Well… to understand the optimal price, you need to first understand the client business issue and objectives. Ensure what is the attention to increase:
- Market share?
- Revenue?
- Profit?
- Some mix of these?
The optimal price required to gain market share is different from what is required to generate maximum revenue as well as profit maximization. It is therefore crucial to have a conversation with the client to understand what they are trying to accomplish and how the results from the research will be used to help solve their business isssue.
You need to understand the buying process
It is critical to understang the consumer and their buying process before embarking on a pricing strategy. The client needs to understand :
- How the product is used
- What do customers perceive as alternatives to this product? the availability of alternative products
- Where do customers buy?
- Who influences the purchase decision?
- Do they seek variety?
- Can they stock up when prices are lower?
- Are there switching costs?
- What is their price awareness?
- How easy is it to compare alternative offers?
- What are the risks of a poor purchase decision?
- How emotional/impulsive is the purchase?
Having an appreciation for each of the listed factors is key to developing the right pricing matrix.
The main tools used for conducting pricing research varies by stage of development.
We will divide price framework into 3 main areas:
- Early Stage
Particularly, if the product is new to the market and/or the category. We can use pre-launch testing to understand the perceived value of the product and to get a sense for a price range, consumers price and their associated drivers. The pricing derivedat this point is NOT considered the final price and mus not be recommended as such.
Lets start by defining some of the related components in this area.
- Understand appropriate competitive context
- Understand buying process
- Estimate the perceived value:
- How to improve this through product modification
- How to better communicate value
A better way to understand pricing is to provide context-show a competitive set with prices.
To measure psychological response to price/value perceptions, we can use Van Westendorp (VW) model :
Pricing strategy, Van Westendorp Model
Typical output for Van Westendorp.
The focus here is the acceptable price range which has boundaries at where too expensive and inexpensive cross too inexpensive and expensive cross.
The chart above is a typical output from Van Westendorp or called PSM (Price Sensitive Meter) study cross references the four standard PSM questions to produce the calculated price. The following information derived from the PSM analysis.
- The indifference/ Normal Price Point (IPP) balances the number who think it is an inexpensive and the number who think it is expensive. This point often used as the input for other anlyses.
- The point of Marginal Cheapness balances the number who think it is too inexpensive and the number who think it is expensive. The Point of Marginal Cheapness is the lowest price point for the acceptable price range.
- The point of Marginal Expensiveness balances the number who think it is inexpensive and the nnumber who think it is too expensive. The point of Marginal Expensiveness is the highest price point for the acceptable price range.
- The acceptable price range is determined by the gap between the marginal cheapness point ($3.05) and the point of marginal expensivenss ($4.60). this price range is what is typically used in selecting price for future testing.
- Pre-Launch
At this stage we need to determine the right price for launching a product. There are several components to setting the final price and it is the case that clients may want to understand each component before deciding on the right price. We can help them by estimate price elasticity, understand price discrimination & impact on their existing portfolio as well as assess profitability with multiple price points and provide volume forecast.
To do the pre launch test we can us the Discrete choice modelling.
Depending on the situation, client may request we provide the optimal price for his portofolio. But, what is optimization? Optimization means finding the “best available” values of some objective given a defined input. Do you know the difference between simulation and optimization? When we run simulation, a price is input to see the impact on Share of choice, Share of value, etc. When we run optimization, the process is different, determine the outcome the client is looking for such as maximizing volume and the optimal price for that objective will be provided.
- Post Launch
If you need to track and adjust prices to ensure the product stays competitive in the market, we have to ensure there is consistency between what is being charged and consumers’ perceived value of the product. This tracking and adjustments includes: value perception, cost increases, price tracking, competitor moves and impact of promotions.
OK, thats all from me..
Hopefully these will be useful for you! Bye 🙂
Annisa Noor Rafina 