5 Surprising Things I Learned About Pricing Research
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My first job after my Ph.D. was in pricing consulting. Early on, I learned the cutting edge of pricing research. For the past six years, I have been immersed in pricing again. This time to develop something more powerful. On this journey, I stumbled across many common misconceptions. Avoiding any one of them is pure impact. Together, they can mean "10x profits" for you.
No. 1 - No one talks about “Costs”
"Cost-plus pricing is the way controllers approach pricing. But not marketers and customer insight professionals. I've seen a lot of price optimization studies. They use very different measurements, but they have one thing in common:
They do not look at cost.
Instead, they look at the price demand curve they found and look for price regions that "look" flat. It turns out that "looking" is not a very scientific method.
Common sense tells you that maximum profit comes from selling enough at a good enough margin (gross profit = volume x margin). If your variable costs are too high (say $10), your margins may be so thin (say $1) that selling less at a higher margin (say selling at $12 instead of $11, doubling your margin on say -20% less volume) can boost your profits. The optimal price balances decreasing volume with increasing margins.
“The optimal price trades off declining volume with increasing margins.
Why does no one see this? Typically, insights professionals do not have costing on hand. It's highly confidential information that you don't want to give to a research agency. As a result, agencies do not report volume-margin trade-offs, and over time people tend to forget that it could be important.
(Note: Supra Price Optimizer has a profit simulator built in. We simply enter estimated COGS figures and the brand can change the figures on their own).
No. 2 - “Van Westendorp” is a scam
The most popular pricing method on LinkedIn is the Van Westendorp (or sometimes called the Price Sensitivity Meter). It asks four simple open-ended questions about pricing (what price is too expensive, too expensive, a bargain, and too cheap). The analysis looks fancy though. According to the inventor, the optimal price is higher than the price at which the number of people who say "too cheap" and "pricey" is similar, and lower than the price at which the number of people who say "is a bargain" and "too expensive" is similar.
The analysis looks really scientific, but it lacks any evidence.
The method IS useful to understand the ballpark numbers about where a price range should be considered. But the specific predictive power is weak. This was also confirmed by a recent comparative study by the University of Osfalia.
More than any other method, Van-Westendorp is affected by several measurement biases. But the most serious shortcoming is that the method recommends a price range as optimal - without even considering the costs. A critical person would consider this negligent.
No. 3 - Pricing is dynamic
When you test willingness to pay, you take advantage of the fact that customers have an opinion about what a good price is based on their experience in the market. But that experience can change if the competition starts to change prices.
Methods like conjoint measurement try to be smart and replace the customer's opinion with assumed competitive prices. In this way, it finds the willingness to accept a price - provided that
the customer evaluates competitive prices at the POS in the same way as in the survey.
the reality is the same as the simulated competitive prices and offers.
By point 2 at the latest, the method falls flat. It does not cure the core problem of market dynamics and introduces the risk of biasing the whole analysis with inappropriate assumptions.
Sure, later in the market simulation phase you can simulate different market price scenarios. But these simulators usually miss the mark in predicting sales for a simple reason: Distribution rate, advertising efforts, shopper marketing tactics, packaging changes-all of these and more drive sales, not just price and product features.
To cut a long story short, wouldn't it be better to simply and reliably measure how much the product sells at a given price... and measure again when the market changes quickly? If this exercise would be cheap and fast, this would be the better solution. (guess what Supra Price Optimizer does)
"Pricing is dynamic" doesn't end here. If you find that lowering prices would generate more profit, you may fall into a trap: the "commodity trap. Because the competition may have to react. If you sell more, they will sell less. You may just start a downward spiral.
This simple example tells us that Pricing Insights methods are just that. They need to be integrated into a dynamic market model - qualitatively or quantitatively.
In the long run, other pricing dynamics come into play. For a new soft drink, we optimized prices, but we tested them with panelists who knew the product only from pictures and descriptions, and we tested them with people who had already tried the product.
Guess what? The optimal price for the latter turned out to be 50% higher. Sure, if a product is good, you are more likely to buy it after the trial, and the optimal price shifts to the right.
If you optimize pricing at launch and the product survives, a few years later the optimal price may be very different because many of the target customers have already tried it.
Learn: Pricing must be aligned with product lifecycle status. Products require regular pricing maintenance. This, in turn, requires an agile, low-cost, and rapid pricing research methodology.
No. 4 - Price thresholds work… when
As a pricing expert, you tend to love higher prices. You admire bold prices like $100 instead of $99.99. When you review the literature, you find mixed opinions. So we at Supra put it to the test. This is what we found:
Pricing below a price threshold works a lot of times.
It works better for commoditized product categories. It may not work for luxury or B2B products.
Pricing needs to consider "price simplicity". A price needs to be easy to read. $99.99 is more difficult to read than $99. So the latter might be better. 8.79 is more difficult to read than 8.80. So the latter might be better. Price thresholds should only be used for important thresholds. The reason: Confused minds don't buy.
Although I love round prices, I needed to change my mind.
No. 5 - Pricing is directly related to feature and brand communication
Mmmh, isn't that obvious? The whole point of value pricing is just that. The whole point of doing conjoint is that the features determine the value and that makes higher prices sell.
But my emphasis is on communication. It is not enough to just test a list of bullet points, which is how Conjoint approaches the game.
In 2023, we tested the Apple Vision Pro glasses using Supra's Implicit Price & Product Intelligence approach. Two of the fifteen key features were intuitive gesture control and 3D events and gaming capabilities. The feature was there. It was just that most potential customers could not quite imagine how it would really work.
Our Causal AI driver analysis showed that those who expected gesture control to work perfectly, for example, were by far the most likely to buy at higher prices.
In fact, Apple responded by launching the product with extensive video demonstrations of how this very new feature worked.
The same was true for the SONOS MOVE and ROAM wireless speakers. They found through the same exercise that many people did not understand that this was not a Bluetooth speaker. By improving communication, the product launch was a huge success.
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Pricing research is more difficult than many marketers believe. Sure, you need costs and retail margins, and of course the price-demand curve. You should certainly avoid using the Van-Westendorp method as your sole source of information.
Also, pricing is dynamic; smart managers optimize prices regularly. It pays off big time. Price implementation is then equally important. Price thresholds work well when used wisely. Finally, optimal prices depend not only on product features, but also on product communication.
Do pricing in this holistic mindset and it may well be that you will 10x your profits.
THIS is what I mean with “10x Insights”