Every single company tries to find the optimal prices for their products. Professional companies does not rely only on their gut feeling, but conduct pricing research to find the right price. These companies also know that price analysis are difficult to conduct in that they require solid methodologies. In the following paragraphs we will present the most often used pricing research methods to aid you in selecting the best approach.
Van Westendorp pricing research method – price sensitivity meter (directly price-related questions)
Since Van Westendorp developed the method in 1976 it has been used a lot within consumer goods and simple Business-to-Business products. In theory, the method covers the acceptable price ranges and the optimal price by asking the respondents four questions:
- At what price would you consider this item to represent a good value?
- At what price would you say this item is getting expensive but you would still consider it?
- At what price would you say this item is so expensive that you would no longer consider it?
- At what price would you say this item is so inexpensive that you would begin to question its quality?
The VW pricing research method has been the most often used method trough many years, but only few pricing research consultants base their recommendations on the VW method. Because of the fact that respondents are asked directly about price you risk that the respondents/customers will lowball their answers. Another problem is that the price sensitivity graphs look very similar even when analyzing different products.
Other problems with the method are its lack of focusing on buying interest which makes it doubtful whether the respondent actually wants to buy the product. Contribution only uses the method in rare situations always supported by other pricing research methods.
Gabor Granger pricing research method (directly price-related questions)
The Gabor Granger method is named after the economists that developed the method in the 1960’ties. In this analysis the respondent sees a product and gets asked about the buying intention at a certain price. Subsequently, the question is repeated but at a different price. The process is repeated a couple of times until it have clarified the maximum price that the respondent is willing to pay. As with the VW method, the Gabor Granger pricing research method has the weakness of using directly price-related questions, which quickly get transparent to the respondent and make it likely that the he or she will lowball the respective answers. Despite that the method has been used by many throughout the years, Contribution does not find it valid to base any recommendations on and thereby do not use the method at all.
Sales modeling (regression analysis of historical data)
Sales modeling is a technique where historical sales data unveil how sales volume is affected by price changes or other market variables such as season, advertising, promotions, competitors’ prices and etc. When used as a pricing research method it gives measurements of the price elasticity, which quantifies the customers’ price sensitivity for the product.
The method is widely accepted and with modern POS data management systems also fairly accessible. On the other hand, the isolation of the many variables affecting sales can make the process expensive and time-consuming, and it can also be argued that historical data are not good to predict the future of the market if it is dynamic. In addition, a pricing research method consisting of price factors beyond the historical data has some uncertainties, which is a weakness if you want to know how higher prices affect the volume. However, sales modeling can be good to use if the data set is big enough and it concerns a stabile product category in a mature market.
Pricing research through Conjoint analyses (trade-off research)
In Conjoint analyses the respondent is asked to choose the product that best fulfill his or her needs between different product alternatives presented to the respondent. When a decision has been made, the process is repeated with new product alternatives. Every single alternative contains parameters such as price, and the analysis give fairly precise answers to the customers’ price sensitivity.
Among pricing research consultants the Conjoint method is the most recommended way to conduct a pricing research. That is mainly because of its ability to reflect real buying situations and to give the most precise and useful results if you know to conduct such a price analysis the right way.
Pricing research through Economic analysis (qualitative)
A lot of products such as technical, energy and software products give customers some economic advantages by being timesaving and even sometimes with effects on the topline. In this regard, a pricing research shall determine the exact economic value of the economic advantages, as the customers perceive them. Normally this is conducted through personal interviews which can be time-consuming and difficult to get in-depth with. Nonetheless, the personal interviews can be necessary as the basis for pricing. In addition, the personal interviews can be necessary in order to develop different calculations that can prove the value of the product in a valid way.
However, it is important to note that this type of pricing research method has to be supported by other methods. That is because we have often seen that the customers in addition to the economic advantages also perceive some none-quantifiable advantages, which strengthen their willingness to buy. Since the economic value analysis cannot give this insight, we highly recommend supporting it with other methods in order to conduct the most valid pricing research.
Pricing research with Value map
The pricing research method ‘Value map’ is often conducted for single products or a small number of products. Thus, this pricing research method is more difficult to use for companies with a huge assortment of products because customers often buy a large part of a given assortment. In that case, a price research of one or a handful of products does not necessarily show the customers’ perception of the total product portfolio in a fair and true way.
Value maps are a pricing research method that reveals the customers’ perception of value and product across the entire assortment, or divided into main categories of the various product lines.
VALUE MAP
Company market position, balance between perceived price and perceived benefits vis-à-vis competitors
Value disadvantage
Value advantage
Benefits of Value Maps
- Competitive positioning is not about factual differences, but perceived ones. A company may in fact be expensive, but perceived to be cheap.
- A Value Map will illustrate the different segments in the market, and the relative size of these.
- It will show those companies that have a good balance between the benefits offered and prices – and which companies are likely to loose (value disadvantage) or gain market shares (value advantage).
- Value mapping will demonstrate customers buying criteria and how well you perform vis-à-vis competitors.
- And, it will show which attributes or benefits the company will gain most value from improving – and what are the likely consequences of competitors planned improvements.
This pricing research method includes an uncovering of the customers’ most important decision criteria (not only on product level, but also with regard to delivery and service), and additionally an evaluation of how the customers perceive the company’s performance compared to known competitors when it comes to these important criteria. This kind of data is shown in a value map where the players in the market are placed due to the customers’ perceived value and perceived price (please note the graph).
In other words, this pricing research method with Value map will show how your company’s prices and value are perceived compared to your competitors. This will give your company valuable insight to use in the evaluation of possible price adjustments, and additionally it will tell you where it is beneficial to invest resources in order to improve the customers’ value perception. Thus, the pricing research also implies a strategic dimension.
A Value map is specifically based on the customers’ value perception instead of facts. By conducting numerous pricing researches, we have seen several examples of how a company was perceived to be cheaper than their main competitors were, even though the opposite was true when you compared the actual product prices. In a specific example, this difference between actual prices and the value perception shown in a conducted pricing research was because customers made a broader comparison including customer service when they had problems with the given product. In that case, our client managed to help their customers more quickly and thereby reduced the customers’ total cost of ownership because of a better Customer Service compared to what their competitors could offer the customers. To put in another way, the specific pricing research revealed an opportunity to increase prices even though they already were higher than the competitors’ prices were. This lead to a price increase of 4% without any negative implications on sales volume.
The right methods give a valid pricing research
Researching the customers’ willingness to purchase requires careful thought and skilled execution in order for a company to get a valid and useful result of a pricing research. If you have any questions on how to conduct a valid analysis for your company please do not hesitate to contact us and let Contribution help you.
Tel.: +45 50 50 45 49 or by mail info@contribution.dk.