Guidebook 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue Guidebook | 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue 1 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue Pricing is powerful when it comes to driving an immediate impact to your bottom line. While most new revenue initiatives take months before generating a positive ROI, marginal price increases can boost profits and market share within weeks, or even days, of implemen- tation. Yet, too often, marketers remain cautious about price, hesitant in pursuing these low-hanging opportunities for fear of turning away prospective customers. The result is suboptimal, with companies overestimating price sensitivities and leaving significant money on the table. According to a recent Bain & Co survey of more than 1,700 companies, roughly 85 percent of respondents believe there is significant room to improve their pricing decisions. With the rise of aggressive pricing innovation from companies like Amazon, Uber, Adobe, and Spotify, price sensitivity is increasingly a myth that companies cannot afford to bear. As consumers embrace new dynamic pricing and subscription models, marketers can no longer simply extrapolate historical trends to predict what customers may be willing to pay in the future. Fortunately, there is an array of market research methodologies that help companies move beyond guesswork when it comes to price. Whether your company is launching a new product or looking for a more profitable way to reset your current customer relationships, these 5 methods will help you capture the full value of your product and service offerings and project correctly for future competition. Let’s take a closer look at each of these 5 pricing methodologies, and how to use them to maximize pricing and plan for the future. Guidebook | 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue 2 Gabor-Granger Pricing Model 01 This classic pricing technique helps marketers discover the optimal price point that will maximize revenue from any given product or service. The test uses a sequence of “yes/no” questions to gauge respondents’ likelihood of purchasing a product or service at various price points. Since respondents are expressing a clear intent to buy, the resulting data offers a strong indicator of how customers value a product or service, and how sales might fluctuate as price increases. The Gabor-Granger method allows marketers to: • Verify customers’ willingness to pay more for a product or service • Determine how changes in price might affect demand elasticity • Identify revenue-maximizing price points Due to its binary structure, the Gabor- Granger method is most helpful for products or services with fixed attri- butes. Marketers should also keep in mind that these are directional findings, which may not fully reflect the potential impact of competitors’ pricing on actual behavior. For that reason, researchers often combine this method with other tests, such as conjoint analysis. Guidebook | 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue 3 01 Gabor-Granger Pricing Model How to Conduct Gabor-Granger Pricing Method: To find the optimal price, each respondent is presented with a series of nearly identical questions. For example, “Would you buy a bed frame at X at price Y?” In each of the several questions, the price shown to a respondent is adapted based on the respondent’s previous answer. This helps market researchers find the maximum price each respondent is willing to pay for a product. If you wanted to find out how to price your new bed frame, you could start with price points of $80 to $200 (increments of $10). The method works as follows: 1. Respondents will be assigned one price randomly. 2. If they indicate they are willing to pay that price, they are offered a higher price that is also randomly chosen. 3. If they aren’t willing to pay that price, they are offered a lower randomly chosen price. 4. This process repeats until you find the highest price respondents are willing to pay. This method helps you find the Gabor-Granger variable and will help you produce a demand chart, where the x-axis represents the prices and the y-axis represents the percentage of people willing to pay the price. You’ll also see a revenue curve, where the y-axis is the percentage of optimal revenue, and the x-axis is the price. Guidebook | 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue 4 Van Westendorp Price Sensitivity Meter (PSM) 02 The Price Sensitivity Meter (PSM) uncovers the full range of prices that customers may be willing to pay for your product. The test asks respondents to self-identify the prices at which they would consider a product or service: too cheap, a bargain, pricey (but not unrea- sonable), or too expensive. This data reveals a more sophisticated picture of consumer preferences, though one that is not as explicit as the Gabor-Granger purchase meter. PSM data helps marketers: • Assess the acceptable price range for a product or service • Identify outer bounds of marginal cheapness and expensiveness • Approximate the optimal price point given current market preferences The major assumption underlying PSM is that respondents possess a certain level of knowledge about the market and its various offerings, which is true in the vast majority of situations, but may not be the case with a new product introduction. Overall, PSM reveals opportunities where customers may be receptive to higher price points or premium alternatives. Guidebook | 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue 5 02 Van Westendorp Price Sensitivity Meter (PSM) How to Conduct PSM: With PSM, market researchers ask a series of questions to gauge a participant’s attitude toward the product at various price points. For example, if you wanted to gauge the respondent’s attitude about the bed frame at various price points, you could ask: 1. At what price would you consider this bed frame to be priced so low that you would feel the quality was low? This helps you understand what price is too cheap. 2. At what price would you consider this bed frame to be a bargain? This determines what is a bargain. 3. At what price would you consider this bed frame as starting to get expensive? This helps you understand what potential customers believe is pricey. 4. At what price would you consider this bed frame so expensive that you wouldn’t buy it? This gauges what customers think is too expensive. When you get your answers, you can then plot 4 different cumulative frequency curves to help find the best price. Guidebook | 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue 6 Conjoint Analysis 03 Conjoint analysis is an essential research method that informs everything from advertising messages to product development to supply chain optimization — and it also has a key role to play in pricing. The technique uses a variety of multiple—or discrete—choice surveys to gauge how respondents value different product attributes or features. In contrast to simpler surveys that ask respondents about specific items, this multi-attribute model approximates real-world decision making and tradeoffs. When applied to price, conjoint analysis can help companies: • Assess how pricing strategies perform within a competitive set • Uncover new or unacknowledged drivers of customer preferences • Identify which features correspond most closely to higher or lower prices This advanced statistical method can be more complex to design, but new services like Conjoint.ly have accel- erated the speed and ease of running such tests. Sometimes marketers pair the analysis with a qualita- tive component, which can help round out the picture as to why respondents made the choices they did. Guidebook | 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue 7 03 Conjoint Analysis How To Conduct Conjoint Analysis: There are several different types of conjoint analysis methods, but let’s look at a basic example. A basic conjoint analysis survey to determine the price will present respondents with different product features at different prices and the respondent will go through a trade-off process choosing which one they will buy. This trade-off process eventually reveals which features are preferenced and which drive a willingness to pay more. For example, you could test the same feature of “wood” bed frame at different prices (e.g. wood bed frame at $80, wood bed frame at $100, wood bed frame at $200, etc.). In the event you are comparing different features, you can establish alternate prices for different features. Once you have decided on the features and prices, create and distribute your survey. Then, quantify the answers by assigning a rating to each response. At the end of the study, tabulate the results to establish the optimal price point. Conjoint analysis is highly involved and the best way to design a study is with the help of a software program to help you build your study. Guidebook | 5 Pricing Market Research Methodologies for Maximizing Growth and Revenue 8 A/B Testing 04 While conjoint analysis offers a realistic scenario of real-world tradeoffs, some marketers may prefer to additionally verify their findings with live, in-market A/B tests. These tests circumvent the problem of customers not always behaving in accordance with their expressed preferences in surveys or focus groups. Real-world trials can be expensive to execute, but the rise of digital marketplaces and cloud-based research platforms have greatly lowered the cost and improved the speed at which marketers can test and verify their pricing hypotheses. How To Conduct An A/B Test: A/B testing presents a “paired comparison” that asks respondents to make tradeoffs. In the survey, ask “Which of the following are you most likely to purchase?” Then, follow the question with two responses: • A bed frame with features A, B and C at $100 • A bed frame with features A, Y, and Z at $200 This approach helps you understand if there are certain feature combinations that will allow you to charge more.