The vast majority of products have psychological price thresholds. If you have to raise the price beyond these you might as well go all in.
Studies of willingness to pay generally disclose one or more psychological price thresholds, which courses demand to fall significantly if the price point is exceeded. The studies also show that demand will drop the most just after the psychological price threshold after which the curve flattens out up until the next threshold.
So if your product is currently priced just below one of these price points, and you have to raise the price beyond the threshold, the above means that a small price lift does not make sense. In stead go all in so that the drop in volume is offset by wider contribution margins.
Do not fall into the price trap when launching your new product
There is a strong tendency to underprice new products. Do not fall into this trap.
Our price research for new products again and again proves that the internally estimated prices are lower than the market is actually willing to pay. The only question is if it is 10%, 20% or as much as 80%, as we have even seen.
The wrongheaded estimates happen because prices are spoken down internally. The competitors’ strengths are overestimated, the value of your product underestimated, the usual contribution margins are applied irrespective of the perceived customer value, too much emphasis is given to sales reps and distributor feedback, even though it is well known that they want the product to be as cheap as possible.
When you consider how expensive and risky it is to develop and launch new products maximizing the ROI should be the target. So watch out for the price trap!
Limit, or even better yet, don’t use Van Westendorp
The Van Westendorp method is often used to analyze price sensitivity but should not be.
The technique consists of four simple pricing questions from which a product’s optimal price can be derived. It has for many years been the most widely used technique among research agencies, consultants and companies that found the method online and appreciated its simplicity. We have also used it, but only to a very limited because:
- It does not reveal anything new if price transparency is prevalent in the market.
- It does not give reliable results if customers haven’t got reference prices, as is often the case for new products.
- It, worst of all, seems to result in more or less the same price curves even with different products and price points.Therefore, the price range definition seems to matter more than the willingness to pay.
In our experience, VW is best used to research price premiums for new features that are being added to existing products.
Include price sensitivity in other market research projects
Price sensitivity research is usually done as individual projects. But it does not have to be. It can often be included as an integrated part of other market research projects
The desire to undertake new market research are sometimes limited as time and money is already being spend on customer satisfaction surveys, brand analysis, etc. and burdening the customers further is not appreciated.
Much research, however, collects data that is not used, or include questions which can be substituted by smarter techniques that may free up space in the questionnaire to include questions of perceived value/price (Value Maps) and/or willingness to pay. By doing so data is obtained which immediately can be put to use to optimize prices and earnings, while at the same time maximizing the value of the research budget.