Listen to this Article
This article was written by Hilary DeCamp, Chief Methodologist at Material.
Although there are signs that inflation is beginning to cool in the U.S., it remains a sticky subject for business leaders and product marketers everywhere. High interest rates, climbing operational costs and general uncertainty have locked many companies in perpetual cost-control mode. However, instead of a laser focus on reining in costs, revenue maximization through pricing and promotions could be the smarter move.
With your balance sheet under the microscope, you may be unsure whether you should raise your prices or hold the line and try to steal market share from higher priced competitors. Would you be better off adjusting base prices to employ an aggressive discounting strategy, or sticking with everyday low prices? Or perhaps you’re considering adding products to your portfolio to provide options for price-sensitive buyers or to drive premium consumers toward more profitable items.
Getting pricing just right can have an instant positive impact on your bottom line. (Take PepsiCo for example, which saw its Q3 sales rise by nearly 7% after implementing an 11% price increase.) Getting it wrong, though, can erode customer loyalty, leave money on the table and even damage your brand’s long-term health. Many do-it-yourself research platforms offer basic tools to help you assess possible pricing changes. But buyer beware: If you don’t build the proper consumer psychology into your study – including complex considerations of the human thought processes occurring at the point of sale – you could be led astray.
This means testing the right pricing options with the right methodology for the decision processes you’re trying to understand or influence.
The most powerful pricing strategies account for emotional and not entirely rational factors that drive consumer decision making. This requires the help of a partner with expertise in both sophisticated modeling and consumer psychology.
If you want to get these crucial decisions right, it’s essential to have a grasp of the behavioral science underpinning consumer decisions.
Let’s explore some of the pricing decisions product marketers need consumer testing to support, and the ways behavioral science can factor into each of them.
When you’re pricing a new product, first impressions matter.
Determining a product’s price for entry into the market is a pivotal moment for any brand.
Van Westendorp’s Price Sensitivity Meter is a popular and inexpensive tool for guiding pricing decisions based on the combination of willingness to pay and quality perceptions created by price points. But even when additional questions are added to tap potential impacts on demand, this type of work should be viewed as preliminary guidance and not definitive pricing support. You can rely on this approach in early concept screening to help determine which price points to use in later rounds of rigorous priced concept testing for demand forecasts.
Price skimming (entering at a high price and lowering it over time) maximizes profit over time and maintains quality perceptions, while penetration pricing (coming in low at the start) buys share and may permanently cast you as a value brand in the minds of consumers. These initial customer perceptions can be extremely difficult to shake. Rigorously assessing the impacts of your price on perceived quality requires monadic cell testing where price is just one element of the concept your audience will evaluate.
This type of anchoring can also happen within a survey. If consumers are first exposed to a concept at a low (or high) price, this will influence their perceived value of the offering and limit the price points the report being willing to spend. If doing sequential monadic price exposures, be sure to present both high and low prices in the first position so the anchoring bias can be balanced out.
Re-pricing a fixed product requires consideration of market competition and human perceptions.
Adjusting the price of an existing, fixed product requires balancing demand against revenue per unit in the context of competitive prices and potential pricing responses.
If the price range is not large enough to impact consumer quality perceptions of your established brand, you could rely on a Gabor Granger price test that varies the cost of your item and competitor items to see what premium you or they can support.
If you are considering a drastic price change, you need a monadic cell price test to both incorporate and measure the quality perceptions created by your price options.
Drastic price increases should be approached with care; most consumers have established expectations about a brand and its prices. On a fundamental behavioral level, people do not like to have their assumptions challenged.
When adjusting product features along with price, assess the psychological factors that can impact demand.
Choice modeling is the go-to approach for assessing the price/value trade-offs consumers make, but it mostly captures the rational reactions to base prices.
Even-numbered prices (e.g., $50.00) are seen as more premium, while odd prices (e.g., $49.99) are perceived as a better deal. You must choose and test your price points based on the brand image you are trying to convey, the type of reaction you are trying to elicit and the type of buyer you want to attract. Don’t make the assumption that demand will fall along the smooth modeled elasticity curve within the range of values tested – the model won’t differentiate between those two prices.
If a major psychological price point occurs within the range you are considering – such as shifting from prices in the $20’s to prices in the $30’s – test just above and below that price break to capture the likely stark shift in demand when the leading digit changes.
Understand the human behaviors and impulses tied to price discounts.
If yours is a heavily dealt category, your choice models should factor in discounts as a separate variable because promotions are a psychological tool, rather than a simple pricing lever. How people react to $22.49 as your base price and how they react to you being on sale for $22.49 are quite different; generally, the latter drives more sales. This is another example of anchoring, in which consumers presented with a discounted item will tend to focus less on the discount price per se, and more on the fact that they are getting a deal relative to the original price.
In addition, FMCGs should consider measuring not only product choice but item volume when testing discounts since deep discounts could trigger unprofitable stock-up from your current customers.
Whether a brand can integrate new price tiers depends on consumer perceptions of value and quality.
Brands must weigh numerous factors when considering adding a price tier to engage new customers.
From a consumer psychology standpoint, a value brand probably can’t launch a more expensive offering (to capitalize on the fact that higher income buyers have been less impacted by recent economic shifts) since the brand’s perceived lower quality would be at odds with a higher price item. Rather, these companies would likely need to launch a new fighting brand in order to compete on the high end.
A premium brand, on the other hand, could launch a more value-minded option at a lower price point, so long as careful monadic cell concept testing finds that there is no negative blow-back on consumers’ premium perceptions of the brand. If there is, a fighting brand might be the safer bet.
Building fighting brands requires a sophisticated understanding of brand architecture. Once built, optimizing the price gaps between the tiers requires a choice model, not just a concept test. You don’t want to sacrifice total profitability through cannibalization.
Integrating subscription options can drive repeat purchases, but risks excluding commitment-phobic buyers.
If you sell direct-to-consumer, you may wish to design a subscription option for fans or loyal users. Here, you’ll need to test the minimum size of discount needed to trigger the commitment without undermining profitability. You’ll also need to reassess these pricing decisions over time as you experience churn and compare repeat purchase rates of subscribers and others.
If you plan to make your goods only available by subscription, it’s important to test how many potential customers you are excluding from your customer base by requiring the long-term commitment. Ultimately, to set a foundation for sustainable customer engagement, subscription programs must be designed with long-term behaviors in mind.
Pricing research should never be just a numbers game.
The most impactful pricing strategies are backed by rigorous testing that incorporates the nuances of consumer psychology and behavioral science to unlock deep human understanding. In an uncertain economic environment where customers are reevaluating their spending habits, an investment in high-quality pricing research can return tremendous value.
Learn more about how Material’s capabilities in research methodology, behavioral science and human understanding can help enable your business growth goals.