How to Conduct an Online Pricing Survey
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.
Understanding and Calculating Price Elasticity of Demand
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.
What Is a Pricing Survey?
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.
Different Types of Pricing Surveys: Pros and Cons
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.
Customer Willingness to Pay
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.
Pros
- Simple – Willingness to pay methods are direct and simple. They are, therefore, easy for researchers to program and for research participants to answer.
- Easy for participants – Willingness to pay methods only require participants to state how much they are willing to pay for something. As a result, they do not require participants to have background knowledge about a product, experience using the product, or information about the market. People’s responses may be more realistic with this background knowledge, but it isn’t crucial.
Cons
- Lack context – Willingness to pay methods lack context. By asking about people’s willingness to pay at one point in time, and in the absence of other information, these methods risk trading inaccuracy in people’s answers for simplicity of execution.
- Participants May Overestimate Price Sensitivity – Another important limitation of willingness to pay methods is that people have been found to overstate their price sensitivity. That is, researchers have noticed that people generally list lower prices within willingness to pay studies than correspond to their actual behavior.
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.
van Westendorp Price Sensitivity Meter
The van Westendorp method asks people a series of questions designed to elicit the optimal price for a product. These questions are:
- At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)
- At what price would you consider the product to be priced so low that you would feel the quality couldn’t be very good? (Too cheap)
- At what price would you consider the product starting to get expensive, so that it is not out of the question, but you would have to give some thought to buying it? (Expensive/High Side)
- At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)
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.
Pros
- Simple – With just four questions, the van Westendorp model is easy to program and easy for participants to answer.
- Flexible – Even though this method yields an “Optimal Price Point,” the van Westendorp model also yields a range of prices. Within this range, a business can choose how to price their products. Moving up within the range may send certain signals about the brand’s quality whereas moving down may help compete with other products already on the market.
Cons
- Assumes familiarity – Perhaps the most serious limitation of the van Westendorp pricing model is that it assumes participants are familiar with your product. If you are bringing a new product to market or if you have a product that only a small segment of the population buys (e.g,. luxury goods) then the prices people are willing to pay may be off-base.
- Ignores Costs – Another serious limitation of the van Westendorp model is that it completely ignores your costs. If a pricing survey tells you that the “Optimal Price Point” is $50 less than what it costs to make your product, you’ve got a problem.
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.
- Lacks Context – More broadly than the limitations above, the van Westendorp model lacks context. People answering your questions aren’t thinking about how competing products are priced, or how competing businesses might react to a change in your prices. Because this model lacks context, it is best used when consumers already have familiarity with the market you are introducing your product into.
Gabor Granger Method
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.
Pros
- Easy to administer – The Gabor Granger method is easy to execute. Especially within online studies, all researchers need to do is program a series of questions for participants to answer.
- Refines pricing decisions – The Gabor Granger method works best when you have knowledge about how much people are willing to pay for a product before conducting your survey. By beginning with what you already know, this method helps refine your pricing decisions by identifying price points that push demand up and down.
Cons
- Ignores Competition – Like the van Westendorp, the Gabor Granger method does not consider competitors. This means that the pricing data yielded by the Gabor Granger method have to be considered in light of which attributes might make a competing product more attractive and how competing products are priced.
- Lacks Context – Even though the Gabor Granger method is more indirect and more informative than a method like the Willingness to Pay, it still lacks the context that consumers really make purchasing decisions in.
Conjoint Analysis and Discrete Choice Models
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.
Pros
- Realism – Conjoint analysis offers a realistic buying scenario by combining multiple product characteristics with various price points. Participants are asked to consider how various attributes of a product influence their willingness to pay for it. The combination of various features and products
- Accuracy – Conjoint analysis tends to yield more accurate pricing information because it creates more of the context that buying decisions actually take place in.
Cons
- Complexity – Unlike the other pricing models presented here, conjoint analysis and discrete choice models are not so easy to carry out. Someone without a background in research may find executing the study or analysis challenging.
- Resource Intensive – Conjoint analysis studies generally demand more time and resources than the other methods presented above. This is in part because conjoint analysis studies often require more programming work and in part because most organizations lack internal resources to carry out a conjoint analysis study. As a result, businesses often have to pay a market research company or some other organization to conduct a conjoint analysis study on their behalf.
Selecting Online Participants
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.
Managing and Maintaining Data Quality
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.
