Pricing is an important decision for any business. Whether your business is developing a new product or introducing an existing product to a new market, getting the price right is crucial.

If you set the price too high, customers will walk away. If it's too low, your business will make less money than it could.

There are four major pricing methodologies: the Van Westendorp Price Sensitivity Meter, the Gabor-Granger method, monadic testing (pricing experiment), and conjoint analysis.

Van Westendorp

The Van Westendorp approach involves asking survey respondents about four prices:

• the price that is so low that the customer questions its quality.
• the price at which the customer would consider the product a bargain.
• the price at which the customer would consider the product expensive and might not buy it.
• the price at which the customer would consider the product too expensive and would not buy it.

The responses to these questions allow us to determine a range of prices that are acceptable to customers. Van Westendorp can be helpful for new products for which we don't know what the price range should be and if there isn't any relevant competition to consider. Most of the time though, it is unrealistic to consider price ranges without considering the options customers already have.

Gabor-Granger

We ask customers whether they would purchase a product or service at different prices. We can then put the data together from all respondents and create a demand curve, showing the percentage of respondents who are willing to buy the product at each price. We can then use this demand curve to select the price that maximizes revenue or profit.

The Gabor-Granger method can help companies learn about price elasticity, how demand varies with price, for their product. However, it ignores product features other than price as well as competing products. Unlike Van Westendorp, Gabor-Granger requires that we start out with a price range.

Monadic Testing (Pricing Experiment)

Survey respondents are randomly assigned to see one of two (or more) prices. The product of interest is often showed along with other products at their respective prices. Respondents are asked whether they would buy the product (if the product is shown alone) or which product they would buy (if the product is shown along with others).

Monadic testing is a scientific approach to pricing research. However, it makes it difficult to test a variety of price points as well as responses to multiple potential products.

Conjoint Analysis

Conjoint analysis is a more sophisticated type of experiment that shows survey respondents hypothetical products or services with varying features and prices. It asks respondents to select one (usually they can also select none). Respondents go through several such choice tasks. We can then combine all the data and create a market simulator. Using the simulator we can identify the product features and price that maximize market share, revenue, or profit.

Using the simulator, we can also calculate customers' willingness to pay for specific product or service features. That way, companies can find out in advance whether a feature is going to be profitable. In other words, they can make sure that customers are willing to pay more for a feature than what it costs the company to implement.