Getting The Price Right Takes More Than Guesswork
Friday, October 29, 2010
as published on October 29, 2010 by the Dallas Business Journal
Setting the optimal price for a product or service is one of the most challenging decisions a business makes. You must consider:
- Customers’ willingness to pay
- Cost of products and services
- Competitors’ pricing
- Market changes affecting demand
It still surprises me when I encounter entrepreneurs who only focus on cost and competitor’s pricing, making assumptions about customers’ willingness to pay without any real research.
For most product categories, there are at least three customer types in pricing attitudes:
- Price sensitive customers, always looking for the lowest price
- Customers who understand value and are willing to pay for the benefits delivered
- Customers who are looking for a trusted partner/brand that can reduce the risk of aggravation later, thus price plays a secondary role in their buying decision
To set optimal prices, businesses should conduct primary research to identify customer pricing segments and determine what product/service attributes and benefits may drive demand in the context of the competitive landscape.
There are two main categories of pricing research methods:
- Direct Questioning: Questions are asked directly about willingness-to-pay, buy/not buy decisions, questions about prices considered too expensive or too cheap, etc. Some of these approaches tend to yield biased results since the questions put respondents in a bargaining mode that only leads to price lowballing, so results should be taken as exploratory.
- Trade-off Analysis: We ask respondents to make a choice between product attributes or product configurations, in which price is another variable among many attributes to consider. Methods in this category tend to mimic the purchase situation in a more realistic way as the studies can be designed to reflect competitors’ pricing, brand consideration, and customer segments. The results are then used to simulate “what-if” scenarios to identify the prices that maximize revenues, profit or share of preference under different market conditions and cost structures.
If done right, pricing research can really help a business to set the optimal prices that lead to growth and profits.
This is part of a series of pricing research posts that Jeffrey Henning and I are writing. The series so far:
To learn more about our price research service visit Price Research.