sign up

Subscribe to Email Updates

pricing research: psychological barriers and the FMCG approach

christian-dubovan-Y_x747Yshlw-unsplash 

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. Handing over that money just didn’t sit right.
 
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.
blake-wisz--JJg90OAnWI-unsplash
Psychological factors
 
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.
 
However, once you hit that $5 mark, it puts a slight lump in the throat. The coffee purchase has crossed a mental price barrier.
 
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 expectation of excellence’ 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.
 
It can be even more difficult to know how an increase or decrease in price could affect your sales/profit, and how to optimise this.
 
That’s where pricing research comes in.
artem-beliaikin-pPzQP35zh4o-unsplash

Pricing research

Put simply, this 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.
 
(Perhaps a few baristas in Sydney could consider doing some pricing research to avoid getting into the same sort of pricing pickle again.)
 

PLAY’s preferred FMCG approach


We like to do things a little differently around here (if you know us then you'll know that already!).
 
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 areas of specialism), this approach works especially well because people generally have a good idea of prices in supermarkets, so there is an inherent context.

juliana-mayo-c_lCEnLV4Jw-unsplash

Here's how it works.
 
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.
 
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.
jaz-king-DOoYFgTQWfs-unsplash
 

Alternative methods

 
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
 
Whilst these aren’t our preferred approaches, we will of course run them for you (if you ask nicely!). 
 
Here’s a break down: 
 

Van Westerndorp

 
This is a fairly straightforward approach that simply involves asking four questions in the survey. The analysis can be done using an Excel template. We only run this if a client requests it.
 
Pros:

  • 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
 
Cons:

  • 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

 

Gabor Granger

 
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 to. Again, we only run this if the client requests it.
 
Pros:

  • 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
 
Cons:

  • 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 hello@playmr.com.au.

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. Talking of innovation, download our quick guide to find out how to harness the consumer perspective in the innovation process.

Download Innovation Quick Guide 

get the playbook

packaging: the silent salesman

 

Packaging is arguably the most valuable consumer touchpoint; after all, we all judge books by their covers.

 

The risks of poor packaging design are huge, and customer alienation can lead to severe losses in sales.

 

Do you understand the mind of your shopper, and what leads them to purchase? Packaging research is the essential first step in the pack design (or redesign) process.

 

Download our 8 top tips to help you navigate the difficult journey, maximise opportunities and avoid the common pitfalls.

 

Download Today

sign up

Subscribe to Email Updates

you may also enjoy

5 top tips for a successful seasonal pack promotion

Over the years we've worked with hundreds of brands to launch seasonal products and packs and we've picked up a fair few pointers along the way.

Read More

shopper research: optimise path to purchase and protect your margins

There are many amazing brands out there that people seem to love, but somehow the sales data doesn't seem to match up. Why is this the case? As buyer ...

Read More

meet the new technology transforming shopper research

Let’s face it, we all judge books by their covers, which is why we invest so much time and resource in nailing our packaging. The key to getting packa...

Read More

make a play today

MAKE AN ENQUIRY

P 02 80970200  |  E hello@playmr.com.au

DOWNLOAD THE PACKAGING PLAYBOOK