Pricing Research: It’s All About Optimization

Pricing Research

Price is a fundamental element of new product development research. Different methods may be employed to find the optimal price, such as the Gabor Granger technique, Van Westendorp Price Sensitivity Monitor (PSM) and Brand Price Trade-Off (BPTO), but they do not account for other dynamics that influence interest in a product. In reality, the price of a product itself does not exist in isolation. Many other factors drive consumer interest in a product and they are not independent of price. Accordingly we recommend an optimization approach when conducting pricing and product development research.

When we set out to conduct product development research, we are often asked by our clients “which is the best combination of product features and price?” This calls on us to employ the approach of optimization. Optimization, in general, is the practice of making the best or most effective use of a situation or resources under a set of constraints. In the context of product development, optimization actually means building a product that most effectively accomplishes your business objectives.

Knowing what we are optimizing is a consequence of what your business objectives are. Are you seeking to maximize revenue? Is it to maximize profit? Is your goal to saturate the market with this new product, leaving as little room for competitors as possible? It is through understanding these business objectives that we can direct our analysis towards the appropriate optimization methodology.

The optimization problem must also be framed within the scope of conditions, which we “optimize with respect to.” From a business standpoint, it may not be feasible to set certain features at certain levels, there may be pressures to maintain a specific feature or level, or a desired price. It is these conditions that we adhere to and which drive custom optimization solutions. For example, in the case of optimizing interest, often the solution which yields the most interest is when the product is offered for free, or when each of the product features are all set to their most preferred levels. A solution of this sort is likely not feasible from the perspective of your business. Though we are maximizing interest, the constraints that we have placed on this solution are not realistic. To truly hone a solution that is realistic and offers your business actionable results, we must frame this solution in the context of these constraints. This requires that you, the client, work with your internal stakeholders to answer the questions about the feasibility of this product offering. Such as “what is the minimum price we can offer?” or “Are there any combinations of attributes that we cannot, realistically, offer together in this product.”

When this form of optimization analysis is conducted, we are able to estimate, for example, that you can achieve this much revenue (or interest) at price x, with product attributes a, b and c. Or, if you lower price and remove attribute c, you can still achieve comparable revenue.

Price analysis is more effective when price is viewed as an additional independent variable, something that contributes to your specific business goals and objectives, and our approach to optimization is an effective means to help you see the bigger picture.

Written by Jamie Hainer

At Phase 5, we bring together experts in marketing research, user and customer experience, innovation and design. This unique, collaborative approach drives business results by applying strategic insights to your product development, go-to-market and customer relationship decisions. We’d love to speak with you!