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Pricing research

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You, as a brand, can have the best product in the market and still not be preferred by customers due to inappropriate pricing. The price of your product should reflect on its features, quality and advantages. Anything that is over or below that can be disappointing, for the brand and for its customers. 

Overpricing can label your product as expensive and can limit your market share. Underpricing can make your customers question your product’s quality as it may seem too good to be true. 

Pricing research is the right tool for any brand to make sure that their product is optimally priced to suit the budget of their target market. Pricing research is a methodology that seeks to understand what the customers think of the brand’s products and services and what would they be willing to pay for it? 

Obviously, this willingness to pay has to have a lower limit that helps brands cover their costs in addition to generating revenue. However, if market research suggests a price that is lower than this limit, then it is not feasible to go ahead with developing and marketing the product in the first place. 

By conducting thorough and accurate pricing research, brands can make sure they charge enough to generate good returns on investment while making the product affordable and appeasing for their target customers.

But the question is – how to decide the optimal price?

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01

Types of approaches to pricing research

Based on the type of research methodology, there are two approaches that can be described as follows:

The direct approach: This approach involves providing the participants in the research, a description of the product, its features, advantages and the problems it will solve for the customers. Based on this description in addition to their own buying experience, the participants quote a price that they would be willing to pay for the product so described. The benefit of such an approach is the fact that it does not limit the respondent’s answers to a set of pre-defined and structured options. The open ended nature of the questioning allows the respondent to express themselves freely by elaborating on the reasons for their choice. Given that efforts are put in to avoid sampling bias by increasing sample size and choosing the right participants, this technique can help a great deal in narrowing down the price range.

A lot also depends on the description of the product that is provided. The researcher needs to be up to date regarding any data that can support the respondents in making their decision. 

The indirect approach: While the direct approach assumes the participant’s interest in buying the product, the indirect approach uses a combination of product description and price to ask if the participant will be interested in purchasing. This approach shifts the center of focus from price quoting to demand assessment. The indirect approach helps the researcher in understanding the level of interest that a respondent has in the product, given its features and pricing. Further, it explains customer mindset about the type of features they look for and whether or not do they have a need for the type of products that the brand is offering. 

Now that we’ve understood the approaches to gathering market information on pricing, it is clear how both these approaches gather customer data.

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02

Pricing research techniques

Gabor-Granger direct pricing technique 

This type of pricing research is also known as direct pricing as it tries to capture an optimal price based on respondent’s willingness to buy at different price points. 

The respondent is given a product and its description along with different prices. Respondents are asked to answer- Would you buy this product at this particular price?

Price points are changed continuously and respondent replies at each point are noted. Respondents may respond in a “yes, no, maybe” form or may rate their likelihood of purchasing at that price point. Price points can also be decided using uniform skips such as increasing or decreasing the price by $5, $10, $15 and so on or randomizing the choices altogether.

Gabor Granger helps in deciding the upper and lower limit of individual research participants. It, however, does not consider the competitive brand pricing which may be less than the ones estimated through this research and so decides prices under the assumption of a monopoly market. 

 

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Van Westendorp price sensitivity model

The Van Westendorp model focuses on developing a price range for products, unlike the Gabor-Granger technique which focused on specific price points. This model asks a series of questions that help determine the point of marginal cheapness, point of marginal expensiveness and the optimal price point. The questions are designed in such a manner that allows the researcher to test the price points which are too expensive and too cheap and accordingly, develop a price range.

The four questions are as follows:

  • What price is so low that it makes you question the product quality?
  • At what price do you feel that buying the product would be a good bargain for you as a customer?
  • What price would you see as being expensive, but worth considering?
  • What price would you term as too expensive?

These four simple questions help the researcher in building a line graph to analyze and evaluate a price range.

Similar to Gabor-Granger, this technique also does not consider competitive pricing. Moreover, the optimal price point determined by this method isn’t exactly accurately, as it does not consider the costs involved. The surveyed individuals have to be selected carefully in order to ensure that they are a fit candidate to provide educated answers to the above questions. 

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Brand price trade offs

This is an easy to understand pricing research technique mainly due to usage of direct correlation between brand and price. Here, the respondents are given a product with price points increasing constantly until the point where the respondent chooses not to purchase. This method is not generally preferable for finding the ideal price mainly because of its biased responses. Respondents can easily keep track of price changes and can accordingly alter their answers to suit the researcher. 

Pricing research requires the genuine and accurate point of view of its participants as a representative of the targeted customer segments.  

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Brand price trade offs

This is an easy to understand pricing research technique mainly due to usage of direct correlation between brand and price. Here, the respondents are given a product with price points increasing constantly until the point where the respondent chooses not to purchase. This method is not generally preferable for finding the ideal price mainly because of its biased responses. Respondents can easily keep track of price changes and can accordingly alter their answers to suit the researcher. 

Pricing research requires the genuine and accurate point of view of its participants as a representative of the targeted customer segments.  

Conjoint analysis

Conjoint analysis is considered to be a more holistic, realistic and reliable approach when it comes to determining optimal price for any product. Apart from suggesting what price attracts the market and encourages buying, conjoint analysis also helps discover the customer mindset and the importance they assign to different attributes of a product. 

In the discrete choice variant of this method, researchers are given the freedom to experiment with different attributes and assign them to create product packages. These packages not only have a price tag attached to them, they also come with certain product features that may catch the eye of a customer. These features vary from product to product. For smartphones, these attributes may be storage, RAM, processor and so on and for a clothing brand it may the fiber quality, the color and the size. 

After designing these product packages, research participants are asked to choose one and provide a reason for the same. The participant choice helps the researcher find areas that may make the customer consider the pricing to be appropriate. Apart from this, the product packages can also be designed to resemble competitor’s product and this can help contrast between multiple price and product models.

It is important that the product packages tested during research is limited so that the respondent doesn’t get confused and overburdened. Overloading the participant with multiple choices can lead to inaccurate selection and make the process long and cumbersome.

Choose what suits you best 

Regardless of the variety of techniques and methodologies that exist in the market, brands have to choose what suits them best. This requires considering the product development stage, attributes to be tested, existing competitors and their offerings and costs involved. Choosing the right method can help brands get an idea of what attracts the customers and how they can price their products correctly to cover costs and earn a surplus while maintaining and expanding their market share.

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