Different Approaches To Price Optimization That You Can Use For Your Optical Products
In a previous post, we explained that pricing new products a unique product like “Lunettes De Créateur” can sometimes be problematic. If you price too high you might lose customers who are not willing to pay for a higher-priced product, moreover, if you price too low you might end up losing profits for products that should have been more profitable. In marketing research, pricing is essential. Anyone familiar with the four Ps understands that pricing is as important as the Product, Place, and Promotion, moreover you cannot have a product mix without having a good grasp of pricing products.
In pricing research, we recognize mainly two approaches among many others that depend on the circumstance the product is being priced (newly developed, known to consumers, the existence of competitive factors, etc). The two most known approaches are direct and indirect pricing methods. A more complex yet more accurate and reliable in accounting for competitive products is the discrete choice method.
The direct pricing method is based on the customer’s Willingness To Pay (WTP) estimation and consists of asking customers to directly state their WTP of the studied product. The question is “What is the highest price you would be willing to pay for this product?” To incentivize customers to give realistic stated WTP, a modified version called “incentive-aligned WTP” obliges the customer to buy the priced product if the price drawn using a lottery is less or equal to his stated WTP. Besides the major disadvantage of the direct pricing method is that customers tend to overstate their price sensitivity often or not be able to give a price because of a lack of knowledge, the WTP remains simple and useful in some circumstances when a new product is being developed.
Indirect pricing approaches are more accurate than direct approaches where they ask respondents more realistic questions and scenarios. The most employed indirect methods in marketing research are Gabor-Granger Indirect Price Method (GG) and the Van Westendorp Price Sensitivity Model (VW). The GG method helps determine the highest price the customer is willing to pay for a product. The interviewer gives the random price (and not the respondent) from a list of prices and asks the customer to answer if he is willing to pay, is it too cheap, or too high (a five-point scale is used from definitely would purchase to definitely would not purchase). GG is very reliable for studying new products and discovering the maximum customers are willing to pay.
The VW Price Sensitivity Model is an extended version of GG that is based on finding an acceptable price as a quality indicator. In a sense it takes into consideration low priced products can probably be of low quality as well as high-priced. The VW allows customers to price a new product balancing value against price with a high price and a low price a customer will pay for this product. To get these answers, researchers ask respondents four questions that reflect four perspectives:
Cheap: at what price does this product start to seem cheap to you, that is, when does it start to seem like a bargain?
Expensive: at what price does this product start to seem expensive to you?
Too Cheap: at what price does this product become too cheap to you, that is, so cheap that you would question its quality and not buy it?
Too Expensive: at what price does this product become too expensive, that you would not consider buying it?