I was in a meeting last week about pricing research and we talked about how far it's come from the days of simply asking people what they'd pay for something. From laddering to Van Westendorp's Price Sensitivity Meter to Discrete Choice modeling, the research industry has grown in sophistication in addressing this very crucial aspect of product development and marketing.
I started thinking back over some of the pricing research I've been involved with over the years, and I realized that at times our clients come to us without the information they'll need to make the project a success. That's not to say they're not doing their job -- but pricing research does have a few requisites. Here are 3 keys to effective pricing research:
- Know what it costs to produce. This can be tricky for a start-up service or for a physical product that hasn't been manufactured yet. But we need a basic understanding of what the minimum price should be -- anything below that would be unprofitable, so there's no sense including extremely low price points. The sky's the limit on the maximum, but we need the minimum in order to anchor the study design in reality.
- Know the competition. Speaking of reality, we can design pricing research with or without factoring in competitive products. But if you're going to include your competitors, we need an understanding of what their products are and how they're priced. We want to construct choices that are as close to reality as possible. Premium-priced brands should reflect premium prices, or your results could skew in a strange direction.
- Know your pricing objective. What are you trying to maximize: unit sales? revenue? profit? Of course, everyone wants all of these. But in laying out a pricing strategy, it helps to understand how the trade-offs will impact your bottom line: is it more desirable to sell more units at a lower price or fewer units at a higher price?
This list is by no means exhaustive -- I welcome your additions!