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Pricing Research Techniques

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Table of Contents
01

What is Pricing Research?

Product pricing plays a crucial role in contributing to a company’s profitability, having a big effect on whether customers purchase their product or not. Hence, it is very important to companies that they get their pricing right.

Pricing Research involves using research techniques to help measure the impact of a change in price on the demand of a product. Pricing research helps organizations determine the optimal price for their products in a way that maximises revenue and market share. This is a qualitative form of research that allows you to capture high returns on product investments and preserves the value of your brand.

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02

Types of Pricing Research Techniques

Pricing techniques help companies determine how much their target audience is willing to pay for a product. The four main methodologies of pricing strategy are:

Conjoint Analysis

  • The conjoint analysis pricing research technique is considered to be the most reliable way to determine price. It uses a type of conjoint analysis called discrete-choice modelling with which researchers determine the influence of price, as well as product features, on a customers’ willingness to pay certain price points. 
  • Respondents are given a choice of two to five product profiles with different configurations and are then asked to choose one. This allows researchers to create pricing and packaging models.
  • This method helps gain useful insights on the complexity of pricing and product preferences. However, it does require specialized expertise to execute, and tends to be more expensive to conduct than other pricing research techniques.
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Monadic Price Testing 

  • Monadic price testing is a commonly used technique in price research as it is one of the least biased ways to measure price sensitivity. It involves respondents being shown product descriptions and then being asked about their likelihood to purchase it at a given price point. This kind of direct questioning can provide useful insights on the appeal of your product at a certain price, across different customer segments. 
  • The monadic design uses a split cell test wherein the sample group is divided across the different price points being tested. For instance, if you are testing 5 price points, the sample size will be divided into 5 cells, or groups. It is important to ensure that each cell group has a similar demographic mix. Each cell will be shown a different price point and will be asked about their likelihood to purchase the product at that price. With this data, a price sensitivity curve is graphed, showing purchase intent at each of the five price points.
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Sequential Monadic 

  • Sequential monadic testing, similar to monadic testing, aims to gather information on purchase intent at different price points to build a price sensitivity curve. However, in sequential monadic price testing, each respondent evaluates each price point. Price points may be revealed to respondents in an ascending or descending order. 
  • Compared to monadic testing, this method requires smaller sample sizes, thereby reducing sampling costs. This is because, instead of grouping respondents into categories and asking them to evaluate only one price point, sequential monadic testing asks every respondent to evaluate every price point. This way, each respondent provides more data as they evaluate more than one price point. 
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Van Westendorp’s Price Sensitivity Meter (PSM)

  • Dutch economist, Peter Van Westendorp, developed this price sensitivity meter that constructs a range of acceptable price points for a given product. It does so by asking respondents the following four questions:
      • Too Expensive: 

“At what price would you think this product is too expensive to consider?”

      • Expensive:

 “At what price would you think this product is expensive but worth considering?”

      • Cheap: 

“At what price would you think this product is a bargain?”

      • Too Cheap:

“At what price would you think the product is so inexpensive that you would question its quality?”

  • After charting the cumulative frequency of the responses to these questions, you can determine a set of ranges, and an optimal price. This will range from a lower threshold to an upper threshold, as well as the optimal price point. 
  • PSM is used to understand pricing expectations, rather than willingness to pay or likelihood to buy. It tries to identify how much respondents would expect a product to cost, and helps understand price perceptions for that product. By understanding price perceptions, you can better develop pricing strategies to appeal to your target audience.  
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