Exploring Price Testing Methodologies: A Comprehensive Guide
Effective pricing strategies can help companies not only to increase revenues but also to leverage operating profits in a faster way than trying to optimise operating expenses by supply chain adjustments or cost cutting. To pick the right pricing strategy, companies need to understand what consumers are willing to pay for a product or a service and uncover potential for price adjustments first to implement price changes that put significant leverage on operating profits. In this article we delve into various price testing methodologies, their advantages and disadvantages.
Methods to Understand Consumer Price Perceptions
Van Westendorp Price Sensitivity Meter (PSM)
The Van Westendorp PSM is a consumer survey method that identifies price sensitivities and preferences using four key questions:
👉"At what price would the product or service be so expensive that you would not consider buying it?" This question helps identify a product's price range's upper limit from the consumer's perspective.
👉"At what price would you describe the product as expensive, but you would still buy it?" This question helps to determine the high end of the acceptable price range, where the consumer begins to feel the product is expensive but still sees enough value to purchase it.
👉 "At what price would the product be too cheap for you to doubt its quality and not buy it?"This question aims to find the lower limit where the price is so low that consumers question the product's quality or authenticity.
👉 "At what price would the product be a bargain, i.e., a great buy for the money?"This question helps to establish the lower end of the acceptable price range, where consumers feel they are getting good value for their money.
Utilising the Van Westendorp Price Sensitivity Meter, price ranges for new products or services can be determined.
➕ Simple and straightforward
➕ Provides a range of acceptable prices
➕ Good for products with no market history
➖ Ignores competitors' prices
➖ Doesn't consider actual consumer behaviour vs their stated opinion
The Gabor-Granger Method assesses the willingness of consumers to buy at various price points through a survey. Researchers can use the results to determine the best price-sales scenario for the business case of their product or services to decide on the right price strategy.
With the Gabor-Granger Method, you would inquire survey participants about the probability of purchase if the price were to rise by an additional amount, say $5, $7.50, $10, $12.50, and so on.
Similarly to a Fake Door Test, the Gabor-Granger Technique explores how and if a price can be raised without significantly impacting sales volume and at which levels notable shifts in consumer willingness to pay would occur.
The Gabor-Granger Method is useful for products with an established market presence where consumers are aware of the key benefits of the product and likely to have a purchase intent for the respective product.
Methods for Analysing Potential Trade-offs and Costs
The conjoint analysis evaluates how price and other product attributes influence consumer preferences and choices. It allows researchers to understand how valuable a product or service is perceived by consumers. There are multiple types of conjoint analysis as follows:
1️⃣ Choice-Based Conjoint (CBC) Analysis: This common type of conjoint analysis is used to determine how respondents value combinations of features. It involves presenting participants with a series of options or profiles and asking them to make choices, similar to real-world decision-making scenarios.
2️⃣ Adaptive Conjoint Analysis (ACA): In ACA, each respondent's survey experience is tailored based on their responses to initial questions. This method is particularly useful in studies with a large number of features or attributes, as it helps streamline the process and extract more valuable insights from each respondent.
3️⃣ Full-Profile Conjoint Analysis:Here, respondents are presented with complete product descriptions and asked to choose the one they would most likely purchase. This method provides a comprehensive view of consumer preferences by considering all aspects of a product.
4️⃣ MaxDiff Conjoint Analysis: Also known as Best-Worst Scaling, this technique involves presenting multiple options to respondents, who are then asked to rank these from best to worst or most likely to buy to least likely to buy. It's effective in understanding the relative importance of different product attributes.
5️⃣ Ranking-based Conjoint Analysis: This type involves asking respondents to rank different product profiles based on their preferences. It’s a straightforward approach that directly elicits consumer preferences.
6️⃣ Rating-based Conjoint Analysis: In this type, respondents rate product profiles on a scale (like 1 to 5 or 1 to 10). It gives a more nuanced understanding of their preferences compared to ranking.#
Each type of conjoint analysis has its unique applications and can be chosen based on the specific goals and context of the study. Hybrid models that combine elements of different types are also used to leverage the strengths of each approach
➕ Provides a holistic view of consumer decision-making for specific prices
➕ Useful for complex products with multiple features and information layers
➖ Requires advanced statistical knowledge
➖ More resource-intensive to conduct than regular survey-based qualitative research methods
This method begins by calculating the actual cost incurred in creating a product. This includes the expenses for materials, labour costs for your workforce, and a proportionate part of overhead costs, which encompasses various operational expenses like utilities. Once these costs are totaled, a markup percentage is then applied on top of this sum. While some might consider this approach rudimentary, its significance lies in its ability to set a baseline price. Selling below this calculated price would lead to direct financial loss, making this method instrumental in ensuring that pricing decisions maintain profitability at the very least. The cost-plus pricing is commonly used in manufacturing or basic retail industries.
➕ Easy to calculate and apply
➕ Ensures coverage of costs and profit margins
➖ May not reflect market demand or competitor pricing
➖ Can lead to noncompetitive pricing
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Evaluating Price Acceptance in real Market Environments
Monadic Price Testing
The monadic method stands out due to its distinct approach. This technique involves dividing the participant pool into several segments, with each group being presented with the same stimulus (identical product or concept) at varying price points. By analysing the collective responses, insights are gained into the price levels that are most appealing and acceptable to consumers. The monadic method is useful for testing price sensitivity for a single product variant. Behavioural research methods for price testing such as fake door tests (pretotyping) can also be set up and considered as a monadic test.
➕ Yields clear insights into price acceptance by consumers
➕ Reduces bias by testing one price at a time
➖ Requires larger sample sizes for accuracy
➖ Can be time-consuming and expensive if not executed with the correct infrastructure and tool set
Behavioural research can measure consumer behaviour in a real-life environment and derives insights from consumer actions in relation to the presented stimulus of the test (e.g. a product with a specific price). It can be applied both for existing and new products. A common behavioural research technique for price testing is pretotyping, also called fake door test, smoke test, painted door or red eye test. It can gather insights through the use of real customer journeys, often consisting of ads and landing pages, and measuring consumer actions along the journey, such as conversion rates. This data can then be used to formulate a business case with each tested price point based on conversion rates along the journey. We have formulated a comprehensive guide on pretotyping here which you can use for free.
While in classic market research the lower prices are often chosen from consumer surveys, behavioural research makes it possible to test various price points separately in a realistic environment. In this way, even for higher prices, better conversion rates can be measured without surveying consumers but by measuring their actions.
➕ Cost-effective and low-risk validation: One of the standout benefits of this approach is its cost efficiency. Businesses can measure the interest and price sensitivity for a new concept without investing in actual product development, thus significantly reducing financial risk
➕ Real-life data: Pretotyping provides real-life data on consumer behaviour derived from actual but for consumers unknowingly simulated buying scenarios. The insights are drawn from how consumers interact with the presented price points, giving businesses immediate insights into real consumer price sensitivity.
➕ More reliable insights: By understanding real consumer actions rather than opinions, businesses can make more informed choices about which pricing decision to take without losing out on sales volume. We have recently published an article on the 40% gap between stated behaviour and actual consumer behaviour in shopping. You can access the article here.
➖ Potential consumer disappointment: It’s crucial to inform consumers about the fact that the presented product is not available before gathering and proceeding with any personal data to avoid any false expectations or disappointments by your potential customers.
➖ Scope on early phases:While being fast, low-risk and reliable, this method still primarily assesses initial price acceptance. It might not fully capture long-term market viability or customer loyalty dynamics.
Crafting Your Own Price Testing Framework
To implement an effective price testing strategy, start by setting clear goals and selecting the appropriate product category. Choose a testing method that aligns with your objectives, gather reliable data, and analyse the results meticulously. Each methodology offers unique insights into consumer price perceptions, and by applying them jointly, businesses can navigate the complex pricing landscape, striking the right balance between profitability and market appeal. The right pricing strategy can be a game-changer for your business case and leveraging your operating profits in the most significant way as illustrated in our recent blog article on why pricing is the key to leveraging operating profits.
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Daniel is the Founder & CEO of Horizon. He is driving the strategic development of the organization, establishing a thriving company culture with a team on a mission to help teams build products that customers really want. Daniel has a strong track record in sales, marketing and building startups from zero to one. Before Horizon, he successfully founded and co-founded multiple companies, i.e. Candylabs, BikeBeat and Venture Advisory Partners.