Pricing is a crucial component of the marketing mix. How to price a new product or how much to increase the price of an existing product are decisions that marketers have to make all the time. In many cases, they turn to marketing research to shed light. There are a wide variety of pricing models available in the market and most companies spend a lot of time doing research to arrive at their pricing decisions.
Once you have determined the pricing strategy for your product, you could get to the research stage to determine which pricing works best with potential consumers. Your research agency will, of course, recommend the right pricing research and here are some common ones:
- BPTO. BPTO (Brand Price Trade-Off Analysis) is a method to gain insights into expected purchase behaviour at various price points for competitive products.
- Gabor Granger. The Gabor–Granger method is aimed at finding the highest price that respondents are willing to pay. The technique helps us in understanding the price elasticity for a product. In the technique, you ask people the likelihood of their purchasing a product or service at different prices. This will enable you to plot a demand and revenue curve so that you can determine the optimum price to deliver the maximum revenue.
- Van Westendorp. The Van Westendorp Price Sensitivity Meter is a technique for gauging consumers’ price expectations. This technique evaluates a range of price points under consideration. Specifically, the technique seeks to identify the price at which the consumer interest begins to fall off. It is also used when a marketer wants to evaluate the impact of pricing changes or to see how consumers view their prices versus the competition.
- Conjoint Analysis. Conjoint Analysis is a more rigorous methodology and looks at how choices are made and hence the importance of price in these choices. In Conjoint Analysis, customers trade off price against other product features or, in the Discrete Choice Analysis variant, price against the brand. By looking at how customers make decisions, the impact of price changes can be assessed.
By all means do all the pricing researches that you want to do – I have done many myself! However, quite frankly, you could determine the pricing by looking at things in a more practical way:
- If your product is not radically different from others, you should try and stay in the ballpark of competitive products.
- People will pay a bit more for perceived value. If your product offers higher value, don’t hesitate to price it a bit higher.
- If you are really high on quality, charge more. Consumers expect to pay more for high quality products and are, in fact, likely to be suspicious of low pricing for perceived high quality.
- High priced products should offer prestige. If they don’t, consumers won’t buy them. Apple products are distinct and they offer prestige. That is why Apple is able to price its products much higher than competition and consumers feel special using Apple products.
- Be aware of nuances in the FMCG category, especially in a country like India. For example, cigarettes are predominantly sold loose in India. Because of paucity of change, retailers tend to overcharge per stick. For example, if you launch a brand at Rs.17.00 per pack (Rs. 1.70 per stick), retailers are likely to charge consumers Rs.2.00 per stick, citing lack of change. Such inconvenient pricing leads consumers to not even consider the brand since they feel they are overpaying. If research has indicated that Rs.17 per pack is the best launch price, ignore it and launch at a higher Rs.19 or even Rs.20 a pack so that the stick buyers don’t feel cheated. You will notice that many FMCG brands try and maintain convenient pricing (Rs.5, Rs.10 etc.) for as long as they can.
- Pricing has a direct impact on bottom line profitability. Also, many times, you will find that your profitability is higher at a slightly high price/lower sales scenario compared with a lower price/higher sales scenario. Unless your pricing strategy specifically calls for very low pricing vis-à-vis competition, don’t be scared to err on the side of higher pricing.
While pricing decisions are critical, given their direct impact on sales and profitability, don’t get too bogged down in research. Use common sense and you should be fine.
Sources: Wikipedia; Jack Trout
Visual courtesy: https://www.flickr.com/photos/elsie/