How do you figure out what to charge for your new plant-based, cell-based, or sustainable product or service to maximize sales? Depending on your specific goals (and your budget), there are several possible approaches to using consumer feedback to set your price. In this blog we explore four of them, ranging from relatively simple (and inexpensive) methods to relatively complex (and more expensive) techniques. Let’s dive in!
Willingness to Pay
The easiest way to find out what consumers are willing to pay for your product is to ask them outright. This is a straightforward approach and can be done with a single survey question if your research budget is limited. For example, as part of a recent client project, we provided our panelists with a one-paragraph description of a new concept and asked them something similar to the following question:
How much would you expect to pay for a 12-ounce package of this product?
- Less than $5.00
- $5.00 to $7.49
- $7.50 to $9.99
- $10.00 to $12.49
- $12.50 to $14.99
- $15.00 to $17.49
- $17.50 to $19.99
- $20.00 to $22.49
- $22.50 to $24.99
- $25.00 or more
- I would not buy this product
The results for a question like this can provide an overall sense of what consumers expect to pay for a product. If you pair it with respondent demographics and other attributes, you can also understand which types of consumers are willing to pay more for your product or service (and may therefore represent good target audiences). And you can do it simply and inexpensively.
However, this kind of direct, self-reported approach has its limitations. Perhaps the biggest is that asking consumers to choose a single price (or price range) provides limited data when asked in isolation, where the methods described below will approach pricing from multiple angles. If your company’s research budget allows, Moonshot Collaborative typically recommends one of the more sophisticated approaches below.
Van Westendorp Pricing
Developed by Dutch economist Peter Van Westendorp, this approach uses a series of four survey questions to help determine an acceptable price range for a new product or service. Respondents who represent the target audience are given a detailed description of the new product/service and then asked the following questions:
- At what price would this product begin to be inexpensive?
- At what price would this product begin to be expensive?
- At what price would this product begin to be so expensive that you would never consider buying it?
- At what price would this product begin to be so inexpensive that you would doubt the quality and not buy it?
The result is a chart like the one below (courtesy of Qualtrics, the platform that Moonshot Collaborative uses for our research):
The Van Westendorp method is especially useful for identifying an acceptable range of prices for a new concept. With a little extra work, you can also use it to identify an optimal price. Drawbacks for this approach include putting a heavier cognitive burden on respondents by asking them to come up with their own numbers and fill in open-ended questions (which means more reliance on how they interpret the question and think about the answer). The results can also be questionable if respondents have no experience on which to base possible price ranges (though you can overcome this by setting minimum and maximum prices).
The Gabor-Granger pricing method, also developed by economists, takes an approach that puts less of a burden on respondents to think too hard about pricing. After you define an acceptable range of prices and a reasonable number of increments between minimum and maximum, respondents are then randomly shown a price and asked if they would buy the described product or service at that price.
If they say “yes,” then they’re asked the question again, but at a slightly higher price point. If they say “no,” they’re asked again at a slightly lower price. This process continues until an optimal price is determined (or the respondent reaches the minimum or maximum price). This iterative approach is simpler for respondents to understand than the Van Westendorp approach described above, but it can provide some very useful data.
The Gabor-Granger method can be used to generate simulated demand and revenue curves. You can use these curves to determine your product’s price elasticity (a measure of how sensitive customer demand is to changes in price) and the revenue-maximizing price for your product. The chart below (from QuestionPro) shows an example of the demand and revenue curves you can generate using this method.
The Gabor-Granger approach can arguably provide more information than the Van Westendorp approach, but it also has its limitations. Notably, having a predefined price range and a limited number of individual price points can be too much of a constraint when exploring a brand new concept. For that reason, Gabor-Granger is generally used to explore pricing for existing concepts that have relatively established price ranges.
Conjoint Analysis Pricing
The last technique we’ll discuss looks at pricing in the context of other product or service attributes (or features). Conjoint analysis is a survey research method that identifies the relative importance of different product attributes. By presenting different features in varying combinations and asking people which they prefer, you can determine how much “utility” people assign to each product attribute.
If you include price as one of your attributes, then you can also get rich information on which product attributes lead to an increase in willingness to pay. You can use this data to determine which attributes to emphasize and to identify one or more optimal price-attribute combinations that you know will resonate with consumers. There are also several different flavors of conjoint analysis that can help with specific price-optimization scenarios.
Ready to optimize your product pricing? At Moonshot Collaborative, we’ll work with you to understand your goals and budget, and determine which of the above methods to use in our research based on your unique business needs.
Don’t have a research budget right now? Check out our report on Plant-Based Price Premiums for cost effective insights on pricing your products so they fly off the shelves.