Triple Your Profits with the Price Sensitivity Research Approach. One of the fastest and proven ways for an organization to maximize its profit is to set the right price. And a good means of achieving this is to use the price sensitivity research approach.
Getting your price right can triple your profits faster than jacking up volume. Not that increasing volume doesn’t help. But even high volume with the wrong price will shrink your profits just as fast.
Despite the impacts of pricing on a business bottomline, many managers are still hesitant about trying initiatives that help boost price for fear of losing customers. But not extracting the best sustainable price from customers will hurt your business far more in the long run.
So how can a manager set profitable prices without negatively affecting sales volume? The solution is to turn to price sensitivity research tools.
The first and most powerful tool is the Van Westendorp’s price sensitivity meter. Another price setting tool that also helps, though not as powerful as the Van Westendorp meter, is price laddering.
But before we explore the tools that would plump up your bottomline, let’s take a look at what is price sensitivity.
What Is Price Sensitivity?
According to Investopedia, “price sensitivity is the degree to which the price of a product affects consumers’ purchasing behaviors.”
In other words, it is the volume of sales your business will gain or lose at a specific price point.
So having an in-depth knowledge of a product or service price sensitivity will aid in discovering the maximum price range of a product. Furthermore, the exercise will uncover the impact of specific prices on a business sales numbers.
How to Measure Price Sensitivity
The major way to ensure success when determining the price sensitivity of a product is to know your target market and customer personas. Each set of target customers will always perceive your product’s value differently. What this means is you may have to conduct separate price sensitivity for the different target markets.
Once you have segmented your potential customers, the next stage involves picking which tool to measure price sensitivity with.
Van Westendorp Price Sensitivity Meter
The Van Westendorp’s Price Sensitivity Meter gauges the price sensitivity of an offering by surveying how much a target group is willing to pay in ranges. In the survey, each respondent is asked 4 questions:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
The #1 and #2 questions compel respondents to determine a price range they consider acceptable, while #3 and #4 help respondents narrow their optimal price range.
To get a more specific price point, responses from the survey are plotted on a graph.
In price laddering, potential customers are asked to rate on a scale of 1 – 10 their willingness to buy a product at a specific price.
If the participant’s willingness to buy at a certain price is below a given threshold (mostly 8), the price is further lowered, and the participant is asked to rate again.
Though respondents can be asked to rate as many price points as possible, but generally, not more than 3 price points are used to eliminate unnecessary response bias.
After the survey, responses are then evaluated to determine the rate of targeted customers that would buy at the tested price points.
No matter the technique you use, always remember that your data is based on how your respondents perceive value. And this perception varies in everybody.
As a result, see your price sensitivity research as a tool to give you an insight into how potential customers perceive your product’s value.
Triple Your Profits with the Price Sensitivity Research Approach.