Product Pricing Research
Marketor℠ is a system for improving company revenue through demand curve measurement and analysis.
Most executives and product managers are aware that setting the right price for a product is critical. In practice, however, the methods by which companies go about price setting are often less than optimal. IPR provides a rigorous, quantitative, and highly defendable approach to determining the optimal price range for a company’s products. Here are examples of pricing questions that we answer:
- Will a change in price increase or decrease spending (revenue)? What is our price elasticity?
- How much will a reduction in the price for one of our products reduce demand for our other products? How much cannibalization will we see?
- What combination of prices for a product portfolio (good, better, best) will produce maximum revenue (or profit)?
- We have two products which are used together (razor & razor blades). How should we jointly price them to maximize profit?
- How should we structure upgrade prices to encourage customers to stay on current versions and to maximize profit?
- How might we best move from a perpetual license selling model to a recurring revenue subscription model?
The key ingredient to all of the above elements is an accurate understanding of product demand. IPR uses market surveys and economic analysis to estimate product demand at a variety of potential price points. Usually, product demand increases as prices are lowered, and product demand shrinks as prices are raised. For most companies, however, a rigorous, quantitative understanding of that price-demand sensitivity is lacking, and their pricing decisions are often made using other means.
IPR uses survey tools to understand a product’s demand curve and answer company pricing questions. IPR creates a simulated shopping environment. A pricing simulator then helps companies estimate the likely product demand using a wide variety of potential prices.
For example, IPR has helped numerous clients optimally price a product “bundle,” as well as the separate ingredient components of that bundle. IPR shows how a bundle priced too high discourages “sell up” and generates suboptimal revenue. At the same time, IPR also shows how the prices of ingredient products set too low cannibalize the sales and higher revenue of the bundle. Only by simultaneously optimizing the price for the entire product portfolio, balancing the prices of the bundle and ingredient products, is a company able to maximize revenue and meet its goals. IPR works hand in hand with product managers, client research departments, and other company executives to answer their specific pricing questions.
Individual product questions:
- How steep is the demand curve for product X? Is there a price point at which demand will really take off?
- What is the “price elasticity of demand” for all the products of a company?
- At what price is product or company revenue (or profit) maximized?
- What’s the likely revenue impact from a different pricing structure entirely (outright purchase, lease financing, rental, etc.)?
- Which customer segments are most price-sensitive?
- Which competitive offerings does a company’s product most closely compete with?
- What’s the right price response in the event a competitor raises/lowers price?
Product portfolio questions:
- How much can one improve revenue and profit by introducing a “premium” product version or a “value priced” or “lite” version?
- What’s the right price to charge for a product bundle vis-à-vis the ingredient products?
- Which ingredient products are cannibalized most if the bundle is priced too low?
- What price is needed to quickly migrate customers over to a new product version or edition?
Product feature questions:
- What price should a company charge if a particular new feature is included?
- Compile a list of questions, formal hypotheses, or company suspicions regarding price and potential pricing strategies.
- Identify the set of company products, product bundles, and competitor offerings of interest.
- Identify the range of relevant prices for the products of interest.
- Identify any specific customer groups of interest, and set quotas for each group.
- Develop the simulated shopping experience and educational materials to support the shopping experience.
- Conduct IPR pricing survey; alternative survey media are available.
- Compile and analyze survey results.
- Present executive summary and recommendations.
- Deliver pricing simulator and supporting analysis to staff.
The core of an IPR pricing survey is a mock shopping experience. Potential customers see actual product options displayed with as much realistic information as exists in the real world. Customers then “purchase” the product quantities that are most attractive to them. These potential customers see a variety of product prices. By examining purchase behavior under a variety of price conditions, IPR is able to estimate demand curves for the products of interest.
IPR’s approach to pricing research is not a “discrete choice” task, “conjoint” method, or multinomial logit exercise. Our data collection and analysis methods are very different and:
- Allow potential customers to purchase multiple product offerings at the same time – something customers often do in the real world.
- Respect the fact that real-world customers often purchase products in quantity rather than in a discrete (“pick one”) activity.
- Allow customers to enter the market, postpone purchase, or exit the market if they so choose as a result of the price.
IPR’s data analysis steps are also quite different from other existing approaches. A typical IPR study:
- Measures demand over a much wider range of prices than is typically seen in discrete-choice projects.
- Provides explicit estimates of a specific product’s cross-price effects. (A cross-price effect is the demand exerted on one product as a result of price changes in another.)
- Measures only realistic price combinations and scenarios. A company’s “premium” product offerings, for example, are not priced at odds with “value priced” products. We respect the natural price order that exists in real-world product portfolios.
IPR provides a Microsoft Excel-based market simulator that easily communicates the study results and allows for “what if” price analysis. Through a simulator, product managers can explore the likely impact of a price move before they commit company resources or risk disrupting the market. IPR’s simulator:
- Provides detailed quantitative support for the key study conclusions, including IPR’s product and pricing recommendations.
- Is completely transparent. Users can trace all mathematical logic and demand equations. Nothing is hidden or withheld inside “proprietary” estimation tools.
- Is extremely flexible. Nonlinear demand forms and segment-level analyses are easily accommodated.
- Readily reveals how a change in a product’s price impacts not only its own demand, but the demand for other products in the relevant market, product revenue, and total portfolio revenue (or profit)
Complete pricing recommendations:
- Are organized by segments of interest to the client.
- Include full support from the market simulator.
Executive summary presentation:
- Is in client’s choice of format.
- Includes relevant visual charts and demand curve conclusions.
- Shows all key questionnaire results.
- Includes cross-tabs or banners weighted such that sample characteristics best match the population proportions observed in the target market.
- Enables the client to observe the estimated demand curves for each product of interest.
- Allows “what if” analysis to explore a change in pricing strategy.
- Contains the estimated optimal prices that maximize company and product revenue (or profit).
For more information on IPR’s pricing research methods, please contact Brent Johnson of IPR at 801-362-7421 or firstname.lastname@example.org.
One of IPR’s clients – a mid-sized software tools company – asked us to help them determine the optimal prices for a single-seat version, as well as for multiple-seat and server versions of a business tool. They also wanted to understand the perceived value of one year of software upgrades.
To address this need, IPR undertook a web-based survey of business software users and purchase decision-makers in the target market. The survey included a web-based pre-recorded audio/video session to educate respondents about the software product. To allow for more sophisticated analysis and recommendations, the survey featured multiple “volumetric” choice screens with a focus on alternative prices for the company’s product line as well as competitive products.
Based on its analysis of the survey results, IPR recommended that the client price single-seat versions relatively highly, with relatively low pricing for multiple-seat versions. Recommended pricing on server software was relatively high, particularly for the department server version – to drive customers to the enterprise version. The study found that one-year upgrades were very popular if they were not overpriced.