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Determining how to price your product or service appropriately is always tricky, but it can be especially difficult for companies with limited or non-existent market research resources.
ADVANCED TOOL
A team of professors at Kellogg recently identified a new methodology that can provide more accurate data about the maximum price a customer would be willing to pay (WTP). The key is identifying the competitive set, a core component of any positioning statement. This helps clarify the context, and acknowledges that a customer’s decision to buy is often about which product in the category to buy.
You can read the whole article, A Better Way To Measure Customers’ Willingness To Pay, in this issue of Kellogg Insight magazine.
BASIC TOOL
Or, if you prefer a more basic tool, these are questions you can ask on your own to get a better sense for how potential customers feel about your product’s pricing.
Caveat #1: Whenever possible, I recommend working with a trained market research professional. However, after many years of working with early stage companies, I’ve seen a lot of startups determined to save money with DIY research, even if it will actually result in unreliable data. This guide is intended to help those diehard DIYers achieve more accurate insights.
First, create a quick description of your product and its features. For example, for a new beverage containing THC you might show a picture of the can and say:
- Flavored sparkling water
- Flavors like Watermelon, Blackberry, Lemon
- Contains 2.5 mg of THC
- Strength similar to a glass of wine or a light beer
- Provides a light buzz within 30 minutes
- Zero calories
- Priced at $20 for a four-pack of 8-ounce cans
Then ask these two key pricing questions:
- How would you rate this product in terms of value for the money?
- More than I would expect to pay for this product
- About the same as I would expect to pay for this product
- Less than what I would expect to pay for this product
- Optional: Why did you answer the way you did?
- Which statement best expresses your opinion about the price?
- More than I would expect to pay for this product
- About the same as I would expect to pay for this product
- Less than what I would expect to pay for this product
- Optional: Why did you answer the way you did?
Depending on what kind of research you’re doing, you could also vary the price point to get a sense of people’s tolerance for the different pricing levels you may be considering.
Caveat #2: To do this with any level of validity, you will need at least 30 responses for each price point to be able to do even a very rough comparison between the different price points.
While this methodology is much less sophisticated than using the Comparative Method of Valuation or the Becker-DeGroot-Marschak methods mentioned in the Kellogg article, it also requires far less specialized knowledge and is much easier for a novice to work with. However, if you are interested in and able to do a more sophisticated exploration, there are many highly qualified market research consultants who can help you do pricing research that will generate more powerful, statistically significant, actionable results for your company.