Pricing is by far the most important element of the marketing mix: and, in fact, it is the only element generating revenue for the company (the other elements of the mix generate expenses). Pricing is therefore one of the most important decisions for any company. It is worth conducting pricing sensitivity studies if any of the following questions come up related to pricing and pricing strategies:
- At what price level can you maximize your price revenue, profit or market share (either in the case of specific products or in the case of the entire product range)?
- Is it possible to achieve a greater market share by reducing the price (examining if demand for a product is price elastic or price inelastic; examining optimal market strategies)?
- Do competitors’ prices and pricing present an opportunity or a threat? Should you react to the actions of the competition or not? If yes, then what action to take?
- Does the product have enough brand value for premium pricing strategies? Is the value of the brand strong enough to charge premium prices for the product?
- What is the most appropriate pricing model in the market?
- What is the extent and the direction of the effects of cross selling and product tying on price revenue and profit?
Through pricing and price sensitivity studies, it becomes possible to assess the following areas:
- Determining the acceptable price range and optimal price levels
- Determining the price sensitivity curve
- Determining optimal price levels (to maximize price revenue, profit or market share) for a product range
- Determining propensity to purchase at various price levels
- Determining the effect of brand value perceptions and brand value on pricing; determining the monetary worth of brand value
- Analysis of price timelines, which help analyze the effect of price on revenue. Tracking the evolution of market share at set intervals (monthly or weekly), at different price levels, provides a unique opportunity to analyze the correlation between demand and price.
- And, perhaps most important, creating the right models to map and forecast the effect of different prices on demand, profit or market share.
In the case of research related to pricing, what is always most important is determining what factors customers consider when determining prices (this includes the product itself, distribution, the positioning of the product and other factors relevant for customers). Depending on the complexity of the product or service, and on the stage of the life cycle curve or the acceptance of the product, we are able to use qualitative or quantitative approaches:
- We employ qualitative research methods (focus groups or in-depth interviews) prior to the launch of a new product or service, to determine how the market sees their price and value, and to determine the optimal pricing model. In-depth interviews are generally used in the case of highly complex purchases and/or unique pricing.
- We rely on quantitative research methods to determine acceptable price ranges, optimal price levels and price elasticity curves. The most widely used methods include the Gabor–Granger method, Van Westerdorp’s Price Sensitivity Meter, the various conjoint and discrete choice models (CBC) and econometric models using timeline analysis.