How Do You Measure Your Price Sensitivity?
The key to success when measuring price sensitivity is to have a deep understanding of your target market and buyer personas. Each of your buyer personas will perceive the value of your product differently and that means each cohort will have a different price sensitivity. The lowest price that one simulated customer is willing to pay may be much higher than another one. As a result, you need to measure the price sensitivity of each of your market segments independently. Breaking down the data you collect makes it representative of the nuances of your market, instead of a non-representative average of all market segments. By understanding the level of sensitivity of your customer base, you can predict the effect of a price increase on sales volume and ultimately find the optimal price point.
Once you’ve segmented your target market, the next step is to pick a methodology that goes beyond simply asking people “What would you pay for product X”. Cognitively, it’s near impossible for people to accurately gauge their own willingness to pay, which is why researchers have invented techniques to circumvent this mental block. Two of the most popular techniques for measuring price sensitivity are price laddering and the Van Westendorp Price Sensitivity meter.
1. Price Laddering
Price Laddering involves asking potential customers about their intent to purchase a particular product at a particular price, usually ranked on a scale of 1 to 10. If the respondent’s intent to purchase response is below a particular threshold (usually 8), then the price is lowered and the respondent is asked about their intent to purchase again. This process can theoretically be continued indefinitely. In practice, respondents are only asked about a maximum of three price points to avoid excessive response bias. The results are then analyzed to determine the percentage of the market that would purchase at any given price.
The beauty of Price Laddering lies in the fact that survey respondents don’t need to propose a price point themselves. Instead, they simply need to match their intent to a sliding scale, which makes the survey simple to complete.
Unfortunately, the simplicity of price laddering can also be its downfall. When respondents are asked about their purchase intentions at successively lower price points it’s easy for them to treat the survey as a negotiation and that can bias your data. Using price laddering also means that not all respondents will add insight to your pricing research efforts as some may refuse to purchase at any of the price points you offer. These drawbacks imply that an effective and statistically significant price laddering campaign usually requires a large number of survey respondents.If you have a large customer base already then gathering respondents is easy, if not then the price laddering approach may not be feasible.