Pricing study

Get the sale with the right price point

In the current market situation of increasing inflation and decreasing consumer confidence, many brands conduct price elasticity studies. And with good reason: offering consumers the right price point maximizes the revenue opportunity and can build long-term consumer loyalty.

Brands have several opportunities to identify their optimal pricing strategy in a changed market situation:

  • Testing price adjustments vs change in packaging sizes
  • Determine price elasticity to determine when changed pricing will affect demand
  • Identifying optimal pricing points for adjusted pricing

A pricing study aims to identify the best pricing for your product or service. The purpose is to identify the best price range for one or more products or services based on consumer preferences. Thus, a pricing study provides you the foundation for maximizing profits for a new or adjusted product or service.

Key insights from a pricing study

  • Optimal pricing level
  • Consumer pricing preferences
  • Product or service value for money indicators
  • Price elasticity measures.

With a pricing study, you will not only gain insights on the optimal price for your product, but also get an overview of the price elasticity.

What methodology to use

We apply recognized methods to analyze pricing preference data, such as the Gabor–Granger method, Van Westendorp's Price Sensitivity Meter and conjoint analysis. Which methodology to use depends on the market situation; pricing studies can be both a part of the product innovation or for testing price levels and price elasticity amidst sudden change in market conditions, competition or as part of a product relaunch. As a general rule of thumb, you should choose

Van Westendorp, if:

  • You are bringing a new product to market, or is entering a new market with the product
  • There is no established price level for the product
  • The product is ready, the only thing that can change based on the results, is the price

Gabor-Granger, if:

  • The product is already introduced in the market
  • You want to know how changing the price would affect your sales volume
  • You want to optimize your revenue / profit

Conjoint, if:

  • It is rather a complex concept test, not only a price test
  • Price is only one attribute among others
  • Market shares of competitor brands should also be estimated.

Learn more about each methodology, the research and results below.

Price test with Van Westendorp

The Van Westendorp methodology is a classic way for consumer brands to uncover the optimal price point for their product. It is typically used for price studies where there is no established price point for the product (e.g., new product, or entering a new market) or if no prediction on actual demand at specific price points is required. We do not recommend using this methodology for purchase volume prediction or to build sophisticated models on.

The study consist of four standardized questions:

  • ”Too expensive”: At what price would you say that it is so expensive you wouldn’t even consider buying it?
  • ”Not a bargain”: At what price would you say that it is not a bargain, but you would still consider buying it?
  • ”Bargain” or ”Not expensive”: At what price would you say that it is a good bargain, a great value for the money?
  • ”Too cheap”: At what price would you say that it is so cheap you would suspect it can’t be good?

The reporting identifies four values:

  • The point of marginal cheapness (PMC)
  • The optimal price point (OPP)
  • The point of marginal expensiveness (PME)
  • The point of indifference (IPP).

When interpreting results it is important to keep in mind, that the OPP is not the only possible ”best” price. Rather, the acceptable price range is between PMC and PME and the optimal price range is between OPP and IPP.

The Van Westendorp Price Model

Uncovering price points can be a part of a market profiling study and/or be combined with a Newton/Miller/Smith demand estimation including two more questions:

  • At the <expensive price> how likely are you to purchase the product in the next six months? Scale 1 (unlikely) to 5 (very likely).
  • At the <cheap price> how likely are you to purchase the product in the next six months? Scale 1 (unlikely) to 5 (very likely).

Price sensitivity with Gabor-Granger

The Gabor-Granger method is typically used to identify price elasticity and predict estimated revenue, thus a key approach when researching price sensitivity. It is typically used when a product is introduced to the market and has an established price, when you want to know how changing the price would affect sales (both in volume and revenue), or when you wants to know the price elasticity value.

The research is simple in terms of the survey as it simply repeats one question to the respondent:

  • Would you buy this product at a price X?

The questions is repeated with decreasing X values until the answer is ’Yes’. This is because it is assumed that a customer who would buy the product at X would also buy it at X – Δ, and, thus, the answers directly refer to consumers' purchase intent. The cumulative values of this show the total proportion of consumers willing to buy the product at a given price point.

Data is then processed with an inverse cumulative distribution of answers plotted and the calculation of the price elasticity (PE) using the formula

Price elasticity of demand = Percentage change in quantity demanded ÷ Percentage change in price

The results of the analysis are divided into three:

  • Elastic: PE > 1 (marked green in the illustration below)
  • Unit elastic: PE = 1 (marked purple in the illustration below)
  • Inelastic: PE < 1 (marked blue in the illustration below)

Analyzing Price Elasticity with the Gabor-Granger method

Uncovering price elasticity can be done in an isolated study or in connection with a price sensitivity study (cf. below), other pricing study approaches (e.g. a MaxDiff or conjoint analysis), or as part of a concept test.

Pricing studies using conjoint analysis

Price studies can also be a part of a concept test, you may want to understand the importance of price relative to other attributes, or you are looking to uncover your expected market shares or purchase intent for different options. For this, a conjoint analysis can be the right option.

The research can be done as a choice-based conjoint/adaptive choice-based conjoint. This requires the product attributes and attribute levels are defined. To make it a price test, price must be one of the attributes. In the survey, respondents are

  • shown combinations of those attribute levels in pairs
  • asked to pick one from each pair (”If these two products were your only choice, which one would you choose?”)

The data is then analyzed to establish four dimensions:

  • For each attribute, an overall importance is calculated
  • For each level of each attribute, a utility value is calculated
  • For every possible combination of attribute levels (e.g., big blue rectangle vs. small red circle on a packaging design), the total utility of the product can be calculated
  • Predictive models can be built to calculate an estimated level of demand for every possible combination of attribute levels

Conjoint price analysis

Based on the analysis, the utility values can be used in predictive models estimating market shares and purchase intent:

  • Utility values can be interpolated for any price value (even for those that were not asked in the survey)
  • Competitor brands can be included in the survey and used as another attribute
  • A predictive model is built using the utility values as predictors and the purchase intent as dependent variable 

The model can be implemented in an interactive modelling tool, where

  • the user can select the desired levels for each attribute
  • the model will calculate the predicted purchase probability for the selected values
  • If multiple brands are added to the model, it will also calculate the expected market shares, based on the probability of purchasing each brand.

If you are still in doubt how to design your pricing study, we are happy to guide you based on your individual research objectives.

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Take your setup one step further
Standardize, democratize and accelerate your time-to-market for new products with a streamlined custom concept testing framework
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Take your setup one step further
Standardize, democratize and accelerate your time-to-market for new products with a streamlined custom concept testing framework
Learn more