friend, (a CEO at one of the main online film processing companies), thinks he’s priced too low and leaving money on the table – what can we do?”

“Demand Elasticity,” I replied.   “We’ll take care of him. “  I could have said Trade-Off but I was trying to sound smart, demand elasticity being just one of the outputs of a complete trade off project.

A study proposal was accepted and we were off to the races.  Lucky for me we had a crack-statistician in-house.  The lead marketer for the client was a great guy and very good at his job, though new to Trade Off methodology.  Together, the three of us clicked and made our way carefully through the study design.  Herein lies the magic – the client, our stats guy and myself were in constant contact as the project evolved.  At one point the client asked for a number of features and levels that was too large overall – resulting in a model/matrix too unwieldy.  We whittled it down.   At another point the client asked:

“Why would I present a pricing option I would never put in the marketplace”?

 We explained – the ranges for price in the survey should be just a little below and above the outside of your envelope.  That way we can interpolate accurately, AND, you never have to look to the results and wish you had gone just a little higher or lower in, for example, price.

 We found that the client had indeed priced themselves into a low-level corner.  In addition to the other main online film processing competitors, (Yes, this most certainly pre-dates Instagram!), there was Wal-Mart and Costco – where a large proportion of America developed their family pics, and the client’s price was below those monolith’s prices for the same service.

We looked at the results, ran numerous scenarios with the model and produced the key visual, a chart where demand and price intersected – exactly $1.00 above the client’s current main price.

The rest is history.  The client raised price by $1.00 per transaction, demand continued to rise and notably more revenue was generated.  The client was purchased by a large Silicon Valley entity, (with “H” and ‘P” in the name), and the CEO went on to Sand Hill Road to join an elite VC.  Years later that same former CEO referred to the project as the one that defined the low-price point for the category, and indeed it had.

Trade off methodology can be very powerful – especially when the project team gets on the same page early with clear objectives and the willingness to reach a common goal – actionable information that will describe, as precisely as possible, what to do to maximize the bottom line.

For more detail on Trade Off and Conjoint execution – check out the following publications here at Macroinc.com:

A High Tech Crystal Ball

A User’s Guide to Conjoint Analysis