Price Analysis
Find the right pricing with our profound market research expertise
Here are the most prominent methods to find the right pricing.
Pricing is an essential part of the marketing mix. But even successful companies sometimes do not have an optimized pricing for their products or services: some could sell more of their products at a lower price, while others loose out on profit by setting prices too low, although consumers would be willing to spend more.
Van Westendorp's Price Sensitivity Meter (PSM)
Peter Van Westendorp was responsible for a well-known procedure to determine price readiness. Van Westendorp answers the two questions: What is the maximum price consumers would pay for a product and how high can a price be for the product to still be bought?
For the analysis, test persons are asked four questions:
(1) At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
(2) At what price would you consider the product to be priced so low that you would feel the quality could not be very good? (Too cheap)
(3) At what price would you consider the product to get expensive, so that it is not out of the question, but you would have to give some thought before buying it? (Expensive/High Side)
(4) At what price would you consider the product to be a bargain – a great deal for the money? (Cheap/Good value)
An advantage of the Van Westendorp method is the simple, visual presentation of results through a graph. The X-axis shows the prices and the Y-axis the cumulative frequency (percentage of respondents who named this price). Using a simple procedure (inverse value input for the curves cheap and expensive), four curves are formed on the basis of the four questions.
According to Van Westendorp, the intersection of the curves too favorable and too expensive represents the optimal price.
For the analysis, subjects are asked four questions:
(1) At what price would the product be too expensive that you would not buy it? (too expensive)
(2) At what price would you consider the product expensive but still be willing to buy it? (expensive)
(3) At what price would you consider it cheap so that you get good value for your money? (Cheap)
(4) What price would be too low for you to expect poor quality and not buy the product? (too cheap)
One advantage of the Van Westendorp method is the simple, visual presentation of the results using a diagram. The prices are shown on the X-axis and the cumulative frequency (percentage of respondents who named this price) on the Y-axis. A simple procedure (inverse value entry for the curves cheap and expensive) is used to create four curves based on the four questions.
The intersection of the curves too cheap and too expensive represent the optimal price, according to Van Westendorp.
The intersection of the graphs of „not expensive“ and „not favorable“ is called the point of maximum price difference. At this point, the exact same number of consumers find the price either „expensive“ or „cheap“. This is where the price comes in best in the perception of consumers. As a downside, Van Westendorp’s meter does not adress product characteristics, as it purely deals with prices.
How do I optimize my Companies Price Demand Function?
The price demand function gives evidence of the ratio between price and sales, i.e. the price at which a company sells the exact amount of products to achieve the best possible profit. However, few companies know their price demand function in detail.
Gabor Granger Method
The popular method to explore the relationship between price and sales was developed by Andre Garbor and Clive Granger. Respondents indicate the probability with which they would buy a product at a number of defined price points. Throughout the entire sample, the price point information is cumulated and a price demand function is defined. Now the turnover can be calculated for each price.
However, the Gabor-Granger method ignores the influence of competitor products and prices. Thus, it is best suited for product innovations or for products that are less exposed to competition. Conjoint analysis offer a solution to overcome this downside: via simulation certain product characteristics such as packaging design, quality perception, smell, haptics and price are compared and evaluated by the survey participants.
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