Pricing Research

When the new product is introduced to the market, pricing is crucial.� If the product is priced too high or too low, the profits will suffer.� The simplest way to set pricing is a method that could be described as "cost-plus" pricing.� With this strategy, the firm would calculate the cost of making the product and add a percentage of desired profit to come up with the selling price.� This method, however, does not give information on whether or not potential customers will purchase the product at the calculated price.� How can research help in this important marketing decision and contribute to positive business outcomes?

Gathering market information to support the product's pricing is an important step.� If there are not enough resources to reach out to the potential customer directly, the company should at least collect and analyze pricing of competing products and gauge demand for similar product offerings.� Primary research is the most accurate way of determining the ultimate price point for the new product's launch.�

�When reaching out to the target audience in the form of an online survey or a focus group, the researcher could simply ask the price that the potential customer is willing to pay for the described product offering.� This method, however, might produce biased results because respondents will tend to give price points on a lower point scale. Instead of an open ended question, a researcher could also ask if the potential customer is willing to purchase the product at a certain price point.� This technique, however, would call for prior research in order to determine the price points to be evaluated.� In addition to these "simple to design" techniques, there are various more complicated ones.� Such techniques as Conjoint, Discrete Choice, or Van Westendorp model, which is also known as the Price Sensitivity Meter (PSM), offer more sophisticated ways of answering questions about price.�

Both Conjoint and Discrete Choice are the methods of designing a study, in which the respondent is asked to choose various packages of different product features.� Price is tested, as such a feature, in combination with others.� This technique is expensive to implement and requires special software for analysis and "experiment design" of the study.� While this offers great benefits for evaluating the overall package with price as one of the components, it does not quite justify the associated with it cost for just the pricing research.� When only pricing needs to be tested, Van Westendorp fits better as the less expensive but still sophisticated enough method.�

Van Westerdorp model is based on the four questions that are being asked of respondents.� These questions are asking respondents to indicate the points, at which the price:
Is considered so low that the respondents would question the product's quality (too low)Is considered a bargain or a great value for the money (bargain)Is starting to get expensive (expensive)Is too expensive to consider buying the product (too expensive)

The�� answers to these questions are plotted on a diagram, in which the price lines for perceptions of "too low," "bargain," "expensive," "too expensive" can be identified.� The intersection of these lines gives valuable information on the price ranges for product's entry to the market.� The theory states that the price should be set somewhere between the "expected price," which is defined as the point of intersection of "expensive" and "bargain" and the "optimum price," which is defined as the point of intersection of "too cheap" and "too expensive."�

Pricing research is an important component of introducing new products to the market.� There are some full service research providers that swear by the Conjoint techniques, the Discrete Analysis, or the Van Westerdorp model.� All of these methods provide their value but choosing the one that fits best with the research goal is crucial for the business success.� While Conjoint might work for some, it will just introduce unwanted information and unnecessary costs for other studies.� At the same time, the Van Westerdorp model will not add much value as to what could be changed in the product's overall package to increase its appeal to the market.�