Everyday Marketing Ideas

Oversimplistic Pricing Research

A recent YMCA pricing research study proposal I made makes clear the old adage — you get what you pay for (and sometimes not even that). Like most businesses and revenue-generating organizations, pricing is a critical element for any YMCA. Price your rates too high and you’ll likely push away prospective members. Price too low and you won’t cover overhead (like full-size pools). Thus, the ideal situation is to find the optimal price — the price that will generate strong membership AND strong revenue.

But how do you go about doing that? How does any organization or company find the optimal price? One obvious solution is real-world testing. You set a price and see what happens, adjusting up or down depending on how you think demand will rise or fall. Or you can employ market research. Focus groups can be a good way to test scenarios and perhaps get some initial feedback. However, any serious pricing research effort is primarily going to be a quantitative study, where statistical relevancy ensures that the results are valid and reliable.

Here’s where a potential problem lies.

Much of what is done as pricing research may not provide an optimal price. In fact, it may provide shaky pricing information. Here’s why. Most pricing research, especially for non-profits or small- to mid-sized organizations, is fairly simplistic. It has to be in order to keep the cost of the research down. Thus, what’s called a “monadic” approach is taken in which fairly simple and straightforward questions are asked. For example, “what is the likelihood you would purchase at membership at $50 a month? $35 a month? $25 a month?” The results are then combined with the potential market size to give the research purchaser an estimate of revenue based on the “preferred” price.

The problem is that “preferred” price may not be the optimal price. What if the optimal price was $30? Because none of the questions introduced that figure, how do we know it’s NOT the best price to offer — the price that will bring in the most memberships and revenue? Based on the monadic approach, the YMCA might set its individual pricing level at $35 and that may be higher than what could generate higher volume. There is no way for the YMCA officials to know based on the research if $35 or $30 is the optimal price.

Is there an alternative? Actually, there are two. A familiar and proven technique in market research circles that can pinpoint optimal pricing levels is called conjoint or trade-off analysis. Basically, you test pricing in conjunction with other features — the theory being that in real life we all “trade off” the price of something with the benefits or features of that product or service in the pursuit of finding “value.” But this method is expensive relative to other techniques. To do conjoint analysis correctly requires sufficient time and research knowledge. Most legitimate research firms have both, but you’ll pay for that expertise. On the other hand, if done correctly, you can generally take the results “to the bank.”

Another alternative is less costly, but may provide a similar optimal pricing result. It’s called the Van Westendorp or Price Sensitivity model. Named after an economist, this model is based on the principles that most people have a rough notion of the range of what things cost and that some prices are low and people know that a low price reflects poor quality. Combining these two forces, Van Westendorp developed a model of asking four questions:

What price would be SO CHEAP that you would question the quality of the product?
At what price would you consider this product a REAL BARGAIN?
At what price would you consider this product STARTING TO GET EXPENSIVE?
What price would be SO EXPENSIVE that you would not consider buying the product?

When you accumulate the results from these four questions, you get graphs that cross over one another, and it’s these crossing points that determine a product’s (a) maximum and minimum prices and (b) the optimal price. Time and time again the Van Westendorp model has proven effective at pinpointing a more precise price that prospective customers say is what they will pay. The other real advantage of this technique is that no actual prices are introduced, thereby potentially biasing the results. Only what the interview subjects say is recorded, not their reaction to a preconceived price.

The technique is not without its share of weaknesses, but it’s a far cry from the more simplistic “monadic” approach, which may be somewhat accurate but certainly not more precise. Which begs the question — in terms of trying to come up with a realistic revenue generation scenario for a planned YMCA — does it make more financial sense to be somewhat right or right on the money when it comes to pricing?

Gene Pinder is president of PinOak Analytics, a market consulting and research firm based in North Carolina. he has conducted or directed more than 100 research projects, including Internet, mail, and phone studies for for-profit and non-profit entities. He is also the Assistant Director of Executive Programs in the School of Public Health at the University of North Carolina at Chapel Hill.