As a business owner, one of the most important decisions you will make is how to price your products or services. Pricing can greatly impact your business success, and getting it wrong can be costly. This is where pricing research comes in, which involves studying and analyzing different pricing strategies to determine the best approach for your business. In this article, we will explore pricing research methods, how to conduct a pricing study, the benefits of pricing research, and more.
Pricing research is a crucial aspect of any business, as it helps you to make informed decisions about pricing your products or services. With the availability of advanced market research software for pricing research, it has become easier to conduct pricing studies and make data-driven pricing decisions.
Types Of Pricing Research Methods
There are several types of pricing research methods. Some of the most common methods are:
- Conjoint analysis
- Price sensitivity meter (PSM--Van Westendorp pricing model
- Gabor-Granger pricing method
- Monadic price experiments
Each of these methods has its own unique approach and can provide valuable insights into consumer behavior and preferences towards pricing. The method you choose will depend on your research objectives, target audience, and product or service offering. Below, we will explore each of these methods, in more detail.
Conjoint Analysis
Conjoint analysis is a popular pricing research method used to measure the relative importance of different product features and pricing attributes. It is based on the idea that consumers make trade-offs among different features of a product when deciding to purchase it. By using this method, researchers can identify the most important product features and pricing attributes that affect consumer behavior.
Strengths:
- It helps businesses to understand the most important factors that influence customer decision-making, allowing them to optimize product features and pricing strategies.
- It allows researchers to simulate different product configurations and pricing scenarios, giving businesses valuable insights into how customers might react to different offerings.
Weaknesses:
- It can be time-consuming and expensive to conduct, especially for complex products or services.
- It assumes that customers make decisions based solely on the features and pricing of the product, which may not always be the case.
Price Sensitivity Meter (PSM—van Westendorp approach)
The Van Westendorp Price Sensitivity Meter is another pricing research method used to measure how sensitive customers are to changes in price. It is based on four questions that ask customers to specify the acceptability of different price points:
- At what price would you consider the product to be so expensive that you would not consider buying it?
- At what price would you consider the product to be priced so low that you would question its quality?
- At what price would you consider the product starting to get expensive, but you would still consider buying it?
- At what price would you consider the product to be a bargain, a great buy for the money?
Strengths:
- It provides businesses with a range of acceptable prices for their products, allowing them to make informed pricing decisions.
- It is a simple and easy-to-understand method that can be used with a wide range of products and services.
Weaknesses:
- It relies on customers' perceptions of price, which may not always be accurate or reliable.
- It assumes that customers have a clear idea of what they are willing to pay for a product, which may not always be the case.
- It typically focuses on just one product concept, rather than multiple variations of the same product.
Gabor-Granger Method
The Gabor-Granger method is a pricing research method that asks customers to indicate their willingness to buy a product at different price points. It is based on the assumption that customers' willingness to buy a product decreases as the price increases.
Strengths:
- It provides businesses with a clear understanding of the price range at which customers are willing to buy their products.
- It is a simple and straightforward method that can be used with a wide range of products and services.
Weaknesses:
- It assumes that customers are rational decision-makers who will base their purchase decisions solely on price, which may not always be the case.
- It does not provide information on the relative importance of different product features or pricing attributes.
- It is so clearly a pricing game to respondents that the data may not be predictive of actual purchase decisions.
Monadic Price Experiments
Monadic price experiments involve randomly dividing respondents into different groups and showing each group a different price for the product concept. Often, the test product concept is shown in competition against other fixed competitors, as well as the “None” option (the ability to walk away and not buy anything).
Strengths:
- It is usually considered a scientifically sound experiment.
- If made to look like market choice scenarios with competitors also represented, it more realistically resembles market choices.
- It is quick for respondents to answer, since it typically only involves a single choice or buy/no buy question.
Weaknesses:
- It typically focuses on just one product concept, rather than multiple variations of the same product.
- Sample size requirements are typically larger than other pricing research approaches.
How To Conduct a Price Study
To conduct a pricing study, you need to:
- Define your research objectives
- Identify your target audience
- Select the appropriate research method
It's also important to determine how to price the study itself, which involves considering factors such as the level of detail required, the length of the study, and the resources available. Once you have collected the data, you can analyze it and make informed pricing decisions.
Benefits of Pricing Research
The benefits of pricing research include understanding your customers' willingness to pay, identifying pricing strategies that work best for your business, and gaining insights into how your competitors price their products or services. This information can help you make data-driven pricing decisions that can increase revenue and profitability.
An Example of How Pricing Can Affect Business Success
If you are launching a new product, you might consider using a penetration pricing strategy to capture market share quickly. This involves setting a lower price initially to attract customers and then gradually increasing the price over time as your product gains popularity. On the other hand, if you are offering a high-end luxury product, you might use a skimming pricing strategy to target customers willing to pay a premium price for exclusivity.
Pricing Strategies
There are four common pricing strategies:
- Cost-plus pricing
- Value-based pricing
- Penetration pricing
- Skimming pricing
Each of these strategies has its own advantages and disadvantages, and the best approach will depend on your business goals, target audience, and product or service offering. The survey-based research methods we’ve been discussing in this article more directly address the proposition of value-based pricing: setting prices based on the perceived value of the offering to the consumer.
A good pricing strategy is one that aligns with your business goals, target audience, and product or service offering. It should also take into account your costs, competitors, and market demand. The best approach is to test different pricing strategies and measure their impact on revenue and profitability.
Conclusion: What Is the Best Pricing Research Method?
Ultimately, the best pricing research method depends on various factors such as product type, market demand, and competition. Conjoint analysis is a useful method for pricing new products or modifications to existing products, while the other pricing research approaches we’ve been discussing tend to focus on just one proposed new product or a single proposed product modification.
Pricing research is a crucial aspect of any business, and with the right tools and methods, it's easier than ever to conduct a pricing study and make data-driven pricing decisions. Understanding your customers' willingness to pay, identifying the best pricing strategies for your business, and testing different approaches will help you to increase revenue and profitability.
Learn more about how our Discover survey platform can help you with your next price study.