Pricing your new product feels like a treacherous balancing act. Set it too high, and nobody buys. Set it too low, and you’re leaving money on the table with every sale you make.
Fortunately, today’s modern techniques for gathering authentic consumer data have taken most of the guesswork out of product pricing analysis. With the right methods and a comprehensive product intelligence platform, you can quit spitballing and start assigning price tags with clarity and confidence.
Let’s see how it works.
What is pricing analysis?
Pricing analysis is the process of using quantitative, survey-based methods to determine the ideal price point for your product. This is the sweet spot where you’re maximizing margins without losing market share.
Of course, pricing strategy isn’t one-size-fits-all, and you may purposefully go outside the optimal range for one reason or another. Some brands temporarily skimp on margins to rapidly increase market share (penetration pricing). Others might be launching a novelty, high-value product that they know early adopters will be salivating over, and they’ll launch it at a premium but gradually lower the price to capture a wider range of customers (price skimming). This latter approach is often associated with innovative tech gadgets, but it can also apply to personal care products like a face moisturizer that uses a relatively new ingredient.
Whatever your strategy, it’s crucial to get rock-solid data demonstrating what people are willing to pay for what you’re offering. When the costs of production rise, you can test how readily people will drop off as you raise the price (known as “price sensitivity”). You can also stay ahead of shifts in the market that may indicate a change in the willingness to pay for a product like yours.
Some pricing analysis methods, like choice-based conjoint analysis, let you tie price sensitivity to specific features (or lack thereof). Others focus solely on price and assume no product variation.
The psychological underpinnings of pricing analysis
The implications of your chosen price point go beyond the basics of “too high, lose customers; too low, lose out on profits.” Incorrect pricing can also have a subtle impact on people’s perception of your brand, and this can be enduring.
For example, an overly low price can make people suspect your product to be of poor quality, and you might have a hard time getting your target customers to shed this assumption.
Luxury pricing is famously resistant to the clear-cut logic of most pricing modules. The Veblen Effect counterintuitively dictates that certain products will actually become more attractive at higher prices—as long as they’re widely perceived as a status symbol.
All of this has to do with human psychology. In order to understand how your chosen price point will impact sales and brand perception, you must find out how it resonates with people on a psychological level, not just relative to their bank account.
Pricing strategies and pricing analysis methods
There are many things that you can take into account when determining what type of price tag to slap onto your shiny new product. The most obvious one is cost-based pricing, in which you sum up all the costs associated with production and then add a markup.
If your competitors are able to create a similar product much more cheaply, however, you might be out of luck. This is why companies often use competitor-based pricing in order to stay within the ballpark of other options.
But what if your brand perception or unique product features allow you to safely command a higher price point? Value-based pricing might be your ticket to achieving profits your competitors can’t hold a candle to.
Once you settle on a strategy for determining your price point, you’ll want to back up your choice with pricing analysis. Here are a few examples of how to conduct pricing analysis.
- Gabor-Granger Pricing Model. This simple method lets you clearly determine the point at which raising the price becomes a dealbreaker. In a survey, you’ll describe your product and ask people whether they would purchase it at, say, $7.50, then $8.50, then $9.50 and so on. It works best when you’ve already got a product on the market and you’d like to see whether your customers will tolerate a price increase.
- Van Westendorp Price Sensitivity Meter. Here, you’ll ask consumers at what points your product comes across as “too expensive,” “somewhat expensive,” “a bit of a bargain,” and “too cheap to trust the quality.” This results in four lines that create a few key intersections. For example, the “too cheap” and “too expensive” lines intersect to give you the optimal price point, or OPP.
- Choice-Based Conjoint Analysis (CBC). Widely considered the gold standard of pricing analysis techniques, conjoint analysis lets you test variations of your product against people’s willingness to spend more money on it. It can be tricky to implement, since in order to ensure statistical significance, you’ll need to get a good distribution of all the variations while avoiding survey fatigue on the part of respondents.
- Monadic price testing. If you want to compare feature-related price sensitivity without letting the comparison between options result in biased answers, you can show separate versions of the product to different groups of survey-takers. Although it might not be obvious, comparison can sometimes cause inauthenticity. For example, imagine you’re testing the price of rose flavored yogurt—it’s the SAME yogurt—in two different containers, one plastic and one ceramic. People seeing both options in a CBC survey will know full well that the yogurt in each container is exactly the same stuff. However, “out in the wild” (i.e., the Whole Foods), the ceramic jar option might sell quite well at a premium, since it leads to a subconscious assumption of higher quality.
How to do competitor pricing analysis
Getting a clear-eyed view of your competitors’ pricing strategies is vital whether or not you’re planning on matching your pricing to theirs. Even if you expect to sell at a premium where they sell at a discount, you still want to use their pricing as a benchmark, and you want to understand the reasoning behind their choices.
First, determine who your competitors actually are. These could be direct (they sell a very similar product to a similar group of people) or indirect (they offer a different sort of solution that meets a similar need among your target consumers).
Next, gather data on their pricing strategies. Do they price above, at, or below the average for their category? Do they offer discounts or seasonal pricing, and if so, when?
Look at how their product compares to yours and examine any differentiating factors. What are their value propositions? How do they position their product in a crowded market? This can help you determine whether you want to compete primarily on price or focus on the unique value your product brings to the table.
You can also use competitor pricing analysis to see if you can successfully use a specific product as a “loss leader” to capture more market share. A loss leader is a product that you sell below market price in order to attract more shoppers to your e-commerce website or to your section of the grocery store, where they’ll hopefully buy your pricier products, too.
Challenges of pricing analysis challenges and how to overcome them
The elephant in the room when it comes to pricing analysis data—and really any data that you’re trying to gather about consumer habits—is the issue of authenticity. Do people’s survey responses match what they would actually do when faced with the choice of whether or not to buy something when they’re actually shopping?
This is where a fully-fledged product intelligence platform comes into play. Platforms like Highlight can help you integrate pricing-related insights with ethnographic studies of how people use the type of product you offer. Whether you’re trying to gauge interest through “purchase intent” questions or determine which features matter most before you measure pricing sensitivity, couching pricing analysis data in an understanding of people’s daily lives and their motivations makes the data more realistic.
Why pricing analysis isn’t a one-and-done thing
Times change, society changes, people change. From tariffs to global warming-induced scarcity, there’s always something threatening to throw your carefully calculated pricing off balance, and you’ll once again need to test people’s willingness to pay.
Consumer perception can also change on a dime. Perhaps you banked on having people perceive a much-touted skincare ingredient as being worth premium pricing, and then someone on Reddit starts a popular thread explaining why that ingredient really isn’t all it’s cracked up to be. If you don’t find out about this in time to do damage control, your brand perception could come crashing down. Staying on top of the zeitgeist via consumer interviews and social listening can help here.
Your competitors are also not going to stay constant. Rather, they’re going to keep analyzing your pricing and shifting theirs around to maximize their advantage. There’s truly no rest for the wicked!
All of these are reasons why you should test your pricing levels with real consumers as often as you can—and use a comprehensive product intelligence platform to build a nuanced understanding of how people perceive your product’s value.