Market research for pricing

Determining the best price for your product is critical to its success in the marketplace. The price needs to be high enough to cover your costs and provide revenue, but low enough that customers are willing to pay for it—without leaving money on the table. The only way to know the most effective price for your product or service is to conduct market research.

There are four main methodologies for researching an effective pricing strategy: Van Westendorp, Gabor-Granger, conjoint analysis, and brand-price trade-off. Let’s take a closer look at each of these methods 

Pricing research is an important component of your overall market research. Appropriate pricing affects everything from brand image to the perception of value to success in the market. 

Your pricing research provides two main types of insights that can be applied to other market research efforts:

Pricing research utilizes both quantitative and qualitative data. Quantitative data is primarily used for setting the price, and qualitative data is used to assess consumer sentiment at various price points. Together, they provide insights that can be used throughout your market research.

Your market research for pricing starts by delving into who your customers are. Collect relevant information, such as demographics, geographic locations, buying habits, etc., for market and customer segmentation. This will also prove useful with brand segmentation as you decide which products to market to which market segments.

Once you have your target market identified, you can choose one or more of the following pricing research methods as part of your price optimization strategy to determine the optimal price for your product or service.

The Van Westendorp Price Sensitivity Meter was developed in 1976 by Peter Van Westendorp, a Dutch economist. This pricing research method is used to identify a series of price points that are psychologically relevant to your customers’ buying behaviors. It reveals your customers’ sensitivity to price, purchasing power, and how much they are willing to pay for a particular product or service. Van Westendorp is one of the most popular and effective pricing strategies in market research.

The Van Westendorp method utilizes four main questions. Survey respondents are asked to view an image of a product or service. They are then asked questions to determine the optimal price point and range of prices based on the image and any additional information provided. This context is necessary to acquire accurate answers from respondents.

The questions read:

Each of these questions can be open-ended, as above, or closed-ended with appropriate prices or price ranges offered in a multiple-choice format.

The data collected via survey for this analysis is used to plot points on a price sensitivity map. The x-axis represents the price, and the y-axis represents the percentage of respondents who selected that price. Once plotted, you can evaluate the data based on where the points intersect. 

The intersection of points one and two (referencing questions above) is the point of marginal cheapness (PMC) and the intersection of points two and four is the point of marginal expensiveness (PME). Your range of acceptable pricing is the range between these points.

This pricing methodology is especially useful when bringing a new product to the market. You can gather information directly from your target market so that you can price your new product within the range they are willing to pay. 

It’s also useful to use this data analysis when you’re repositioning an established product in an existing market. The information you gather about consumer perceptions of the current price of your product will help you understand the impact on sales if you change your pricing.

When you’re updating product features, Van Westendorp can help you see what price change will be deemed acceptable based on the feature changes.

Please note that the Van Westendorp Price Sensitivity Meter does not take competitors’ pricing into account for analysis.

The Gabor-Granger Direct Pricing Technique was developed by economists Andre Gabor and Clive Granger in the 1960s. This pricing research method utilizes surveys to learn the price elasticity of a product. Gabor-Granger also uses surveys to collect data directly from target consumers to determine demand at varied price points, which can be applied to ascertain the optimal price point for the market.

Gabor-Granger relies on skip logic to streamline the survey process for respondents, presenting them with relevant questions based on their answers to previous ones. 

Considering your knowledge about product A, how likely are you to buy it at $Y?

If the respondent answers with responses 3, 4, or 5, skip logic will present them with the same question with a lower price.

If they responded with answers 1 or 2, the responses would be included toward a top-2-box score. The percentage of respondents for these answers is added together to represent respondents who are likely to buy your product.

To clarify, if 10% answered with response one (extremely likely) and 35% answered with response two (very likely), your top-2-box score for the product would be 45%. That 45% represents the target market who would likely purchase the product at the price presented.

Another way Gabor-Granger questions are asked is this:

Considering your knowledge of product X, would you purchase the product for $100?

A “yes” response would prompt the question to be asked again with a price of $125, for example. If “yes” again, another increment is added to the price and the questions continue until the respondent selects “no.” So, in this case, if you presented them with $25 incremental increases and they responded “no” to $200, the maximum price they would purchase the product for is $175.

The Gabor-Granger Direct Pricing Technique is especially useful when you want to predict the price at which your target market will be willing to purchase your product or service. With this information, you’ll be able to predict sales numbers.

It’s also valuable in optimizing the price for an existing product that has been updated, evaluating a proposed price increase for a product, and for products with price points below $25 (Van Westendorp becomes too bulky for survey participants with prices below $25).

Gabor-Granger data helps inform price changes to maximize profit and bolster sales when other components of the product are fixed.

This pricing strategy also does not consider competitor pricing analysis. 

Conjoint analysis is yet another way to research pricing strategies and is frequently referred to as the most reliable method. In conjoint analysis, you use discrete choice modeling in surveys to find out the influence of the price and features of a product on a customer’s willingness to pay. Conjoint analysis requires survey respondents to use similar decision-making techniques as they would in a real shopping situation.

Conjoint strategies for pricing also measure the importance of specific features and whether customers are willing to pay more for certain ones.

Survey questions for conjoint analysis include groups of prices and features. Respondents are asked to compare the items based on the provided information and choose which one they would buy.

This process would continue with various prices and features. Streamline as much as possible, so respondents don’t become confused or experience survey fatigue.

Businesses use conjoint analysis as a pricing method to assess the influence price has in combination with various product features. It’s also helping in determining which features are most important to your target market. 

This method is used to evaluate both new and existing product pricing and is a valuable look into how customers make purchase decisions.

BPTO is a tool used to identify what effect price has on various areas such as brand awareness, revenue, market volume, and profitability. It provides insights into consumer preferences for brands based on pricing.

Survey respondents are shown a set of three to five branded products with their associated prices. They are then asked which offer is the most appealing to them.

Below are three tablets at different prices. Assume you are planning to buy a new tablet and the ones in the table below represent the offers you must choose from:

Once a choice is made, the price for that choice will increase incrementally until it reaches a point at which the respondent changes their brand selection or chooses “none of these.”

Brand-Price Trade-Off is most effectively used in markets where brand factors heavily in purchase decisions. 

We’ve created a price-testing template to kick off your pricing market research. Our templates are fully customizable, so use this one as a jumping-off point for your pricing research needs.

Pricing your products or services correctly for your market is a crucial component for the success of your business. The best way to determine optimal pricing is market research—using surveys to obtain valuable information directly from your target customers.

To optimize your pricing effectively to maximize your revenue, use our new price optimization solution. Based on the Van Westendorp model, our solution can help you set prices for new products, optimize pricing for existing products, and personalize pricing based on your target market segments. Determine your customers’ price sensitivity and more with the latest SurveyMonkey solution.
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