Why pricing analysis is still needed
There is sometimes a misconception that if you develop and sell great products (or services), understand customer needs, and offer exceptional customer service then price doesn’t matter.
Sadly, it does. Over 80% of online shoppers check prices before making a purchase. However, don’t automatically think selling at the lowest price is the best strategy (it probably isn’t). Aside from the commercial challenge to margins, brand image etc. prices that are too low cause customers to question the quality of a product (or service) and prices that are too high cause people to think something is too expensive.
It’s a bit of a cliché but the price needs to be seen as value for money but, what does this really mean? In simple terms, it’s about setting a price that fits within peoples’ expectations (sometimes known as optimum pricing) and reflects their perceptions of the product’s value to them.
In many situations price isn’t an issue, established products typically face competition and will be associated with a price level or range. But what if you’re looking to introduce a new product or service where there is no real reference point? This might seem improbable, but innovative, agile businesses do look to introduce new products or derivatives and deciding on the optimum price can be a challenge – pricing research can be a real help here in setting the right price or validating the price you were looking to charge.
At Sapio we use two slightly different pricing research models depending on the nature of the market and the information requirement.
Van Westendorp pricing model
If you are looking to introduce a new (or substantially different) product or service where there isn’t really a reference point for the price, we typically use the Van Westendorp, Price Sensitivity Model (PSM). This helps organisations to understand the price at which the product is considered to be too cheap (i.e. people start to question the quality of the product) and at the other end of the scale the price at which it becomes too expensive. This allows companies to identify an optimum price range based on sales maximisation and revenue per unit sold.
Gabor Granger pricing method
Sometimes you might want to see what impact changing price would have on total sales for an existing product, where the price is known. Faced with this challenge we tend to use the Gabor Granger model. With this approach we ask people to indicate how likely they would be to buy a product at different price points including the price at which it is currently sold.
This gives us a measure of demand at the current price point (which has generated a known sales volume) and this can be compared directly to potential demand at other price points. Analysis then enables us to understand whether the current price is optimal or whether a higher price and the associated lower sales volumes would lead to higher revenues. In short, the research provides a form of demand curve without actually having to change the price to see what happens.
Price has always been a critical element of any marketing strategy but given the visibility digital media offers to potential customers it is perhaps more critical than ever. Why not give us a call to discuss how our pricing research models can help you get it right and understand how you can optimise your revenue.