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Find out how to conduct pricing research to determine the optimal price for new products in order to maximize your revenue and market share.
The price is right! Or is it? There’s only one way to really find out: by conducting pricing research. Choosing the price for your product should be a well-calculated decision, but how do you make that with confidence?
In this guide, we’ll dive into the world of pricing research. We’ll explain why it’s so important, and how you do it effectively.
Pricing research aims to determine the optimal price point for your products, and lays out how changes in price will affect businesses or entire markets over time. With this information, businesses can make well-informed decisions about their pricing strategies, based on profit, revenue, market share and demand.
Pricing studies don’t just aim to find the highest possible price you can justifiably charge for your products or services. Finding the right pricing strategy could also involve working with lower price points, which will have a positive long-term effect on your position in a market.
A pricing study aims to find the ideal price for a product and business, not the highest one you can get away with.
Why should you always keep your eyes on the price? Arguably, price is more important in the early stages of a business, or when there’s a lot of changes happening in the market.
Nevertheless, even established businesses should regularly revisit their price points and see how price is influencing profitability, to make sure they’re not leaving money on the table. Here are four reasons you should be conducting price market research:
A critical part of the market research process is finding out if there’s even a demand for your product. But when transferred to the real world, a desire to buy a certain product isn’t enough—people should really be willing to put their hard-earned bucks on the table in exchange for the product—not just dream about owning it.
But how important is price for consumers, really?
While a great brand, great relationship building and other factors are super important ways to build up loyal customer bases, they don’t eliminate the damage done by the wrong price points.
Let’s put it this way: can you really imagine a consumer looking at the price tag for your product, shaking their head, and then coming back the next day to buy the product anyway. No, neither can we.
Even if they do, a brand can think about whether this is the kind of relationship they want to build with their customers—one where they might put consumers in trouble for convincing them to buy something they can’t really afford.
Maximising your margins? It feels safe to just try and cut costs, and often risky to raise or change your prices. But it could pay off, you just need to do the research to find out if it will.
There will probably come a point where the only way you’ll scale your profitability is by raising your price points, or making changes to your pricing plans—and market research will show you what to fine-tune to maximise revenue and profits while maintaining (and ideally boosting) customer satisfaction.
It’s important to realise that a product’s price and its value aren’t the same thing. Businesses exist to provide value to customers; price just communicates part of it before purchase.
The price people pay for the product should be justified by everything else around it: and the factor you have most impact on is your brand. This is why random price changes often don’t have the desired effect, even when lowering prices. Harvard Business Review describes how customers perceive a price is just as important as the price itself.
Here’s a highly relatable example for you: if Ferrari lowers its prices, will people deem their cars as high-quality as before? Not likely. Linking your price points to the value you actually provide is just as important and vital to your brand.
There are a lot of price strategies to pick from and experiment with, but those experiments should preferably be based on your own market research. Here are some of the most used strategies to help you navigate your pricing.
This one is pretty straightforward: you simply calculate your costs and add your desired mark-up. This works best for products with an easy cost structure.
If you’re entering a new market, you can choose to set a price based on what the competition is charging. This often happens in markets that are already quite saturated, where there’s little wiggle room in price, but you can ‘steal’ customers with better products or branding.
Why do customers pay so much more for Apple products? It’s because the perceived value of those products is a lot higher. If you calculate your perceived value into your price, you can often charge more (or less, so be careful here—your market research might reveal a low perceived value from consumers, which will give you even more to think about).
This is quite rare, but not unheard of: with price skimming, you start with a higher price and lower it as the consumer landscape changes. This works with technologies in markets that rapidly evolve. iPhones lower in price over time, as other models enter the market. Game consoles like PlayStations and Xboxes are usually introduced for a high price, but become cheaper once the hype goes down
For a limited time only! Who hasn’t read it before? With penetration pricing, businesses try to get a lot of consumers hooked on their products in the initial stages by asking lower price points. Once demand starts growing, they increase prices to a sustainable level—setting a low price to enter a competitive market and raising it later
Time to dive into the actual price research methodologies! There are several ways you can conduct research into different price points—on its own, or as part of a larger marketing research. We’ve listed 7 popular methods with their benefits and disadvantages.
If you want to measure price elasticity, the brand-price tradeoff method is your best bet. It takes into account brand value factors to determine how high your prices can go.
How it works:
Consumers are presented with a group of products, all of which are priced at their lowest level. Every consumer picks a product they’d buy. In the next round, that product’s price is increased—the prices of all unpicked products remain the same. The consumer selects again. This process is repeated until the ‘maximum price’ is reached, which is usually whenever a consumer picks a different product than the first pick.
Benefit: puts your brand in a context that allows consumers to analyze you alongside your competitors.
Downside: consumers generally quickly understand what the study is looking for, which can influence their decision-making process.
If you want to measure price sensitivity, go for monadic testing. There are several variations, such as sequential monadic design, paired-comparison design and protomonadic design.
Respondents are presented with a complete set of products, much like in a store. Price is presented. They are asked to choose the product that best fits what they need.
Benefit: monadic testing eliminates bias, because everyone only sees one combination of product-price.
Downside: it’s a static research method that does not consider how price changes of competitors could influence decisions.
The Van Westendorp price sensitivity meter is a type of direct pricing research method. You don’t get one ideal price out of it, but rather a range of ‘acceptable’ prices.
Consumers are presented with a product and the following questions, all about the same product:
Benefit: it’s a simple research method that leaves you with a range of acceptable costs to the consumer, rather than one price point.
Downside: respondents give their answers without seeing and experiencing the product in its full on-the-shelf context, which can lead to slightly unreliable results.
Conjoint analysis is considered to be one of the most reliable ways to determine pricing and uses discrete choice analysis. It looks not only at changes in price, but also at product features to get not only an idea of how much people are willing to pay, but also why.
Conjoint analysis works with discrete choice modelling. Respondents are presented a group of products and are asked to either select or rank the products. This is repeated several times, with each round presenting varying product attributes, including price.
Benefit: looks at more factors than just price, and also calculates the value of specific product features.
Downside: it doesn’t measure changes advertising or competitors could make in the decision-making process.
With regression analysis, you use historical data to estimate what effect changes in price will have on sales.
There are several ways to do this: You can look at the effect of seasons, campaigns and promotions, events in the market such as competitors entering. This can help you make strategic decisions ahead of time, based on real-life events.
Benefit: when enough data is available, the research is reliable.
Downside: not suitable for relatively new product categories.
STEP pricing research is a field research method that can help you determine pricing for your products.
How it Works
Consumers from your target group are divided into groups. Each group will be exposed to the same test, except they will be shown different prices for the presented products—or brand. Then respondents are asked to put stickers on the product offerings to indicate what products they are most likely to purchase. The share of stickers given to a brand is calculated for each respondent group.
Benefit: this method works with all kinds of products
Downside: a very large sample group is needed
Last but not least, there’s In-Market research, where you literally go into the market to see how price affects buying decisions. It has become a lot easier with the surge of technology like POS scanners and big data.
Consumer behavior in actual stores is monitored. Prices can be changed or presented differently to see how it affects purchase decisions.
Benefit: you get real data that isn’t influenced by any bias and has all the necessary elements
Downside: it cannot be used for all kinds of products, is costly and time-consuming
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Senior Customer Research Manager
Nick joined Attest in 2021, with more than 10 years' experience in market research and consumer insights on both agency and brand sides. As part of the Customer Research Team team, Nick takes a hands-on role supporting customers uncover insights and opportunities for growth.
14 min read
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