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:
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.
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.
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:
Gabor-Granger, if:
Conjoint, if:
Learn more about each methodology, the research and results below.
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:
The reporting identifies four values:
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.
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:
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:
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:
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.
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
The data is then analyzed to establish four dimensions:
Based on the analysis, the utility values can be used in predictive models estimating market shares and purchase intent:
The model can be implemented in an interactive modelling tool, where
If you are still in doubt how to design your pricing study, we are happy to guide you based on your individual research objectives.
