Three Ways to Price Products for Maximum Profitability
In the 1990’s, hard disk drive producers invested $6.5 billion in product research and development over four years. Their investment resulted in tremendous breakthroughs, improving storage capacity a thousandfold. As hardware storage increased, the price per surface area dropped 70 percent. As a result, these organizations realized net losses of $800 million, because they failed to correctly price product innovations.
Let this be a warning: Correct pricing is a key component of market growth. According to Bain & Company, price affects profits more than any other factor, including fixed costs, variable costs, and market share.
Pricing research helps you to understand the market’s appetite for your product before you launch. By creating pricing studies, you can determine the optimum price – a price that customers will pay and will generate revenue.
Below are three pricing methods to help maximize profitability.
Van Westendorp is ideal if you have a set product, but no idea on the price range. The study entails presenting your product to a study group and asking four specific questions about your product. The questions find thresholds for the pricing being “too cheap,” “a bargain,” “getting expensive,” and “too expensive.”
When the results are plotted on a histogram, you find an optimal price point and acceptable price range based on where the specific lines cross.
Gabor Granger is a great pricing strategy if you already have price ranges for your products. First, you show a price and ask if the respondents would purchase the product at that price point. If the answer is “yes,” the question asks about a higher price point. This continues until the respondent changes their answer to “no.”
When you’ve gone past this threshold, the survey can then ask if the respondent would buy at a price between the last “yes” and the last “no” to pinpoint the highest possible price. Plotting the responses gives you demand and revenue curves for the product, which let you optimize your price point for maximum profitability.
3. Conjoint Analysis for Pricing
Conjoint analysis allows you to quantify the value that customers put on specific features of your product. Respondents will see between 2-5 different product configurations and then choose which option they like the best. Then evaluate the combinations of packages using statistical analysis. You can optimize the ideal package of features for maximum profitability.
Pricing can be tricky but product research helps you get it right. Ultimately, the right pricing helps drive maximum revenue and avoid undervaluing your product.
To learn more about using research to price your products, check out the Qualtrics e-book: How to Price Products for Maximum Profitability.
eBook:Price Products for Maximum Profitability