17 Aug Is your price right? Don’t guess – Pricing Research is crucial
Pricing research helps you find an optimal price for your product or service to both attract customers and maintain your market share. The optimal price allows you to capture maximum revenue from your offerings.
Do you think your product is priced right? In this blog, we explore what types of pricing research can be done, what are the benefits and how to go about it.
What is Pricing Research?
Pricing Research provides you with the consumer insight you need to make informed pricing strategy decisions. Whether you are planning to launch a new product, expand to a new market or target a new audience, research is the key to an effective pricing strategy.
It aims to discover what customers are willing to pay for a product or a service. This helps you to find the optimal price point to maximise profit. Pricing research guides businesses on how they can increase revenues and profit margin by adjusting prices.
Getting your pricing right has more impact on profit than any other factor including market share, variable costs or fixed costs.
Pricing research has the following key benefits:
- Understanding the target market’s willingness to purchase
- Achieving the highest ROI
- Preserving the value of your brand
Increasingly, companies are deciding to do pricing research in order to maximise their profit. The reason? Given its scientific accuracy, pricing research is a reliable way to optimise your pricing strategy, and in turn your overall business strategy.
In the 1990s, $6.5 billion was invested in the R&D of hard-disk drive manufacturing. This resulted in great innovation as storage capacity increased by 1,000%. The bummer? Even after investing so much in product development, they netted a loss of $800M according to McKinsey’s analysis ONLY because the manufacturers failed to price these innovations correctly.
This proves that an accurate pricing calculation can lead to market growth. Out of the world’s top companies, 76% strongly agreed that their pricing strategies maximised returns at the customer and product levels according to Bain.
Here are 6 ways to effectively conduct pricing research:
- 1. Begin Pricing Research Early
When launching a new product, the marketing research should be done in the development phase. The earlier the better. This allows you to “design-to price”, meaning you can first set the price point and then build products around it in order to deliver the most value to your customers. Pricing research allows you to understand your customers’ willingness to pay. You make sure that you’re not over or under-quoting your offering. By doing all this, you can make more profitable design decisions.
- 2. Choose the Right way to Research
You can do pricing research in two types of businesses; B2B or B2C. For B2B companies, qualitative research is more fitting since the customer base is usually smaller. So, conducting interviews and product tests is easier and more valuable. For B2C companies, quantitative research would be best since the consumer base is very large.
- 3. Conduct your Research Indirectly
It is wiser to not directly ask customers what they are willing to pay for a product. Psychology says that we often do not know what we want. So, consumers are biassed and often overestimate or underestimate their willingness to pay. While conducting pricing research, you must take this into consideration and gather information using indirect questions and techniques.
- 4. Use Pricing Research to Build Meaningful Segmentation
The main objectives of pricing research are to help you segment the market and help you decide the niche you want to target. More importantly, it can help you understand which markets you are not going to pursue. Pricing Research can give you insight into a consumer’s willingness to pay, to make sure your product or service has an adequate market.
- 5. Communicate Insights to your Sales Team
After developing your pricing strategy, the information should be communicated tof your sales team. Using this data, they can then further optimise their sales strategy by efficiently targeting the correct audience. Plenty of companies educate their sales force about the product but not the research about what customers are willing to pay. If you do this, you are enabling them to articulate better sales pitches and refine their price negotiations.
- 6. Set Achievable Goals
Think long-term. Doing large-scale research for just one product doesn’t make financial sense unless you’re a huge conglomerate. Try to gather competition data, price sensitivity and other factors to help you make better business decisions. Try to get as much as you can in return for your research investment by setting defined and achievable goals.
Some basic market research pricing strategies include the following:
- 1. Conjoint Analysis
This is a very common technique for determining price. To do this, we compare what the customer is giving up by paying a certain price for a product to what the customer is gaining by spending that amount, like the features. The economic impact of price changes can be evaluated by analysing how consumers make their purchasing decisions.
Conjoint analysis helps ascertain price sensitivity i.e. how sensitive customers are to changes in the price and allows researchers to create a market model for future use.
- 2. Gabor-Granger
Essentially using the practices of direct marketing, an optimal price is determined. Basically, consumers are asked if they would buy a product at a certain price. Then, they are asked if they would buy the same product but at a different price. From this line of questioning, we determine a price point that is optimum for the customer. The main drawback of this technique is that customers tend to understate or overstate the price they are willing to pay for a product. It also does not account for competitive pricing, hence a competitor may undercut your price and sell more.
- 3. Van Westendorp
This method also uses the methods of direct pricing. The Van Westendorp strategy basically determines whether a product is perceived as too cheap, cheap, a bargain, expensive or just too expensive. It is done by asking customers about different price points, similar to the Gabor-Granger method. However, then these prices are plotted on a graph and the area between them is used to ascertain a range of acceptable prices.
Drawbacks to this method include a lack of competitive research and an assumption that consumers know what the market situation is. It can be helpful if used along with Gabor-Granger or Conjoint methods.
- 4. Additional Tools
Any of these methods can provide a reasonable foundation for your pricing strategy. However, in addition to these research methods, organisations should use competitive intelligence from syndicated market research reports to evaluate competitors and take that into consideration as well. This will better help determine what pricing strategies attract, or deter, customers as a complement to your in-house research.
Aeon offers syndicated research and competitive intelligence collected across 20 cities in India. Leverage the power of market research to help identify growth opportunities in your business. Contact us to find out more.