Pricing studies aim to discover what customers are willing to pay for a product or a service, and by doing so, determine the optimal price point to maximize profit, revenue or market share. Pricing research also determines how an organization can increase revenues and profit margin by increasing or decreasing prices.
While there are many approaches to pricing strategy, three different methodologies generally emerge:
- Van Westendorp Price Sensitivity Meter
- Gabor-Granger Technique
- Conjoint Analysis
Van Westendorp’s price sensitivity meter
Developed by economist Peter Van Westendorp, the price sensitivity meter is a type of direct pricing research that constructs a range of acceptable prices for a given product. By asking the following four questions Van Westendorp’s Price Sensitivity Meter constructs a range of acceptable prices for a given product by asking four questions:
- At what price would you begin to think the item is too expensive to consider?
- At what price would you begin to think the item is so inexpensive that you would question the quality and not consider it?
- At what price would you begin to think the item is getting expensive, but you still might consider it?
- At what price would you think the item is a bargain – a great buy for the money?
Gabor-Granger direct pricing technique
The Gabor-Granger technique is a type of direct pricing that asks respondents if they would purchase a product or service at a specific price. Researchers then change the price and ask respondents again if they would purchase the product or service. For example, researchers might ask respondents to respond to likelihood of purchase questions given the price would increase by an extra $5, $10, $15, $20 and so forth.
This direct pricing technique uses the results to determine demand at certain expected price points, which can then be used to determine an optimal price point within the market. Keep in mind that because direct pricing measurement asks about pricing directly, researchers assume that survey respondents have a certain level of familiarity with the product or service. Additionally, the Garbor-Granger technique does not take competitive pricing into effect.
A more advanced type of research, conjoint analysis is often considered the most accurate and reliable way to determine pricing. Through discrete-choice modeling, a specific type of conjoint analysis, researchers can determines the influence that both price and product features have on brand value.
Discrete choice modeling gives respondents a choice of two to five product configurations and then asks them to choose one of the configurations to help researchers determine packaging and pricing models. Ideally, respondents choices reflect the value or utility he/she assigns to each attribute.