General Retail Business Issues/Conjoint/Discrete Choice Analysis and pricing
QUESTION: Good Day Dr. Dion,
My name is Mark Mancini. My question for you is regarding a study I am conducting on the effect that an alternation in price will have on sales volume in a B2B manufacturer --> retailer scenario.
Specifically, the scenario is such:
A large consumer food brand manufacturer would like to understand how a change in tax burden on the sale of its products to retailers will affect sales volume. This is to say they would like to know by how much they can raise the price of a good to accommodate for the increase in sales tax without sacrificing internal margin.
My question is how to design a proper experiment to determine this. I am assuming that the correct model to choose would be a Discrete Choice Analysis being that I am only analyzing one attribute, price, and how changes in this attribute will affect sales behavior. Is the experiment as simple as selecting a range of prices per product and determining the maximum threshold that a retailer buyer would be willing to pay? What would be the overarching steps one would take to design such a study? Is this purely a price sensibility analysis? Is there a more structure approach to this scenario?
Any help you could provide would be very much appreciated.
Thank you in advance,
It is not that simple. The attribute that you are measuring in a retail environment has more components. For example the supplier can increase wholesale price while also increasing co-op advertising allowances, shipping charges, payment terms and many other components of the deal that could mitigate the price increase at a lesser consequence to the suppliers margins. And what buyers say they will do in a discrete choice analysis does not always come true in the real world as there are many other factors (strength of brand, consumer loyalty, competition) and as well does this hypothetical tax burden only effect this company or does it also impact the competition? This could also be time to sacrifice margin to buy market share.
I am sorry that there is no easy answer to your question!
---------- FOLLOW-UP ----------
Thank you kindly for the response. Please allow me to clarify my question. This inquiry pertains to the market of Mexico where a recent tax law change will affect the food category in that some foods previously classified as one type of category will now be classified into a different category with a higher rate. Thus, some manufacturers will be affected by the change, while others will not. The manufactuer would like to conduct a Conjoint analysis at the consumer level to understand the potential impact of a rise in prices on their products. My previous questions still hold. If one is to measure a change in price as the only "attribute" to be analyzed in a study, would one use a Discrete Choice analysis? How would one structure (from a top level) such a study? Is it simply a matter of varying prices and determining thresholds for the brand?
Thank you again for your help!
You are dangerously close to what we make a living advising clients on! A simple answer is yes, if it is only a consumer study then a Discrete Choice Analysis would likely work. And you are on the right track with varying prices to determine when the consumer would no longer make the purchase.