Market research for pricing

At a glance

Determining the best price for your product is critical to its success in the marketplace. The price needs to be high enough to cover your costs and provide revenue, but low enough that customers are willing to pay for it—without leaving money on the table. The only way to know the most effective price for your product or service is to conduct market research.

There are four main methodologies for researching an effective pricing strategy: Van Westendorp, Gabor-Granger, conjoint analysis, and brand-price trade-off. We cover each below, along with what drives the cost of market research so you can budget accordingly.

Pricing research is an important component of your overall market research. Appropriate pricing affects everything from brand image to the perception of value to success in the market. 

Your pricing research provides two main types of insights that can be applied to other market research efforts:

Pricing research utilizes both quantitative and qualitative data. Quantitative data is primarily used for setting the price, and qualitative data is used to assess consumer sentiment at various price points. Together, they provide insights that can be used throughout your market research.

Your market research for pricing starts by delving into who your customers are. Collect relevant information, such as demographics, geographic locations, buying habits, etc., for market and customer segmentation. This will also prove useful with brand segmentation as you decide which products to market to which market segments.

Once you have your target market identified, you can choose one or more of the following pricing research methods as part of your price optimization strategy to determine the optimal price for your product or service.

Peter Van Westendorp, a Dutch economist, developed the Van Westendorp Price Sensitivity Meter in 1976. This method identifies price points that are psychologically relevant to your customers' buying behaviors. It reveals sensitivity to price, purchasing power, and willingness to pay for a product or service. Van Westendorp remains one of the most popular and effective pricing research methods.

The Van Westendorp method uses four main questions. Respondents view an image of a product or service, then answer questions to determine the optimal price point and range based on that image and any additional context you provide.

The questions read:

You can ask each question open-ended, as shown above, or closed-ended with price ranges offered in a multiple-choice format.

You plot the collected data on a price sensitivity map, with price on the x-axis and the percentage of respondents who selected that price on the y-axis. The intersection of questions one and two is the point of marginal cheapness (PMC), and the intersection of questions two and four is the point of marginal expensiveness (PME). Your acceptable pricing range falls between these two points.

This method works especially well when you bring a new product to market. You gather information directly from your target market so you can price your new product within the range they're willing to pay.

It also helps when you reposition an established product in an existing market. The data you gather about consumer perceptions of your current price shows you the likely impact on sales if you change your pricing.

When you update product features, Van Westendorp helps you see what price change your market will accept based on those feature changes.

Note: the Van Westendorp Price Sensitivity Meter doesn't factor in competitors' pricing.

Economists Andre Gabor and Clive Granger developed the Gabor-Granger Direct Pricing Technique in the 1960s. This method uses surveys to learn the price elasticity of a product. It collects data directly from target consumers to determine demand at varied price points, which you can use to find the optimal price point for the market.

Gabor-Granger relies on skip logic to streamline the survey process, presenting respondents with relevant follow-up questions based on their prior answers.

Considering your knowledge about product A, how likely are you to buy it at $Y?

If a respondent answers with response three, four, or five, skip logic presents the same question at a lower price. If they answer with response one or two, you count that response toward a top-2-box score. Add the percentage of respondents choosing those two answers together to represent the share of your target market who would likely buy at that price.

For example, if 10% answer "extremely likely" and 35% answer "very likely," your top-2-box score for the product is 45%. That 45% represents the target market who would likely purchase the product at the price presented.

Gabor-Granger also asks questions this way: Considering your knowledge of product X, would you purchase the product for $100? A "yes" prompts the question again at a higher price (for example, $125), and so on until the respondent answers "no." If they answer "no" at $200 after $25 increments, the maximum price they'd pay is $175.

Gabor-Granger is especially useful when you want to predict the price at which your target market will purchase your product or service, which helps you forecast sales. It's also valuable for optimizing the price of an updated existing product, evaluating a proposed price increase, and pricing products below $25, where Van Westendorp becomes too complex for respondents.

Gabor-Granger data helps you adjust price to maximize profit and sales when other product components stay fixed. Like Van Westendorp, this method doesn't factor in competitor pricing.

Conjoint analysis is another way to research pricing strategies, and many researchers consider it the most reliable method.

In conjoint analysis, you use discrete choice modeling in surveys to find out how price and features influence a customer's willingness to pay. Conjoint analysis asks respondents to use the same decision-making process they'd use in a real shopping situation.

Conjoint studies also measure the importance of specific features and whether customers will pay more for certain ones.

Survey questions for conjoint analysis include groups of prices and features. Respondents are asked to compare the items based on the provided information and choose which one they would buy.

This process would continue with various prices and features. Streamline as much as possible, so respondents don’t become confused or experience survey fatigue.

Businesses use conjoint analysis as a pricing method to assess the influence price has in combination with various product features. It’s also helping in determining which features are most important to your target market. 

This method is used to evaluate both new and existing product pricing and is a valuable look into how customers make purchase decisions.

BPTO is a tool used to identify what effect price has on various areas such as brand awareness, revenue, market volume, and profitability. It provides insights into consumer preferences for brands based on pricing.

Survey respondents are shown a set of three to five branded products with their associated prices. They are then asked which offer is the most appealing to them.

Below are three tablets at different prices. Assume you are planning to buy a new tablet and the ones in the table below represent the offers you must choose from:

Once a choice is made, the price for that choice will increase incrementally until it reaches a point at which the respondent changes their brand selection or chooses “none of these.”

Brand-Price Trade-Off is most effectively used in markets where brand factors heavily in purchase decisions.

How much does market research cost? It depends heavily on which approach you choose. The table below breaks down the cost of market research across the three most common approaches.

Use this step-by-step process to budget for pricing research accurately, whatever method or approach you choose.

The cost of market research ranges from a few hundred dollars for a self-service survey to tens of thousands of dollars for a full-service agency study. Your total depends on the methodology, sample size, and whether you run the study yourself or bring in outside help.

Pricing research costs vary by method. Van Westendorp and Gabor-Granger studies are generally more affordable to field than conjoint analysis or brand-price trade-off, because they ask fewer, simpler questions per respondent.

Often not by default. Many platforms charge a base fee for the study itself and a separate fee for sourcing respondents through a panel. Bringing your own respondents through a weblink can reduce this part of your cost of market research.

DIY market research has a lower direct dollar cost, but it shifts the cost to your team's time and carries more risk of methodological errors. Full-service agencies cost more but include research expertise and project management.

Choose a methodology-backed, automated solution that builds in best practices, so you're not paying for research expertise and design time separately. This gets you professional-grade methodology at a fraction of an agency's cost and timeline.

Pricing your products or services correctly is a critical component of your business's success. The best way to determine optimal pricing is market research: using surveys to obtain valuable information directly from your target customers.

To optimize your pricing and control the cost of market research, use the Price Optimization solution from SurveyMonkey LaunchPad. Built on the Van Westendorp model, it automatically builds your pricing study, then generates your price sensitivity meter as responses come in, so you can set prices for new products, optimize pricing for existing products, and personalize pricing by segment without hiring a researcher.

Ready to get started? Use the price-testing survey template as a jumping-off point for your pricing research, fully customizable to your product and market.

Get started with SurveyMonkey for all your market research needs.