Odd statement from a full service market research firm but we’re hoping there is some truth to the “truth shall set you free” adage.
I don’t know if this will be received as stating the obvious or revelation but most pricing by most firms is based on direct costs, otherwise known as cost plus accounting. This pricing method benefits from simplicity and ease of calculation but it does nothing to align the supplier’s interests with that of the end client – ironic since most full service firms like to position themselves as “partners”.
Here is straightforward example. A phone survey is conducted with customers of a nationwide consumer products company and 1000 interviews are completed. Let’s assume the direct costs for the fielding of this study are $20,000 or $20 per completed interview. Research Firm A will manage the fielding process, analyze the results, provide a written report and deliver a presentation. (Stay tuned for subsequent post on why this set of very typical deliverables is nearly useless). The firm charges the end client 2x direct costs or $40,000. Now imagine the exact same situation except we have a different full service firm, Research Firm B, and the number of completes for the client is 800 instead of 1000. The 2x multiplier means a client cost of $32,000.
The firm that made 20k profit, Research Firm A, did the exact same amount of work as the Research Firm B who made 4k less in profit. The point is that there is very little relationship between the direct costs and work performed in a full service environment. The supposed “value add” is largely unrelated to direct costs and yet Firm A made 4k more because the client wanted 200 more phone interviews to be done.
On a more philosophical note, this type of pricing provides no incentive for efficiency, tends to ignore opportunity costs and takes the focus away from performance because the cost is always covered by the client. Stay tuned for an upcoming blog post on success fee pricing and how this drastically alters the incentive structure and aligns supplier with client.
Market research cost calculator to sort the issue above out
You are not alone with your opinion. I have been bothered with the issue for quite a long time. In fact, researchers hardly take the effort to justify their price or at least quote consistently. This holds true mostly with small and middle size agencies. Since I work with a market research agency and I have to quote regularly, I decided to develop a system that helps researchers [first I thought about myself only] provide fair and consistent quotes and research price proportionate to the amount of resources necessary to complete a project.
The product is a market research cost calculator that works well with CATI, F2F, online panel, depth interview and focus group methodologies. It solves the problem of CPI, a kind of magic word among market researchers that in fact has not much meaning, because it is meaningful within a well specified project and for the particular sample size only. It is more informative to relate it to the price of any number of additional or failed interview.
The product reflects on many other issues such as quoting for many project options, calculation in multiple currencies, detailed price breakdown for all cost items and by project phases and it helps with project resources planning and scheduling. There are additional benefits such as risk management and overall project optimization. The product is to handle because it is Excel based.
Users can be individuals who want to be pricing champions and mr agencies. Even market research buyers can profit from it, because it helps to control research agencies. Cost of market research should be fair and market research pricing should be cost driven.
More information on this genuine market research cost calculator can be found at www.mrcosting.com .
"The third deadly sin is cost-driven pricing"
Great post! Looking forward to your subsequent post. Peter Drucker, in Management: The Five Deadly Sins, says:
The third deadly sin is cost-driven pricing. Most American and practically all European companies arrive at their prices by adding up costs and putting a profit margin on top. And then, as soon as they have introduced the product, they have to cut the price, redesign it at enormous expense, take losses and often drop a perfectly good product because it is priced incorrectly. Their argument? 'We have to recover our costs and make a profit.'
This is true, but irrelevant. Customers do not see it as their job to ensure a profit for manufacturers. The only sound way to price is to start out with what the market is willing to pay - and thus, it must be assumed, what the competition will charge - and design to that price specification.
Cost-driven pricing is the reason there is no American consumer electronics industry any more. If Toyota and Nissan succeed in pushing the German luxury car makers out of the US market it will be a result of their using price-led costing.
Starting out with price and then whittling down costs is more work initially. But in the end it is much less work than to start out wrong and then spend loss-making years bringing costs into line.