Price analysis is gaining more and more ground as a substitution for the endless discussions and subjective approach that often are a part of corporate price debate. Nonetheless, there is indeed good reason to analyse what the market is willing to pay. Most companies overestimate the price sensitivity of their clients.
It is relevant to assess the willingness to pay (WTP) within a variety of price questions and situations such as:
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. In our experience prices can be regulated with a higher percentage (5-8%) and there are usually differences between the company’s markets and categories.
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 valuable information and -more importantly- significantly increase earnings. There are many analytical methods and not all are of equal quality. Below we have listed the most significant ones, for inspiration:
- Van Westendorp
- Gabor Granger
- Sales modelling
- Choice based Conjoint
- Economic Value
- Value Map
Van Westendorp price analysis – price sensitivity meter (direct price enquiry)
The method was developed in 1976 by Van Westendorp, and has been used within consumer goods and smaller/simpler B2B products. In theory the VW technique uncovers the market’s accepted price span and the optimal price through 4 key 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?
Price graph: The optimal price for this segment is € 19.50, the point perceived as expensive and cheap respectively by an equal amount of customers. The acceptable price range is € 17.5 to app. € 22.50.
Price graph for product x
The key problem is, that the query is directly price-related, and thus many clients low-ball their answers. Another problem is, that the charts are quite similar even though the products analysed are different. Finally, the method does not uncover the interest to buy and therefore it is questionable if the respondent would buy at all.
The VW price analysis method has been the most commonly used through many years, and today only few price analysis consultants would dare to use the VW method as a basis for their recommendations.
Contribution rarely uses this method and, in such cases, only in combination with other analysis methods.
Gabor Granger price analysis (direct price enquiry)
The Gabor Granger method is named after the economists who developed the method in the early 1960ies.
The respondent is presented with a product and asked of his intention to buy at a given price. The same question is posed again at a different price. This process is repeated several times until it is clear, what the respondent’s accepted maximum price is.
A Gabor Granger price analysis has much like the VW the downside, that it consists of direct questions of price and it quite quickly becomes evident to the respondent that the price is of essence and in this case, it is probable that the person low-balls his answers.
Contribution does not find this method credible and thus does not use it.
Sales modelling (regression analysis of historical data)
Sales modelling is a technique in which historical sales data reveal, how sales volume is influenced by changes of price (or other market variables such as season, advertising, promotions, competitors prices etc.). Used as an analytical method it provides readings of price elasticity which quantifies consumer price sensitivity to the product.
The method is widely accepted and with modern POS data management systems also relatively applicable. Isolation of the many variables which influences sales can make the process time-consuming and costly, as it can also be held against the method, that historical data may not always be good markers for future sales if the market is dynamic.
There is a slight uncertainty concerning price analysis of price points that are outside of the historical data which is a weakness, if you want to look at volume effect at higher prices. Nonetheless, if the data is sufficient and you have a stable category in a mature market, sales modelling can easily be used as price analysis.
Price analysis via Conjoint analyses (trade-off research)
When using Conjoint analyses, the respondent is presented with specific product alternatives and must choose the product that best meets his needs (illustration below). After making a choice, the question is then asked again a number of times, each time juxtaposed with different product alternatives. Every product alternative consists of parameters including price and through the analysis, rather precise answers to the consumer’s price sensitivity are obtained.
The Conjoint method is without a doubt the type of price analysis most commonly recommended by price consultants. It is by far the analysis that best portrays real life shopping situations and if the technique in creating the analysis is mastered, in most cases it provides rather precise, useful and operationally applicable 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 at times even giving top line results. It may be beneficial to conduct a price analysis of these products to determine what the consumer’s 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 ensures a valid price analysis
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.
Each year Contribution completes numerous price analyses across different countries. For sparring, to choose the right method of analysis and for specific quotes for execution please contact us here.