While it is easy to get swept up in conceptualising a new product, price is often a major factor in determining whether a product idea succeeds or fails. Price too low and you struggle to turn a profit. Price too high and consumers simply won’t buy.
With cost of living and price rises in the news every day, we’re seeing increased consumer sensitivity around price when assessing new product ideas. The good news is pricing research is here to help you avoid pricing missteps and causing a 'wrong' price to entirely derail reactions to your otherwise great idea.
The importance of understanding context in pricing
If you’re launching into an existing or established category, context can be key.
For everyday consumer purchases, whether they be in the supermarket, the home improvement store or in the bottle shop, consumers pay attention to price in the moment. However, once the purchase moment is over, they quickly forget or mentally discard the absolute price for a more general approximation of what they paid or considered paying.
If you’re launching into an established category, it can be worth subtly reminding consumers of the prices they can expect to pay, either through a priced shelf display or a curated range of price options. Both serve to remind them of the typical prices in the category (from low to high).
Seeing the prices of other familiar brands triggers a powerful System One heuristic in consumers. It anchors their price decisions or judgements in context of the category and, most importantly, against the brands they perceive as relevant to them. For example, when shown the same mock-up of a product shelf, one consumer might focus on the low- to mid-range items and another consumer on the more premium priced options; the same stimulus elicits a different System One reaction from each consumer as they create mental shortcuts around acceptable and unacceptable price points.
Similarly, presenting a range of price points, even if they run the gamut from the very cheap to the very expensive, still helps evoke this heuristic, framing a range of possible prices and allowing the consumer to choose an anchor point within the range.
To determine the optimal price point from across different consumer contexts and guide pricing strategies, we commonly use two different approaches.
1. Van Westendorp’s price sensitivity measure
The Van Westendorp price sensitivity measure is great when exploring price reactions to new and different ideas (i.e. a new product or service) or an idea that will challenge price perceptions in a category (i.e. a product or service that has features and benefits that might drive a willingness to pay more). It presents a wide range of prices from the very cheap to the very expensive with the recommended price in the centre of the price range.
Westendorp relies on four simple, value-focused questions and asks the consumer to choose a corresponding price from a wide scale of possible prices. By compiling the individual responses to the four value questions, we can construct a series of demand curves that identify what proportion of the market find the product pricing to be acceptable or unacceptable at each price point.
The key benefit of the Van Westendorp methodology: multiple price point testing
The Westendorp methodology can act as a reality check since it allows consumers to choose from a wide range of prices. It provides guidance on what the market sees as an acceptable price for the product or service, helping to avoid situations where the product is launched at a too high a price due to unrealistic expectations. Similarly, the approach can help avoid launching at too low a price, identifying where there is potential to increase pricing without impacting product interest.
Testing reactions to multiple price points means Westendorp is helpful for determining promotional price points by identifying price thresholds where demand increases (or decreases) and enabling these to be targeted to maximise price appeal.
2. Gabor Granger
Where traditional purchase intention questions rely on one price point and Van Westendorp leverages a wide range of price points, Gabor Granger strikes a balance between the two. It allows you to assess the demand or interest in purchase at a series of price points, providing more insight than a single purchase intention score.
Gabor Granger is used to identify a small range of price steps above and below the preferred recommended price. With it, consumers are first presented with a randomised price from the options available and asked directly whether or not they would buy the product (or service) at that price. If they say they would buy, they are shown the next highest price and the question repeated, until they indicate they would no longer purchase at the price shown.
Conversely, if a consumer rejects the first price they see, they are shown the next lowest price point and asked again, if they would buy. If they reject it, they see the next lowest price and the question repeats until all price steps are exhausted or they find a price at which they will purchase.
Beyond identifying what proportion of people would buy at each price point, Gabor Granger enables us to calculate price elasticities, construct a demand curve for a product or service and identify at which price point demand is maximised.
Gabor Granger’s strength is its simplicity. It’s easy for consumers to answer and the results are easily understood. It’s also a very real-world solution; typically, a client has a relatively short list of workable prices and Gabor Granger allows them to test reactions to each. Similarly, it’s one thing for a consumer to say something’s ‘expensive’ or ‘too cheap’ (à la Westendorp), but what really matters is, will they buy it at the price shown? Gabor Granger cuts to the chase and answers that fundamental question, helping product and marketing teams to launch at a price that balances their need to address cost of goods, meet the CFO’s expectations, and attract customers.
Summary
These are just two possible research approaches you can be used to help optimise the price you take to market. It's important to remember that while cost of goods and margin may be a starting point, it could be at odds with the what the customer will pay for the benefits offered. Exploring your consumers’ expectations and price during the development process helps to ensure your idea is given the best chance of success on a key consumer and shopper metric.
Lastly, when assessing possible price scenarios consider:
- Is there merit in exploring the widest possible range of potential prices or narrowing to real-world price and promotional bands?
- Is there value in presenting the price of 'competitors' to frame price expectations for your product?
- Is it more useful to determine demand at one price point or many?
All in all, pricing isn't something that should be undertaken lightly. More often than not, it pays to dive deeper.
See distinctiveness in action in our Sealord case study.
