Posted on 3 June 2018
With so many pricing research methodologies out there, how do you know which is the right one for you?
Conjoint.ly offers pricing techniques (Van Westendorp and Gabor-Granger) that both help set prices for a single product with either no competitors (completely new offerings) or where there are too many competitors to benchmark against (e.g., fashion or restaurants). However, they answer slightly different questions.
To illustrate the differences, we conducted three studies to show you how they work and the outputs that you get from each of the separately. Specifically, we tested a floor lamp with 3 heads that has adjustable lighting angle. It is currently not available in the US market.
First, we showed consumers the lamp and simply asked consumers “How much are you willing to pay for this lamp?”. The average was $31.84.
But how reliable is this number, and what does it actually mean? When consumers think about prices, there will always be a range of prices that is acceptable to them. And this number certainly does not mean that 100% of consumers who are offered a lamp at this price will buy it.
Van Westendorp’s PSM is one of the most commonly used pricing technique that helps you understand such price ranges. In PSM, we asked 4 questions to gauge respondent’s attitude towards the floor lamp at various levels of price. Specifically, we asked:
By asking these questions, we are able to explore a little bit more about consumer’s attitude towards floor lamp prices. For example, respondent A will state that $5 would be too cheap for the floor lamp, $20 will be a good bargain (cheap), would still consider the floor lamp at $40 but is considered expensive and $100 will be too expensive. This provides a greater explanatory power than a simple question of “How much are you willing to pay”.
When we combine all responses, we can plot 4 different cumulative frequency curves (for each of too cheap, cheap, expensive, and too expensive). From here, we estimate the acceptable price range to be $24.99 to $35.89.
In addition to the PSM, we also tested willingness to pay for floor lamp using the Gabor-Granger pricing method. The main aim of this method is to find the maximum price each respondent is willing to pay, which allows us to project the price elasticity of the product and find revenue maximising price points.
In the Gabor-Granger experiment, we asked if respondents are willing to buy the floor lamp at various prices (i.e., $15, $25, $35, $45, $55, $65, & $75). Multiple questions of “Would you buy the floor lamp at price X?” will be asked to the respondents. Each subsequent question is an adaptation from respondent’s previous response. For example, when respondent A states that they are willing to buy the floor lamp at $35, the next question would be “Would you buy the floor lamp at $45?”, so forth. When the respondent answers “No”, the previous response will be recorded as the maximum price that respondent is willing to pay for the floor lamp.
The results came back showing that $35.00 is the revenue-maximising price.
Put simply, do not use the simple question of “How much are you willing to pay?” because the result does not mean anything.
Use Van Westendorp when you are unsure what price points the market can potentially accept. For example, it came in handy for a client in the fashion industry who through this method confirmed their long-standing suspicion that they are pricing too low.
Use Gabor-Granger to measure elasticity of demand and to find revenue-maximising price points. For example, this method helped our client, an online education provider, re-set their standard price for a course package.
Still unsure where to start? Let us know. We are here to assist.