The Right Price

Q. What is the most common pricing question you hear from clients? A. We see a lot of different pricing questions. Each question is different, but typically centers on the following themes:

• What are potential customers willing to pay for my new service?
• What price and combination of features will maximize my revenue?
• How many of these am I likely to sell?

How we answer each question is often dependent on where the product or service is in its life cycle. We developed a product called Price Evolution, which is a suite of approaches we use to answer pricing questions at different stages of development.

Q. What methodology do you recommend for a client who wants to know whether to move ahead with a very new concept? A. Early in the life cycle of a new product or service, the first thing our clients want to do is determine if it will warrant a price high enough to continue in development of the concept. We typically recommend a solution that is based on the work of Dutch economist Peter van Westendorp, who developed the Price Sensitivity Meter (PSM). The underlying premise of this model is that there is a relationship between price and quality and that consumers are willing to pay more for a higher quality product. The results of what we call a Price Test provide a range of acceptable prices based on what the respondents cumulatively perceive as either too cheap, good value, getting expensive, or too expensive for the service we are testing. In addition, we ask about the likelihood of purchasing at these price points. The end result is a range of acceptable prices, the prices that will maximize trial and revenue, and price sensitivity.

Q. What if clients want to understand the value of the components or features of the product or service they are testing? A. After our clients are confident their new concept will be a success, either through Price Test or qualitative work, the next step is often to learn how to optimize the offer. In addition, they are looking to understand how the inclusion of certain features impacts the price they are able to charge in the market place.

Here, a disaggregate discrete choice approach, and placing the concept in a competitive situation which provides a life-like environment, is typical. The exercise presents respondents with sets of alternatives and has them choose the one they are most likely to purchase. The results allow clients to understand the effect of price on the purchase decision and provide direction on how to optimize the product offering.

Q. What do you recommend if the concept is ready to launch? A. Many of our clients come to us with the need for very accurate forecasting. They want to know how to adjust consumer-stated survey data to reflect actual behavior. Our typical approach includes marketing variables, as pricing decisions are not made in isolation.

Using a proven forecasting model, we are able to precisely understand the volumetric impact of different pricing strategies. Similar to our other pricing approaches, we can determine the prices that will maximize revenue, profitability, and usage. The client also wants to ascertain the marketing mix that will maximize ROI, which we provide. What's really valuable here too are norms at the sector level, which helps us put the results into perspective.

Q. What about pricing a product that is already on the market? A. Most pricing decisions are made prior to launch, especially for services. However, as you move past launch there is often an ongoing need to understand the impact on price and continue to examine the optimization of features. Clients want to know what the impact of pricing changes, the introduction of additional features or lines, and new competition will have on their current offer.

Q. How does a client benefit from pricing research? A. Pricing decisions are important. In the early concept stages, you want to conduct pricing research so you know whether your product will generate a high enough level of revenue to move forward -- before you invest in any R&D, production, or marketing. Once you're ready to launch, pricing strategies become critical, as price impacts perceptions of the product; misperceptions of what prices you are likely to garner in the marketplace can be dangerous in the decision-making process. Our ability to customize to each client's unique needs with proven standardized approaches is the primary benefit of our approach.