Imagine you’re on the beach with a friend. It’s hot and sunny. After a few hours you’re really thirsty, and just as you’re thinking ‘I could use a drink’ your companion announces they have to go to the bathroom. Before leaving, your friend offers to bring back a soda from the only place nearby that sells drinks—a run-down convenience store. Your friend asks, “How much are you willing to pay for this drink? I’ll only buy it if it’s less than you’re willing to spend.”
How much would you pay for the soda? Do you think you’d be willing to pay more for the drink if it came from a nice establishment, say a fancy resort, rather than a run-down convenience store? Probably not, right? Well, not according to research.
The scenario above is actually from a classic behavioral science experiment. What this experiment repeatedly shows is that people are willing to pay more for the soda when it comes from a fancy resort rather than a run-down convenience store. The question then becomes why?
The answer has many parts, but one thing the scenario highlights is an important component of prices that economists have written about for years: prices are elastic.
Elasticity means there isn’t just one price people are willing to pay for a product but multiple prices. The challenge for businesses is to find the sweet spot, or range, of how much people are willing to pay without exceeding it. In other words, businesses need to find a price point that maximizes revenue and growth without being so high that the price begins to dampen demand.
Companies seeking to find this pricing sweet spot for their own products will often turn toward online pricing surveys to gather the data they need to calculate price elasticity.
A pricing survey is a survey designed to help a business determine how much they should charge for a product or service. Pricing surveys can uncover information such as how much people are willing to pay for a product, which features of a product people view as the most valuable, and whether people in different market segments are willing to pay different amounts for a product.
The utility of a pricing survey is that it provides an empirical way to determine how much people are willing to pay for a product. Rather than relying on a rule of thumb, copying what competitors charge, or one of many other non-empirical ways of determining price, pricing surveys allow a business to set prices with confidence, knowing they have solid information about how much consumers are willing to pay.
Before diving into an online pricing survey, researchers need to know the different methods available, the pros and cons of different pricing strategies, how to select online participants, and how to manage and maintain data quality.
There are many ways to assess how much people are willing to pay for something. Some methods are relatively straightforward: you ask people how much they would pay for a product. Other methods are indirect. Each method is better suited to some situations and circumstances than others.
Like the friend in the soda scenario, willingness to pay methods directly ask people—how much are you willing to pay for this product? The survey question might be open-ended, allowing participants to write in their maximum number, or it may present people with a range of numbers to choose from.
Willingness to pay methods entail some inaccuracy because they lack context. Just as people fail to foresee that they would pay different amounts for a soda in the beach scenario above, people in a willingness to pay study may be inaccurate not because they won’t report honestly about their behavior but because they can’t anticipate how situations may shape their behavior.
The van Westendorp method asks people a series of questions designed to elicit the optimal price for a product. These questions are:
With people’s answers to these questions in hand, the data can be analyzed to produce a graph like the one below.
The area where the lines intersect provides an acceptable price range. By pinpointing different places within this range, a business can determine how much people are willing to pay for a product.
Because the van Westendorp model doesn’t consider costs, it is important to exercise discretion about when to use this model. If people are unfamiliar with your product and the general price point you may sell at, you may choose to constrain choices within your survey.
Rather than giving participants a completely open-ended question, you can ask how much they would be willing to pay within a defined range. This methodological change can partially compensate for a lack of familiarity on the part of the participants with your product.
Like the van Westendorp model, the Gabor Granger pricing method is simple. It involves asking people how likely they would be to purchase a product or service at several different price points. Plotting the data from a Gabor Granger survey yields a curve representing demand and revenue, therefore showing just how elastic the pricing for a given product is.
To conduct a study with the Gabor Granger method, you first present participants with a description of the product or service and ask about their willingness to purchase the product. Based on people’s answers, you can then ask about their willingness to pay for a product by increasing or decreasing the price. Some methods of this technique randomly pick numbers and others are programmed to move up or down based on participants’ previous answers. With the data this method yields, researchers often plot curves that show how revenue and demand shift with changes in price.
Unlike other pricing methods, conjoint analysis and discrete choice methods create a more realistic decision-making environment by having participants consider multiple factors about a product and its price. By simulating how people make decisions while shopping in the real world, conjoint analysis is able to more realistically measure people’s buying decisions.
There are various ways to conduct conjoint analysis and discrete choice studies but one of the most common is called choice-based analysis. When using choice-based analysis, researchers present participants with a series of products with different features and attributes and ask: which of these products would you rather buy? By combining and fully crossing various attributes of the products, researchers are able to determine exactly how important different features are to people’s buying decisions.
After you decide how to conduct your online pricing study, you have to decide where. There are hundreds of online panels that offer access to research participants. With these online panels, it’s easy to target people by hundreds of demographic criteria including age, ethnicity, gender, geographic region, income, or zip code. This level of targeting allows you to ensure the people in your study are similar to people who may buy your product or be aware of your brand.
With tens of millions of online participants worldwide, CloudResearch can connect you with the right research participants for your study. Our research experts can provide guidance about the best online platforms for your study and give direction to help you ensure you’re sampling from the right group of participants. Learn more about sampling or start a conversation with our team.
Not all online panels provide the same data quality. Even in the best circumstances, participants sometimes fail to pay attention and in the worst circumstances some participants try to cheat. Guarding against threats to data quality is important for making valid conclusions. And that is why CloudResearch is an industry leader in data quality. Our SENTRY® system detects inattentive and dishonest participants before they reach your study, ensuring that the people who move on to your study are attentive and ready to participate.
Connect with our research experts or sign up for a CloudResearch account to get started with your next online pricing survey.