Price sensitivity research is an extremely important tool in your business arsenal. Especially in times of economic uncertainty – like 2009 where we saw deflationary pressure, a volatile exchange rate, rising debt and stagnant wages.
One of the best ways to manage pricing is to regularly assess the price sensitivity of your target market and adjust accordingly.
Pricing research is considered a challenge by many companies. They are not sure how to do it and whether the results will be effective. But there are a few tools for doing reliable – and powerfully useful – pricing research. The traditional approach has long been Van Westendorp's price sensitivity meter, which starts with four basic questions:
- At what price would you consider this product so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the price of this product so low that you’d question its quality? (Too cheap)
- At what price would you consider the product starting to get expensive – not out of the question, but you’d need to give some thought to buying it? (Expensive)
- At what price would you consider the product to be a bargain – a great buy for the money? (Inexpensive).
The answers are then plotted on a graph and analyzed. More info on the process can be found here.
There are also newer tools that enable managers to test various price / product scenarios in a very cost effective way. These methods employ conjoint analysis, which presents various options to buyers and gathers input on their price sensitivities and preferences. Much has been written on conjoint analysis, and it’s a tool we use whenever possible to get insight on price sensitivity – here’s a quick primer on conjoint analysis from one of the few companies who build software to deploy conjoint analysis : http://www.sawtoothsoftware.com/download/techpap/undca15.pdf