TRC

By Rajan Sambandam

Which should I use, a Monadic design or a Price Laddering technique?

It’s a practical question that comes up often in pricing research. With Monadic price testing respondents are shown (or read) a single concept, with a single price, and asked about their intentions to purchase or some similar attitude. When more prices need to be measured, more cells are added.

The Price Laddering technique is different. Respondents are initially exposed to a single concept with a single price and intention to purchase is measured, as in a Monadic design approach. From there the two techniques diverge. Those who express lower than desired purchase intent are asked to reconsider their view at successively lower prices. The number of levels tested can be in theory unlimited, but typically the process does not extend beyond three price points.

Monadic designs are generally accepted as the purest means of measuring price sensitivity, as each respondent sees only one price and is not given the opportunity to reevaluate his or her purchase interest. When more prices need to be measured, however, more sample cells must be added. Each new cell must be of sufficient size so that price-demand curves are not muddied by margin of error concerns. Practically, then, it can be difficult to fund and execute Monadic studies when several price points are in play.

Price Laddering offers an obvious practical advantage over Monadic with its smaller sample size requirements, but what about the quality of responses? Are we getting biased answers since the respondent has already been exposed to a price before the second price is displayed? If there were a bias, in which direction would it be (i.e.) would respondents to a laddering task exhibit a higher or a lower take rate?

A test to examine differences between the two techniques

Research on reference prices indicates that people who are shown a higher (reference) price are more likely to pick a lower price than those who are just shown the lower price. For example when a toaster is displayed by itself, the number of people who would buy it is lower than when it is displayed next to a more expensive toaster. If a similar phenomenon is operating in the Price Laddering scenario, then a similar overestimation effect may be expected. To test this idea we conducted two experiments.

The product used in the first experiment was a cell phone concept description and in the second case was a credit card concept description. The cell phone example used three price levels ($139.99, $119.99, $99.99). The credit card example used three levels of annual fee ($50, $25, $0).

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