Editor's note: Bryan Orme is CEO and president, and Keith Chrzan is senior vice president, at Sawtooth Software.
We all know how important it is to figure out the right price to charge. After all, price is one of the key levers in marketing! Charging the right price lets you capture the value and profits your business has earned. So how do we determine an optimal product/service price?
Researchers and academics have proposed multiple survey-based pricing research approaches over the decades (described below) but conjoint analysis is one of the most realistic, powerful and widely trusted approaches.
Before delving into survey-based methods for pricing research, we should recognize that it is possible to conduct pricing research using real sales data. We could conduct in-market pricing research tests to vary our price and capture sales data from paying customers but this can be expensive and risky. Plus, what your competitors do during your in-market test could foul up your pricing experiment.
We could also analyze past sales data to develop models that predict market reactions to price changes. However, existing data often aren’t robust enough, with enough independent price changes to stabilize the kinds of predictive models needed to pinpoint optimal price points for revenue or profit.
On top of the challenges facing in-market tests and models based on existing sales data, crucial blind spots are that they cannot deal with not-yet-launched products, proposed modifications to existing products or setting prices for proposed line extensions. Survey-based techniques, especially conjoint analysis, are recommended for these common situations.
Survey research lets you test different prices and measure the price sensitivity for consumers and key market segments – before you go to market. Unless the survey is realistic and mimics the buying decision (and this can be challenging to do), re...