With so many pricing research methodologies out there, how do you know which is the right one for you?
Conjointly offers pricing techniques (Van Westendorp and Gabor-Granger) that both help set prices for a single product with either no competitors (completely new offerings) or where there are too many competitors to benchmark against (e.g. fashion or restaurants). However, they answer slightly different questions.
To illustrate the differences, we conducted three studies to show you how they work and the outputs that you get from each of the separately. Specifically, we tested a floor lamp with 3 heads that has adjustable lighting angle. It is currently not available in the US market.
Simple willingness to pay question
First, we showed consumers the lamp and simply asked consumers “How much are you willing to pay for this lamp?”. The average was $31.84.
But how reliable is this number, and what does it actually mean? When consumers think about prices, there will always be a range of prices that is acceptable to them. And this number certainly does not mean that 100% of consumers who are offered a lamp at this price will buy it.
Van Westendorp’s Price Sensitivity Meter
Van Westendorp’s PSM is one of the most commonly used pricing technique that helps you understand such price ranges. In PSM, we asked 4 questions to gauge respondent’s attitude towards the floor lamp at various levels of price. Specifically, we asked:
- “At what price would you consider this floor lamp to be priced so low that you would feel the quality couldn’t be very good?” - to understand what is “too cheap”.
- “At what price would you consider this floor lamp to be a bargain—a great buy for the money?” – to determine what is “cheap”.
- “At what price would you consider the floor lamp starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it?” – to determine the what is “expensive”.
- “At what price would you consider the floor lamp to be so expensive that you would not consider buying it?” – to determine the “too expensive” price.
By asking these questions, we are able to explore a little bit more about consumer’s attitude towards floor lamp prices. For example, respondent A will state that $5 would be too cheap for the floor lamp, $20 will be a good bargain (cheap), would still consider the floor lamp at $40 but is considered expensive and $100 will be too expensive. This provides a greater explanatory power than a simple question of “How much are you willing to pay”.
When we combine all responses, we can plot 4 different cumulative frequency curves (for each of too cheap, cheap, expensive, and too expensive). From here, we estimate the acceptable price range to be $24.99 to $35.89.
Gabor-Granger Pricing Method
In addition to the PSM, we also tested willingness to pay for floor lamp using the Gabor-Granger pricing method. The main aim of this method is to find the maximum price each respondent is willing to pay, which allows us to project the price elasticity of the product and find revenue maximising price points.
In the Gabor-Granger experiment, we asked if respondents are willing to buy the floor lamp at various prices (i.e. $15, $25, $35, $45, $55, $65, & $75). Multiple questions of “Would you buy the floor lamp at price X?” will be asked to the respondents. Each subsequent question is an adaptation from respondent’s previous response. For example, when respondent A states that they are willing to buy the floor lamp at $35, the next question would be “Would you buy the floor lamp at $45?”, so forth. When the respondent answers “No”, the previous response will be recorded as the maximum price that respondent is willing to pay for the floor lamp.
The results came back showing that $35.00 is the revenue-maximising price.
Comparing the results of the two methods
As an example of the difference between the two methods, compare the results of a Gabor-Granger and Van Westendorp for a bottle of instant coffee.
The Van Westendorp determined that the best price range for consumer perception is between $5.75 and $7.67.
However, the results from the Gabor Granger determined that the revenue maximising price was at $13.89.
So which one to use?
Put simply, do not use the simple question of “How much are you willing to pay?” because the result does not mean anything.
Use Van Westendorp when you are unsure what price points the market can potentially accept. For example, it came in handy for a client in the fashion industry who through this method confirmed their long-standing suspicion that they are pricing too low.
Use Gabor-Granger to measure elasticity of demand and to find revenue-maximising price points. For example, this method helped our client, an online education provider, re-set their standard price for a course package.
FAQs
For the Van Westendorp, should we set a minimum price for "too cheap" and "cheap"?
If survey participants are paying attention to the survey and take their responses seriously, there should be no need to set a floor price. For most research on Conjointly, the floor price is set to be very low (e.g. 1 dollar) and it does not lead to issues of overly low prices.
However, if you are concerned that some respondents interpret the “too cheap” price in a jovial fashion (e.g. they provide 1 cent as an answer), introducing a higher floor can be a good idea.
Why do we show the four Van Westendorp questions on the same page?
We set up the Van Westendorp question on a single page because we want respondents to consider all four prices at the same time.
Because the methodology assumes that respondents will provide prices in ascending order, we implement a validation that stops them from adding, for a example, a lower “expensive” price that the “cheap” price. From the user interface perspective, it is better experience for respondents to have this validation on the same page.
