Dynamic Price Sensitivity Pricing

How to Make The Most From Your New Product or Service

One of the most frequent objectives of any new product or service introduction is to contribute to the organizations profit potential. Profitability often depends minimizing the cost of goods and maximizing the price and demand. This article discusses a relatively new approach to help you make the most from your new or improved product or service.

There are numerous methods used to assess pricing ranging from simple direct queries, to more theoretical “black box” techniques. Recent work in the area of pricing by Peter Van Westendorp, a Dutch economist, has produced a cutting-edge approach, which is easy to administer and interpret.

i2S Advantage has deployed this method to help clients optimize prices in Financial Services, Healthcare and Beauty services and products, Durable Goods, Packaged Food, and B2B services. The technique, Dynamic Price Sensitivity Modeling (DPSM) identifies the Optimal Price Point (OPP) and the Range of Acceptable Pricing (RAP) for new or improved products or services.

The technique hinges on the premise that a potential buyer of a product can articulate the price points at which they believe a product is too inexpensive, the buyer questions the quality or the ability of the product to deliver the desired benefit and therefore discounts the product from their considered set. Likewise, if the price is too expensive, regardless of the perceived quality or performance, the buyer will not consider purchasing the product. Each individual will have his or her own opinion of what is too inexpensive or too expensive to pay for a product. These decisions are based on a number of factors such as the individual’s past experiences, socioeconomic position, lifestyle, psychographics, experience with the Brand, etc.

The information needed to determine the Optimum Price Point and the Range of Acceptable Pricing is collected through direct questioning. The respondent is asked:

  1. At which price the concept/product begins to get expensive, but that they would still consider buying the concept/product,
  2. At what price the concept/product would definitely be too expensive to be considered,
  3. At what price the concept/product begins to be inexpensive but would still be considered, and
  4. At what price the concept/product becomes too cheap or inexpensive that the respondent would question the value.

Based on the data from the question battery, a graphical representation of the price is prepared, as explained in the following steps:

STEP 1: The cumulative distribution to questions 1 and 3 is graphed. (EXAMPLE 1)

The intercept point is the INDIFFERENCE PRICE (IDP). This represents the point on the price scale where an equal number of respondents experience the brand as “cheap” as experience the brand as “expensive.” The remaining respondents experience this price as neither “cheap” nor “expensive”, thus the price at which the “maximum number of respondents are indifferent.”

A low-level “indifference” percentage indicates a high level of price consciousness, whereas a high level of “indifference” is characteristic of diffuse price consciousness.

STEP 2: Next, the cumulative distribution of response to the “too expensive” and “too cheap” questions (2 and 4) is graphed in the same way (EXAMPLE 2).

The point of intercept yields the OPTIMUM PRICING POINT (OPP) — the price at which an equal number of respondents see the brand as “too cheap” and “too expensive.” This price represents a level at which price-related purchase resistance to a particular product, service, or brand is at its lowest.

STEP 3: The four cumulative distributions are then combined in a graph (Example 3).

In the case where the OPTIMUM PRICE (OPP) falls to the left of the INDIFFERENCE PRICE (IDP), i.e., a lower price, “stress” in price consciousness is indicated.

“Stress” means that consumers experience a normal price, but a number of them experience this price as too high. The greater the separation of the OPP to the left of the IDP, the greater the “stress;” and thus, the greater the feeling that the “normal price” is too high.

A “stress” situation is likely to exist in a product category that has experienced recent price increases, since the IDP tends to reflect, quite accurately, actual current prices. This is particularly so when a high level of price consciousness (low level of indifference) exists.

STEP 4: Finally, the “cheap” and “expensive” cumulative distributions are reversed, producing the “not cheap” and “not expensive” distributions. These are graphed with the original “too expensive” and “too cheap” distributions (EXAMPLE 4).

The price at which the number of people experiencing a product or service as “too cheap” is the same as the number of people experiencing it as expensive (“not cheap”) is referred to as the POINT OF MARGINAL CHEAPNESS (PMC).

The price at which the number of people experiencing a brand as “too expensive” is the same as the number of people experiencing a brand as cheap (“not expensive”) is referred to as the POINT OF MARGINAL EXPENSIVENESS (PME).

The range of prices between these two points, PMC and PME, is referred to as the RANGE OF ACCEPTABLE PRICES (RAP). Experience has shown that pricing outside this range will generate little new business. Unless new marketing claims can effectively alter consumer price consciousness.

About Kathleen Turner

Kathleen Turner (Kathy Yeaton), MBA, President of i2s Advantage (formerly Marketing & Research Partners, based in Dallas Texas), helps Fortune 500 and start-up organizations create and sustain a competitive advantage and build value. Kathleen is a frequent writer and speaker in numerous associations. Contact Kathleen for other articles or more information at 214-632-0183, via email KatTurn@gmail.com, or visit i2S Advantage online at www.i2sadv.com.
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