What is it?
Price Optimisation includes a range of techniques and question forms designed to determine the optimum price level for any given market.
It is all about striking exactly the right balance between charging too much (and suffering depressed volumes) on the one hand and charging too little (and suffering depressed margins) on the other.
Depending on the nature of the product and the market, there are a number of different techniques we can use to identify the sweet spot – where both sales volumes and profit margins are optimised.
Techniques we can use include:
- Gabor Granger method
- Van Westendorp, Price Sensitivity Model (PSM)
- Exploring the impact of Price Elasticity
What’s the benefit of it?
Pricing forms an important element of the marketing mix and can have a major impact on the success or failure of a product depending on whether you get it right or wrong.
In practice people don’t necessarily always need to look at pricing in isolation, but pricing often needs to be considered as part of a wider set of marketing questions. Maybe you are launching a new product or service and you need to understand what prices to set? Maybe you are conducting a review of your existing products and as part of that process you might want to look at whether or not you’re getting the pricing strategy right? Whatever the reason, you don’t want to charge so much that you put people off but, on the other hand, you need to make sure you aren’t giving away your products too cheaply.
When might you use it?
The most common situations in which you would consider turning to price optimisation research are:
- Launching a new/revised product/service and you are not sure of the optimum price for the launch.
- Review of an existing product range where you have concerns that you may be pricing yourself out of the market relative to your competitors.
- Review of an existing product range where you have concerns that you are undercharging and failing to make the margins that your competitors may be achieving.
Pricing forms just one element of the overall marketing mix and, as such, we often need to understand it within a broader context. Nevertheless, pricing strategy can often make a key different to the success or failure of a product and, in order to make the best pricing decisions, market research can help provide an invaluable insight into how customers view price.