Quicklinks to pricing education:

Quicklinks to pricing 101:

Step 1: 10 Pricing Mistakes

Step 2: The Role of Research in Value Optimized Pricing

Step 3: Research Results and Implementation

Step 4: New Product Launch

Step 5: Optimized Pricing of Current Products

Step 6: Strategies for THIS economy

Step 7: Getting Started with Pricing

Step 2: the Role of Research in Value Optimized Pricing

The importance of research in any pricing project is tantamount to the projects ultimate success. The purpose of the research is simple; understand in details the value perceptions and decision making drivers and criteria of the buyer and their willingness to pay for your product or service. Later we will discuss how using statistical analysis will reveal optimal price points all along the demand curve that will help to achieve your pricing objectives.

The Research Methods utilized in Value Optimized Pricing:

The most effective way that we have found to extract those value perceptions, drivers and willingness to pay is through primary research utilizing on-line surveys. Within these surveys tried and true research methodologies are deployed which ultimately will derive a statistical significance of 95% or greater.

Research Methodologies include:

Conjoint Analysis

A technique used in research to determine how people value different features that make up an individual product or service.

The objective of conjoint analysis is to determine what combination of a limited number of attributes, of which price is one, is most influential on respondent choice or decision making. A controlled set of potential products or services is shown to respondents and by analyzing how they make preferences between these products, the implicit valuation of the individual elements making up the product or service can be determined. These implicit valuations (utilities or part-worths) can be used to create market models that estimate market share, revenue and even profitability of new designs.

Van Westendorp

The Price Sensitivity Meter (PSM) is a market technique for determining price preferences. It was introduced in 1976 by Dutch economist Peter van Westendorp. The technique has been used by a wide variety of researchers in the research industry.

The premise underlying PSM is that respondents are capable of envisioning a pricing landscape and that price is an intrinsic measure of value or utility. Participants in a PSM exercise are asked to identify price points at which they can infer a particular value to the product or service under study. PSM allows the researcher to capture the extent to which a product has an inherent value denoted by price.

Value Attribute Positioning

Identify Product Attributes

A product can be described by a number of attributes, such as color, shape, performance, customer support, brand, and price. Customers consciously and subconsciously evaluate the product on these and other attributes when making a purchase decision.

Assess the Attribute Importance Weights

Not all attributes of a product offering are equally valued. It is important to understand the relative importance of product attributes to your customers.

Identify Customer Segments

Customers are not all alike. While there may be some trends that are common to all customers, often segments will emerge with different attribute importance weights. This methodology will not only allow you to identify different customer segments by importance weight, but size them as well to predict the profitability of a specific segment. Then the data can be used to generate compelling value propositions for each segment based on their own preferences.

Determine Attribute Performance

Both the company and its competitors are then rated by customers on their performance along the identified attributes to capture the respective customer perception of each attribute.

Product Attributes	Importance Weights	Company A	Company B	Company C	Company D	Company E
Quality	20.6%	3.87	3.67	3.10	5.09	4.91
Ease of Use	11.7%	2.73	3.25	2.75	1.59	1.35
Reliability	19.6%	4.33	4.35	3.49	4.07	3.39
Upgradeability	12.9%	0.71	2.00	2.70	3.00	4.46
Support	16.1%	2.62	2.98	2.58	3.55	4.33
Name	7.3%	1.47	1.52	1.11	1.44	1.74
Price	11.8%	6.56	1.81	2.71	(2.39)	3.15
(Perceived Value)	100.0%	22.29	19.59	18.44	16.35	23.33

Calculate Perceived Value

The perceived value of a product is calculated by taking the average of the product’s perceived performance attributes weighted by their respective importance weight. This simple weighted average is an all inclusive mechanism for comparing one product against another. Perceived values can be calculated and examined for the whole market or by specific customer segment by using the importance weights for a specific segment.

Calculate the Perceived Value per Dollar

By plotting Perceived Price Value as a function of existing prices across all competitors we can identify the perceived value per dollar at each price point. The derivative of this curve gives us the change in perceived value per dollar change in price. This curve will and its derivative will also indicate the degree to which the product is a luxury good, or more appealing because of the higher price.

Assess Competitive Position

By comparing the perceived values of one company to another you can determine your current competitive advantage or disadvantage.

Examine Marketing Strategy

Pricing recommendations cannot be made without a thorough understanding of the marketing strategy. It is essential to determine company’s short and long term strategy and capabilities. Do they want to maximize profit, revenue, market share? Do they have the operational capacity to support more business or would quality be better with less?

Formulate Current Pricing Recommendations

Combining the Marketing Strategy, Perceived Value per Dollar, and Competitive Position you can generate pricing recommendations. These recommendations can be made more rigorous by the use of various customer choice models which incorporate market share and purchase loyalty for consumables, but we find this costly step is often is not necessary to identify and exploit pricing opportunities.

Identify Non-Price Marketing Strategy Adjustments

This process will often capture opportunities to improve your Marketing success in areas beyond pricing. By comparing attribute performance across the industry, you can highlight opportunities to make strategy adjustments that will strengthen the perceived value of your product. These adjustments have resulted in improved sales effectiveness, increased market share, and greater profits.

PERCEPTION GAP

Importance Weights - Compare Importance weights of Attributes between customers, customer segments, and company employees.
Performance to attributes – Compare how customers and employees differ in their assessment your company and its competitors across the Attributes.
Competitor Analysis – Do your employees correctly understand who your closest competitors are?

Research Section Conclusion

Armed with this new hard data derived from primary research you now have the ability to apply statistical methods and analytics to determine with statistical significance of 95% or greater what the optimal price points would be To achieve your business objectives of:

Maximizing Profitability
Maximizing Revenue
Maximizing Market Share

You will also have the ability to mathematically calculate your:

Price elasticity
Cross Price Elasticity
Your product or service demand curve
Optimal Price Points along the Demand Curve

As you can see Value Optimized Pricing makes any other pricing methodology seem like “gut feel” based on intuition rather than good information and analytics.

In the next section, Step3: Research Results, we will discuss how to use this hard date to determine:

Optimal Bundling
Optimal Messaging
Optimal Product Features
Optimal Positioning
Optimal Sales Tactics