All companies want to price their products optimally. A price analysis usually provides the answers even though many may be quite sceptical due to either having had bad experiences with price analyses or hearing about them.
Nonetheless there is no reason to discard price analyses even though they are difficult. It all comes down to choosing the right method of analysis. Often it is the wrong choice of method that causes problems.
The most applied price analysis techniques follow:
Price analysis via Conjoint analysis (trade-off research)
In a Conjoint analysis the respondent is presented with specific product alternatives out of which the respondent must choose the product best suited to his needs. See illustration of Conjoint analysis below.
After a choice has been made the question is posed again a certain number of times each time with different product alternatives to chose from. Each product alternative consists of certain factors including price and via the analysis you get a very clear picture of consumers’ price sensibility.
The Conjoint analysis is by far the price analysis method that is most often recommended by Price Consultants. It reflects purchasing situations better than any other and as long as the technique in creating the analysis is mastered it will in most price analysis contexts provide the most precise and useful results.
If these were your only options, which would you choose?
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Price analysis via Economic value analysis (qualitative)
Some products, like i.e. technical, energy, software etc. create direct economic benefits for clients by way of saving time and process resources and even giving top line results. It may be beneficial to conduct a price analysis of these products to determine what the consumers’ exact economic value is.
The analysis is normally conducted through personal interviews and can be both time consuming and difficult to fulfill. Nonetheless it is beneficial as it creates a foundation for pricing and concurrently establishes a base for creating calculators in Excel or web, that convincingly document the value of the product.
On the other hand, it is imperative to be aware that the price analysis cannot stand alone. We have often experienced clients who apart from the specific financial benefits obtain non-quantitative benefits that create a higher WTP than the economic value analysis reveals on its own. Thus, we recommend that the analysis is supplemented by other observations to form a final and broadly anchored price conclusion.
Value Map Price Analysis
The analyses described so far are most commonly made for single products or a manageable portfolio. If you have a large product portfolio a price analysis for one or a handful of products is not necessarily normative of the consumer’s perception of the portfolio in its entirety.
In cases like this, Value Maps that uncover the consumer’s value and product perception as a whole, can be applied to the entire assortment or alternatively to main product categories.
Value Map benefits
- Competitive positioning is not about actual differences but about the consumer’s perception. Many examples show products that are expensive but are perceived as cheap.
- A Value Map illustrates the different segments of the market and their relative size.
- It identifies the competition, who have a sound benefit/price balance, and also the providers who are most likely to lose market shares (value lack) or increase market shares (value benefits).
- The Value Map uncovers the most important purchasing criteria and how well providers present them, vis-à-vis the competition. Thus, it shows what properties and benefits can be improved with the greatest effect.
The analysis includes the uncovering of the consumer’s most important decision criteria (not merely on product basis but also considering i.e. ability to deliver and customer service) as well as an evaluation of how the clients perceive your performance in comparison to that of the competition. The data is then cast into a Value Map in which the market’s providers are illustrated on the background of the perceived value and price of the consumer (illustration above).
A Value Map illustrates where your own price and value are placed in comparison to that of your competitors. It creates a valuable input for estimating price adjustments and simultaneously provides information on where it is beneficial to invest to increase consumer’s value perception. Thus, the price analysis additionally contains a strategic dimension.
The right methodology to find your Brand Value
Measuring consumer’s WTP does not only require serious thought but also skilful execution for the company, in order to reach an accurate and usable price analysis through optimal methodology.
When should you use a price analysis?
There are many price questions and situations in which it is relevant to uncover the consumer’s willingness to pay. Here are some of the most important:
Developing new product / product versions: Are you coming up with a brand-new product or a feature upgrade? Our experience shows, that only in 1 in 10 price analyses of new products/features our clients have assessed the optimal market price correctly. As for the rest, the estimation is off target and usually the customers’ willingness to pay has been underestimated. Most companies overestimate customers’ price sensitivity. The question is how much are they off target?
Adjusting existing product prices: No matter if the company has a fixed annual percentage increase of 2-3% or not, a displacement of the client’s perception of product, services and collaboration with market providers eventually takes place. Ultimately, this becomes evident in their WTP and thus makes its common sense to monitor it with a price analysis and optimisation of prices. Some of our clients go through this procedure every two years always with varied conclusions of different markets.
Assessment of new price models/segmentation: New price models are often considered part of new product or service development, nevertheless there is money to be made in assessing new price models in relation to existing business. Not least, it can provide a prospect for a stronger price segmentation, opening doors to new consumer groups and additionally improve capitalisation of the existing client base.
In other words, a price analysis can provide a variety of valuable information of great benefit to your company. You can find much more information about price analysis here.