Price optimization: how to find the ideal price for your product

Price optimization uses market research to set the price that balances what customers are willing to pay against the profit your business needs. It relies on real customer, market, and cost data rather than guesswork, and it is the foundation of a defensible pricing strategy.

Price optimization uses your market research to determine the ideal price point for your product or service that will balance value and profit. It’s the foundation of your pricing strategy and decision-making.

Low prices generally mean better perceived value, which drives higher sales volume but can represent a loss on a per-sale basis.

High price points can generate more profit per sale, but sales volume may drop if customers don't perceive enough value to justify the cost.

Price optimization finds the sweet spot between the two, and that sweet spot affects customer satisfaction, loyalty, and sales all at once.

The following information is critical to optimizing your prices:

Before you collect any of that data, it helps to know why price optimization is worth doing in the first place.

There are four main advantages associated with price optimization.

Improve ROI. Return on investment should improve quickly with optimized pricing. Teams can monitor changes and respond rapidly to shifts in demand, which helps maintain your best ROI over time.

Maximize sales and profits. Locating your best possible price points lets you maximize both sales and profits, because customers respond to pricing that reflects real value. Pricing that isn't optimized can lead to decreased profitability and, in the worst cases, business failure.

React faster to market shifts. Market research solutions from SurveyMonkey keep you close to shifts in the market, so you can respond with appropriate pricing changes based on data instead of instinct.

Understand customer behavior. Price optimization is fundamentally a data analysis process, and that process builds a better understanding of your customers. That understanding should guide which products you offer and at what price your customers are comfortable buying them.

Take a look at additional resources for pricing strategies: Top 5 pricing methods to help price your product and Top 7 pricing strategies and when to use them.

Some pricing strategies fail from a poor understanding of the process or the data behind it. Watch for these specific failure points:

Each of your products needs a price optimized for three separate stages of its life cycle.

Starting prices give customers their first impression of your product's value. The price should reflect baseline demand without relying on discounts or promotions. This works especially well for products with a long life cycle, like groceries or office supplies.

Discounted prices apply to products with a short life cycle, such as seasonal fashion, décor, hotel rooms, or airline tickets. Discounting helps move inventory by tempting customers with a lower price, but keep the product's overall profit contribution in mind when setting the discount level.

Promotional prices temporarily reduce a product's price to create urgency and scarcity, typically for a quick sales boost. A "buy one, get one free" bundle is a common promotional-pricing tactic.

There are several pricing strategies to choose from based on your industry and business model. Once you pick a strategy, you can begin the price optimization process itself.

Penetration pricing enters a product into the market at an extremely low price to disrupt competitors by pulling away their customers. Blockbuster charged around $5 to rent a DVD; Redbox entered with automated rental boxes charging $1 per day for rentals and $1 per day for late fees. Blockbuster is gone. Redbox held on until streaming services ended it too.

Competitive pricing uses competitors' prices as a benchmark, then prices your product the same, above, or below theirs. Your production and overhead need to stay low enough that profits survive at a low price point. Grocery stores commonly use this for store-brand products competing against name brands, and gas stations that price-match still need something else, like location or amenities, to win the customer.

Price skimming launches a product at a higher price, then incrementally lowers it over time as the product becomes less novel and more accessible. Early DVD players cost up to $1,000; the same category now sells for under $25 as the technology matured and demand shifted.

Value-based pricing sets prices according to customers' perceived value rather than production cost. The fashion industry relies heavily on this: a designer handbag regularly carried by A-list celebrities is perceived as higher-value, and its price can climb accordingly.

Market-based pricing sets a price at or very near competitors' prices, based on the product's competitive position rather than its cost or its perceived value. This is common for vehicles and commodities like raw materials, where products are relatively uniform across manufacturers.

Make your price optimization process easy with solutions from SurveyMonkey. Start with a pre-made pricing template that you can customize to your specific needs.

The Gabor-Granger technique determines a revenue and demand curve for a product or service at different price points, also known as price elasticity. In a survey, respondents see a sequence of prices and are asked their likelihood of purchasing the product at each one.

For example, below an image of your product, the following question is presented:

How likely are you to purchase this product at X price?

The question repeats, based on the respondent's previous answer, until the top price customers would pay is determined. Use this to figure out how much you can change your product's price without affecting sales and revenue, and to find the price points where customers' willingness to pay increases or decreases.

The Van Westendorp Price Sensitivity Meter helps you identify the series of price points that are psychologically critical to your audience. It captures your customers' price sensitivity, purchasing power, thought process, and willingness to pay for a specific product, and it's one of the most widely used pricing techniques in market research.

The four questions are:

You can ask these as closed or open-ended questions, depending on whether you already know your acceptable price range.

Price optimization analytics generally comes from one of the survey-based methods above, or from a combined analysis that layers pricing data on top of other feature or demand data. Each method answers a slightly different pricing question.

It's time to put the data together and find the ideal price range for your product, one that maximizes both customer value and your profit. Follow this process, and let your market research back every step rather than a guess.

In an illustrative example from the LaunchPad Price Optimization solution's own analysis output, a Van Westendorp study can return an optimal price point of $10 that sits inside an acceptable range of $8 to $12, the kind of automated result this step-by-step process is meant to produce once your data comes in.

SurveyMonkey LaunchPad runs this analysis for you starting from a pre-made pricing template, so you don't have to build the model by hand.

Price optimization is the use of customer, market, and cost data to determine the price for a product or service that balances customer value against business profit.

Price optimization and pricing optimization refer to the same process: using data to find the ideal price for a product or service. "Pricing optimization" is a more common phrase for the ongoing strategy and process, while "price optimization" more often refers to the specific analysis that produces a price point or range.

Product price optimization is price optimization applied at the individual product level, setting a specific starting, discounted, or promotional price for one product or SKU based on its own demand, cost, and customer value data, rather than a single price applied uniformly across a whole product line.

Price optimization analytics is the data analysis behind price optimization: methods like the Van Westendorp Price Sensitivity Meter and Gabor-Granger that convert survey responses into a demand curve, a price sensitivity range, or a single recommended price point.

Price optimization is calculated by fielding a pricing survey, such as a Van Westendorp or Gabor-Granger study, to your target customers, then analyzing the responses to produce either an acceptable price range or a demand curve. Tools like SurveyMonkey LaunchPad automate this calculation once responses are collected.

Don't rely on guesswork. 

SurveyMonkey offers a range of market research solutions, from do-it-yourself surveys to fully managed studies.

Price Optimization from SurveyMonkey LaunchPad runs a Van Westendorp price sensitivity study and hands back your ideal price point or range automatically, so your next pricing decision is backed by data instead of instinct.

If you'd rather hand the legwork to someone else, SurveyMonkey Market Research Services can design, field, and analyze a custom study for you, from questionnaire design through the final report.