Do you know how much your customers are willing to pay?

Your business success is directly linked to the ability of offering a price that your customers are willing to pay.

As mentioned and detailed in my previous article "What Impacts Pricing", the 3 key pricing drivers are:

• Willingness to pay
• Competition
• Cost Structure

We are now zooming on how to measure the willingness to pay of your targeted audience.

There are many different methodologies to address that research question, but I will be focusing on my preferred technique: Van Westendorp's Price Sensitivity Meter

Why I recommended it?

1. It is easy to execute.
2. The results are clear on interpretation.
3. It follows a quantitative approach; therefore if you apply a representative sample of your targeted segments in your results, you may extrapolate the results for all your targeted segments.

Also, you need to keep in mind that this research method applies open-ended questions combining the valuation at the same time of price and quality.

How to implement this research technique?

1st Step – Identify the target segments of your product/service.

2nd Step – Calculate how many potential customers are in these targeted segments.

3rd Step – From your customers universe, evaluate how many customers you need to contact in your representative sample to be able to get meaningful findings. Therefore it is recommend to contact a sample that conveys a confidence interval of 95% with a margin of error of less than 5%.

4th Step – Conduct the survey (can be in-person, by telephone, or online) with 4 open ended questions (the wording of the questions can be adjusted)

• At what price would you think that the product is too expensive to consider? ("Too Expensive" results)
• At what price would you think that the product is so inexpensive that you would question the quality and not consider it? ("Too Cheap" results)
• At what price would you think the product is becoming expensive, but you still might consider it? ("Not a Bargain" results)
• At what price would you think the product is a bargain, therefore a great buy for the money? ("Bargain" results)

From these questions you may cross the data that you collected with a cumulative perspective (Count of Customers % vs. Price Points) and create a graph similar as this:

The distance between the 2 mentioned below intersection points will give you the range of "Accepted Prices" for your product/service, from a willingness to pay perspective.

• "Not a Bargain" & "Too Cheap" lines
• "Bargain" & "Too Expensive" lines

Some researchers claim that the optimal price is on the intersection of the "Too Cheap" & "Too Expensive" lines, but I challenge that view because as already mentioned the "willingness to pay" isn't the only key driver on pricing to assess the optimal price.

You may argue that Brand strategy and Brand reputation should also be included in these pricing research assessments... and you are right!

Brand value contribution is already incorporated in this research indirectly, as long as your survey questions also mention your brand, if so, customers will incorporate your perceived brand quality and reputation when assessing the product/service price and quality value.

Conclusions:

1. This Pricing research technique will enable you to understand the acceptable price ranges for your product/service from the customer willingness to pay perspective.
2. You will only find the optimal price point (within the ranges) for your product/service after also incorporating in your assessment the other mentioned pricing drivers (Cost Structure and Competition).

As mentioned on the " What Impacts Pricing" article, the willingness to pay is really important, but it is just one of the 3 key pricing drivers.

Therefore the final price setting decision cannot rely only on the Van Westendorp's model analysis. It must also consider the profitability assessment based on your cost structure and the expected competition reactions to your pricing move.