Pricing research is a core part of a business’s pricing strategy and sometimes sounds complicated and long winded but does not have to be. In this post we will outline the most common pricing research methods with examples to help you along the way to understanding price research.
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What is pricing research?
Pricing research measures the fluctuations in demand of a product or service to different changes in price and uncovers the optimal level of price for new products in order to maximize sales revenue. The data gathered from pricing research will help businesses make informed decisions on pricing strategy such as the effects of a price increase on profits.
2 most common pricing research methods
The main methods used to determine the optimal prices of products or services are Gabor Granger and Van Westendorp analysis, which are explained in more detail below.
Gabor Granger
Gabor Granger is a regular pricing technique by which a participant is asked to say how likely they are to buy the product or service at a stated price. It’s best to use a maximum of 8 to 9 test prices, which should be presented in random order to avoid bias.
Basically, participants are presented with a concept of a product at a specific price and are then asked if they are likely to buy. The price is then changed and the potential customer is again asked if they would buy or not. This continues systematically until the participants indicates they would not buy that product concept.
Analysis of the findings helps to produce a market projection for demand of the product across the price points. The demand curve you will see, can then be used to estimate the anticipated revenue and recognise the profitability at chosen price points to come to an overall optimal price.
The questions used for Gabor Granger is straight forward and the method can be used on small sample sizes from at least 50 upwards. However there are limitations you need to be aware of when using Gabor Granger. It’s best to use this method with one product on its own rather than comparing alternative options if learning the competitive background is not required.
Below is an example of Gabor Granger – question text and image of market projection.
EXAMPLE
Knowing all you know about Product X above; would you buy Product X for $100?
Yes
No
They give the answer YES for $120
They are asked the question again for $125 – the answer is YES
The question is asked a third time for $130 – the answer is NO
So, the maximum they are willing to pay for Product X is $125
Below is another variation of the question that uses a scale, so the top 2 answers (very likely and quite likely) are taken for likelihood to buy Product X.
How likely would you buy Product X above for $100?
Very likely
Quite likely
Neither likely nor unlikely
Unlikely
Not at all
In the Gabor Granger chart below you will see the best price to use is around $25 as that will lead to the most sales revenue for the demand received.
Van Westendorp analysis
The Van Westendorp's Price Sensitivity Meter also known as PSM asks four price-related questions, which are then evaluated as a series of 4 aggregate distributions, one distribution for each question. The question formats can vary, but usually take the following form:
At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
The cumulative frequencies are plotted, and the Price Sensitivity Meter (PSM) supports claim that reveals qualities exist for any crossing of the cumulative frequencies for each of the four price categories such as point of marginal cheapness, point of marginal expensiveness or indifference price point as per the illustration below. Note that the standard method requires that two of the four cumulative frequencies must be inverted in order to have the possibility of four intersecting points. Regular practice inverts the cumulative frequencies for "too cheap" and "cheap".
The general explanation of intersecting cumulative figures varies. So basically, between the points where a product is considered too cheap that there may be concerned over the quality to where they find the product too expensive, you will find the optimal price point where these two particular points (too cheap and too expensive) meet.
Van Westendorp analysis is normally used for new products or if there has been a considerable change to a product where no comparative pricing exists. This technique enables you to find the optimum price range, where you can maximise revenue and sales per unit sold.
Other pricing research methods
Alternative methods of pricing research to the ones mentioned above that are also used is Perceived Value Pricing and Conjoint Analysis. An explanation of each is given below.
Perceived Value Pricing
Perceived Value Pricing is a basic pricing technique, where the valuation of a product or service is established according to how much participants are willing to pay for it, instead of its delivery and production costs. Although using a perceived value pricing technique might be basic, it can greatly assist in the effective marketing of a product since it sets product pricing in line with its perceived value by potential buyers. This allows for businesses to make certain products to stand out and be unique compared to other products such as Apple.
Conjoint Analysis
Compared to the previous methods mentioned earlier, conjoint analysis is a far more advanced technique for pricing research and the most effective in establishing the optimal price point. Conjoint analysis is a technique used to assess the relative importance individuals place on different features of a given product including price. A conjoint study normally involves showing participants a set of features and asking them to reveal how much they like or prefer the different attributes of that feature. It is used to learn how changes to price affect demand for products or services as well as measuring preferences for product features, and to predict the likely acceptance of a product if brought to market.
Note this technique requires a lot more time to not only to develop a simulator at the analysis stage to see the what effects are of different price changes but also at the survey stage for both incorporating it into the survey and allowing for the increase time for participants to complete the survey.
Key take out
If you are looking to do pricing research, see what methods are right for you as this is an essential part of your pricing strategy to achieving your business objectives, whether this is for a new product (NPD) or updating an existing offer.
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