Price optimization & finding the ideal price range for your product

What is your pricing strategy? Proper pricing can significantly impact sales, customer satisfaction, profits, and your business growth goals.

Let’s take a few minutes to look at price optimization and how it helps you balance value for your customers and revenue for your company.

What is price optimization?

Price optimization uses your market research to determine the ideal price point for your product or service that will balance value and profit. It’s the foundation of your pricing strategy and decision-making.

Low prices generally equal better value for the customer, which drives a higher sales volume, but can represent a loss as far as revenue for each sale. 

High price points may generate more profit per sale, but sales volumes may drop if customers don’t perceive a high value related to the price.

You can find the sweet spot between value and profit with price optimization. Remember, pricing can affect customer satisfaction, loyalty, and sales.

The following information is critical to optimizing your prices:

  • Customer survey data
    • Amount customers are willing to pay
    • Perceived value for price
    • Customer behavior data
  • Demographics
    • Age
    • Gender
    • Household income
  • Psychographics
    • Lifestyle
  • Geographical market details
    • Segmentation based on location
  • Historic sales data
    • Response to past price changes
  • Operating costs
  • Inventories
    • Avoid items going out of stock when deeply discounted
  • Demand fluctuations
  • Competitive pros and cons
  • Customer lifetime value
  • Churn data

But before you start collecting data, let’s discuss why you should optimize your prices in the first place.

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Advantages of price optimization

There are many benefits associated with pricing optimization.

The four main advantages are:

Improve ROI

Return on investment (ROI) improvements should happen quickly with optimized pricing. You can monitor changes easily, and teams can respond rapidly to fluctuations in demand—which allows you to maintain your best ROI.

Maximize sales and profits

Locating your best possible price points allows you to maximize sales and profits because customers are more likely to pick up on optimal pricing and move forward with purchases. Pricing that isn’t optimized can lead to decreased profitability and business failure.

Faster reactivity to market shifts

Using market research solutions from SurveyMonkey helps you keep your fingers on the pulse of the market. By monitoring shifts in the market, you can respond quickly with appropriate pricing changes—all based on data. 

Understand customer behavior

The entire price optimization process is about analyzing your data. With this comes a better understanding of your customers. This should guide your business strategy for offering products that you know your customers will buy at prices they are comfortable with.

Take a look at additional resources for pricing strategies:

Why price optimization sometimes fails

While some problematic pricing strategies fail due to poor understanding of the process or data, these other aspects can also cause issues: 

  • Guesswork: pricing optimization is based on consistent, carefully collected, and analyzed data. If you simply guess, you’re very likely to encounter problems. 
  • Data errors/inaccuracies: use reliable market research methods and tools to collect and analyze data. SurveyMonkey offers several market research solutions to ensure the success of your pricing strategy.
  • Pricing isn’t value-based: value-based pricing is critical to the success of your products’ sales. Customers will be weighing the value against the price you set. If you don’t take value into account, sales will suffer.
  • Heavy discounting: while discounts can help increase sales volume, discounting too heavily or quickly can cause problems like running out of inventory. It’s best to do price optimization research and start with the best price point for your target market.
  • Misunderstanding tiers: too many or too few options pushes away potential customers. 
  • Ineffective segmentation: it may be tempting to use a model of segmentation that you’ve already created, but for best results, it’s necessary to create a segment based on willingness to pay. 

What you need to optimize for

Each of your products needs to be optimized for starting price, discounted price, and promotional price. This will help you prepare for each stage of your product life cycle:

Starting prices

Your starting prices give your customers the first impression of your product and its value. The price should reflect the product’s baseline demand—without any need for discounts or promotions.

Price optimization works well for the initial pricing of products with a long life cycle

—groceries, office supplies, etc.

Discounted prices

Products with a short life cycle, such as seasonal fashion or décor, hotel rooms, or airline tickets, often are subject to discounted prices. 

Discounted prices help your business decrease inventory by tempting customers with low prices. It’s critical to keep the product’s overall profit contribution in mind when deciding the level of the discounts.

Promotional prices

When you temporarily reduce the price of a product to create a psychological sense of urgency and scarcity, it’s called promotional pricing. This usually gives sales a quick boost.

Promotional pricing may include a discounted price for bundling products together, such as “buy one, get one free.”

Common pricing strategies

There are several types of pricing strategies, and you’ll choose one based on your industry or business. Each one has positives and negatives. Once you choose your strategy, you can begin the price optimization process.

These are a few common pricing strategies to get you started:

Penetration pricing

This is an aggressive pricing strategy in which you enter your product into the marketplace at an extremely low price. This strategy aims to disrupt the competition by pulling customers away with lower prices.

An example of this would be Blockbuster and Redbox. When Blockbuster was still renting out DVDs of our favorite movies for around $5, Redbox put its automated rental boxes outside of several stores. The Redbox price was $1 per day for rentals and $1 per day for late fees. Blockbuster is long gone, but Redbox is hanging on—until streaming services bring it to its end.

Competitive pricing

In competitive pricing, you use your competitors’ prices as your benchmark. You then price your products the same, above, or below theirs. 

You need to ensure that your production and overhead are low enough that your profits don’t become nonexistent with low prices. Grocery stores often use this type of pricing for their own store-brand products that are competing with brand-name products.

If you price match, you’ll need to set your product apart from the competition. Gas stations often offer fuel at the same price—sometimes right across the street from each other—so they each need to offer something more to entice customers to their station.

If you set your price above the competition, you’ll need to have more features, a higher quality, or more overall value. Apple clearly demonstrates this with its iPhone cell phones. They charge a premium but offer advanced features and benefits to justify the higher price.

Price skimming

With price skimming, you launch your product at a higher price and incrementally decrease the price over time. The product will eventually become less novel and more accessible, and the price will decline.

This is commonly seen with tech products. When DVD players were new to the market, they could cost up to $1,000. Now, you can buy a new DVD player on Amazon.com for $22.95. As time went on and technology moved forward, the prices of DVD players steadily dropped.

Value-based pricing

In this strategy, prices are set based on the customers’ perceived product value. In other words, you base your prices on how much a customer believes a product is worth. 

The fashion industry is heavily influenced by value-based pricing. A designer whose handbags are regularly carried by A-list celebrities will be perceived as offering higher-value products. The pricing can skyrocket based on the association. 

Market-based pricing

Unlike the other types of pricing we’ve mentioned, market-based pricing is set in relation to the product’s competitive market position and fit. You’re pricing your product at or very near the price of your competitors.

This is often seen in vehicles and commodities like raw materials and basic resources, where the products are relatively uniform across manufacturers or suppliers.

Finding the ideal price range for your product 

It’s finally time to put all of the information together to find the ideal price range for your product—one that maximizes your customers’ value and your profits. You’ll rely heavily on your market research for a deep understanding of your customers and market to ensure that data, not guesswork, backs your pricing.

Know your customers

Start by gathering both quantitative and qualitative data from your customers. Use transactional data, customer reviews, supply and demand data, churn rate, and other relevant metrics to determine what customers are willing to pay for your product. Delve into your demographic, psychographic, and customer preference data to create a clear picture of your customers, including what features or benefits they value most in your product.

Quantify value

With your customer data in hand, work out what “value” means to your customers and create a value metric. A value metric is what and how you charge for your product. For example, SurveyMonkey pricing is set per user per month, while a laptop computer is a one-time upfront purchase, and a SaaS company may charge by a metric of app usage. 

The value metric for your product should align with your customers’ needs and be easily scalable.

Analyze customer data

It’s time to reach for our data again now that we’ve come up with what your customers value. This time we’re looking for patterns in what features, price points, and value metrics drive or detract from perceived value. You should be able to ascertain how willing segments of your market will be to pay different prices for your product.

With all of the information you’ve gathered, you can create packages, tiers, or price ranges that align with your value metric and customer segments.

Adjust your price and monitor

You’ve set your prices, but you’re not done with optimization. The value you offer compared to your competitors is constantly changing, so you need to monitor and adjust your price accordingly. This is an ongoing process.

We recommend looking at your pricing every six to nine months.

Price optimization solutions

Make your price optimization process easy with solutions from SurveyMonkey. These options can be utilized starting with a pre-made pricing template that you can customize to your specific needs.

Gabor-Granger Pricing Method

The Gabor-Granger technique determines a revenue and demand curve for a product or service at different price points, also known as price elasticity. Used in a survey, respondents are shown a sequence of prices and asked their likelihood of purchasing a particular product at each of the prices shown. 

For example, below an image of your product, the following question would be presented:

How likely are you to purchase this product at X price?

  1. Extremely likely
  2. Very likely
  3. Somewhat likely
  4. Not so likely
  5. Not at all likely

The question process continues, based on the respondent’s answers, until the top price customers would pay is determined. 

Use this information to figure out how much you can change the price of your product without affecting sales and revenue, and find the price points at which customers’ willingness to pay increases or decreases.

Van Westendorp Price Sensitivity Meter

The Van Westendorp Price Sensitivity Meter is a tool to help you identify the series of price points that are psychologically critical to your audience. The series of survey questions capture your customers’ price sensitivity, purchasing power, thought processes, and how much they are willing to pay for a specific product. This is one of the most widely used pricing strategy techniques in market research.

The questions are:

  1. At what price would you consider the product/service to be priced so low that you feel that the quality can’t be very good?
  2. At what price would you consider this product/service to be a bargain—a great buy for the money?
  3. At what price would you say this product/service is starting to get expensive—it’s not out of the question, but you’d have to give some thought to buying it?
  4. At what price would you consider the product/service to be so expensive that you would not consider buying it?

You can use closed or open-ended versions of the questions, depending on whether you already know your acceptable price range. 

It’s time to optimize your prices

Don’t rely on guesswork, with SurveyMonkey, you have the resources at your fingertips to complete the market research you need for price optimization. Get started now to find your optimal price point or range.

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