pricing products: how to find the sweet spot
Is it just me, or does a $5 coffee irritate you too? It's that little bit too expensive to swallow, right?
Or how about the other way around... does the new iPhone crossing that $1,000 boundary feel like you're guaranteed to experience excellence?
In this post we explore how psychological price barriers affect consumers' purchase decisions, and help you optimise your product's pricing (for your consumers and your business), weighing up traditional pricing research methods and sharing PLAY's bespoke approach for FMCG products.
The coffee problem.
Just recently, a few of us from PLAY went to the local coffee shop to get our required morning dose of caffeine and something slightly upsetting happened... the café had put the price up from $4.50 to $5.
Now, it may not sound like much but I think many others would feel the same (even those living in Sydney). $5 just seems a bit excessive for a cup of coffee.
So, we ended up boycotting the café, and switching to the one down the road. As it happens, I think we weren’t the only ones, as shortly afterwards they lowered their prices back down to $4.50.
Psychologically speaking, we’ve all got mental price barriers.
If coffee is $4.30 at one café, $4.50 somewhere else and $4.70 across the road… each of these prices would trigger a similar response in a consumer’s mind. They’re likely to accept the price difference.
Pricing your product just below one of these barriers ($5, $10, $20, $50, etc.) can often be that sweet spot for maximising sales/profit. It’s all to do with the economic principle of ‘price elasticity of demand’.
Of course, if you’re a luxury brand like Apple and you cross the $1,000 price barrier, then this could actually work in your favour. The premium price sets an in consumers’ minds.
There are many other psychological theories and explanations around pricing, such as the 99p rule, anchor pricing, bundle prices, BOGOF, happy hour(!) or opting to remove the $ sign from a menu.
When it comes to pricing your product, it can be very difficult to feel confident in knowing what feels right in the eyes of your consumer (and versus your competition) and what they’ll be willing to pay.
That’s where pricing research comes in.
Our preferred approach to pricing research.
Put simply, pricing research is used to uncover what customers are willing to pay for a good/service and therefore, determine the optimum price point to maximise sales, profit or market share.
At PLAY, we use a more humanised approach in contrast to traditional methods such as the Van Westendorp model, which was created in the 70s and built by a statistician (which is how it feels to the respondent too).
Our recommended approach is cognitively easier for the respondent. It reflects how people think and is not arduous to complete.
When it comes to FMCG (one of our specialties), this approach works especially well because people generally have a good idea of prices in supermarkets, so there is an inherent context.
A brief guide to pricing research.
1. Show the concept to test unpriced purchase intent.
This means you can understand general intent without price bias.
2. Ask pricing expectations of the concept within the context of the competitive shelf.
This will allow respondents to make a realistic assessment of the price at which they would expect to see it on the shelf.
3. Reshow the concept, but this time priced.
If you have a set price to test, do priced purchase intent for the product. If you’re testing multiple price points, use different monadic cells.
4. Ask value for money at the proposed price point.
Again, monadically if you have multiple price points.
5. In the analysis, top and tail the data to remove outliers.
This will give you a more accurate picture of where your sweet spot is.
6. Compare the priced purchase intent results with unpriced purchase intent and expected 'on shelf' price.
This will reveal whether the proposed price is within or outside consumer expectations.
Now, let's run through a couple of traditional approaches, so you've got the full picture.
Alternative ways to price your product or service.
Of course, there are traditional approaches to pricing research, which people have been using for donkey’s years. Namely:
1. Van Westendorp
2. Gabor Granger
Here’s a break down:
This is a fairly straightforward approach that simply involves asking four questions in the survey. The analysis can be done using an Excel template.
Good for getting unprompted/unbiased opinions on acceptable pricing, e.g. if the product is the first of its kind.
Simple for respondents to complete.
It doesn’t reflect how people think when buying FMCG products - there’s a strong argument that most people are perfectly capable of giving a ballpark price for common FMCG products.
Doesn’t generally have any context unless you take the approach we recommended above, and include a shelf with competitor products before the exercise.
Widely used in research but has no scientific basis and has not been validated (for example, no evidence that respondents don’t gives figures that are lower than what they’d actually pay).
It assumes that price is a reflection of value or quality, so is not useful for a true luxury good.
It also assumes that there is a point at which a price can be so low for a product that people feel it will be poor quality, and won’t buy it.
This method is even more straightforward that Van Westendorp, and involves trying to find the highest price point that a respondent will give a top 2 box purchase intent.
Good for getting ‘realistic’ responses because you’ve provided the range of prices in which the product will be launched.
Simple for respondents to complete, and relatively quick.
Can produce demand and revenue curves.
Doesn’t generally have any context unless you take the approach above and include a shelf with competitor products before the exercise.
Responses are biased in the sense that you are providing the respondent with a range to respond to, though there is an element of randomisation to try to disguise the range.
Widely used in research but has no scientific basis and has not been validated.
Over to you.
PLAY specialises in FMCG and retail research, so if you want to look into pricing up your latest product innovation or you've made a change you want to test and optimise, get in touch on 02 8097 0200 or email email@example.com.
And as always, if you've got any research or consumer insight problems or questions you'd like to chat about - we're happy to share our veteran advice!
P.S. Speaking of innovation, download our quick guide to find out how to harness the consumer perspective in the innovation process.