The following piece is an excerpt from: “Pricing Research: How to evaluate price perceptions and willingness to pay.”
Companies need a way to evaluate how much consumers are willing to pay for a product. If a product price is lowered or raised, how does this impact level of interest? How do you determine pricing options for a premium tier versus a basic tier? Which feature should be left out and which should be included? How do you price a product that has no peer or familiarity to consumers? Or you may want to understand price floors (so cheap, you would question the quality) and price ceilings (too expensive to even consider) for your product.
In market research, there are a few traditional methods for understanding price. The one you choose depends on your research objectives and needs.
- Price Sensitivity Meter (Van Westendorp)
- Monadic/Sequential Monadic Price Testing
Price Sensitivity Meter (Van Westendorp)
For many products, consumers have an expected price range at which they are willing to consider buying an item. The Price Sensitivity Meter is a method used for exploratory pricing purposes and allows a researcher to investigate this expected price range for a product or service. For instance, an Internet company might grant free access to it’s software in the US. But should they keep the same price model for other markets like Brazil or Australia? In those markets, what might be an acceptable price range to charge?
The Price Sensitivity Meter (PSM) technique was developed by economist Peter Van Westendorp. With a four-question design, you can understand the price points at which the product is too cheap, a bargain, expensive (but worth considering), or too expensive (completely out of range). This will give you a sense of the range of acceptable prices for your product (price floor and price ceiling) Knowing price perceptions for different geographies or different consumer segments can help you develop the appropriate position or pricing strategies as you seek to reach and define your target audience.
Figure 1. The Price Sensitivity Meter uses a four question design to investigate price perceptions.
Monadic/Sequential Monadic Price Test
Once you have a firmly developed concept or product and understand price perceptions in your market, you’re ready for either a monadic or sequential monadic price test. Your goal at this point is to understand how consumer demand shifts as the pricing and/or configuration of your product concept changes. How will consumer demand change if I increase my software product by $10? What if I then offer free technical support to go with it?
To test consumer demand, the price and concept are shown and the survey respondent is asked likelihood to purchase.
A monadic test uses this set up with a split cell design. For example, if you wanted to test three price points, you can divide the sample into three ‘cells’, or three different groups. Cell 1 would be shown the $10.99 price point; cell 2, the $11.99 price point; cell 3 the $12.99 price point. Whereas a sequential monadic design, each respondent evaluates each price point, one at a time. The researcher may choose to reveal the prices in ascending or descending order.
Once all of our survey data is collected, you can graph a price sensitivity curve. The figure below, for example, shows the purchase intent at each of the price points.
Figure 2. A monadic or sequential monadic test reveals purchase intent for each price point.
Imagine you were a tour agency trying to put together a handful of vacation packages to sell as part of an online promotion. With many different destinations, dozens of hotels, meals and other options to choose from how would you configure and price your product?
Conjoint is a pricing technique used to investigate the value consumer’s place on various features that make up a product, including price. With this technique, you can understand the demand levels for competitive product sets or for different bundle configurations for a product.
In a conjoint exercise, respondents are shown a set of product profiles and asked to choose their preferred one. Respondents go through a set of a dozen such questions, receiving a new set of product profiles each time. This allows you to collect enough data to build a model that quantifies how consumers value each product feature and how interests levels are impacted when the product pricing change.
If you wanted to buy a computer and these would be your only options, which would you choose?
|Computer 1||Computer 2||Computer 3||None: I would not choose any of these|
|Processor Speed||20 GHz||4 GHz||30 Hz|
|Memory||12 GB||4 GB||8 GB|
|HDD Storage||2000 GB||1000 GB||750 GB|
Figure 3 Conjoint analysis measures how different prices and feature options affects demand for a product or services
Understanding price is a key element to successful product development and market positioning. Researchers have long used surveys to investigate how different pricing options may appeal or impact consumer behavior. Most common pricing questions can be addressed utilizing one of the techniques discussed here. Whether you are just beginning to explore the marketplace or want to gauge customer reaction to a new pricing model a survey can be the right starting point of investigation for you.
For more details on pricing research, download our comprehensive guide: “Pricing Research: How to evaluate price perceptions and willingness to pay.”