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How to do a pricing study: from templates and tips to strategies and simulations

2018-02-08 06:19 AM By Luke Freeman

Your pricing model is probably one of the most important things to get right with your product or service. Getting it wrong is a leading cause of business failure: if people aren’t buying what you’re selling at a price that’s profitable, it’s a recipe for failure.

Even if you can become sustainable as an organisation, there’s a huge opportunity cost by not optimising your pricing – it leaves money on the table that a competitor will gladly take to out-invest, out-market and outperform you.

At Positly we work with new ventures who are working on their pricing for the first time as well as existing businesses revisiting their pricing – here we’ll share what we’ve learned.

Note: this post is packed full of so many templates and strategies that it may be daunting.
Don't be afraid to take what you will from it and just experiment with some of it. Remember, you don't have to do everything, any attempt to improve your pricing strategy is better than none!

Our approach to pricing

Sometimes pricing can seem fairly easy, especially for physical products. For example, I could sell you an apple for roughly what it cost me, plus a little margin for my labour. However, many products and services (especially digital ones) simply couldn't work that way – nor should they.

Digital products generally have huge overheads (building the thing) and then over time they can have huge margins. This is also why they can be so profitable, if they succeed.

Key to success with any enterprise is getting the pricing strategy right. That’s why we often recommend using value-based pricing not cost-based pricing (unless you’re in a low margin, high volume sector such as fast moving consumer goods).

Value-based pricing is simply asking the questions such as:
  • How valuable is this to your customer?
  • How costly is the problem this solves?
  • How happy does this make them feel?
  • How much are they willing to pay?
  • At what price would it feel suspiciously “too good to be true”?
  • At what point do they think the product is great value for money?

The ideal situation is that your customers come away feeling like they’ve got a great deal and you have a price which enables you to meet your goals (be it growth, sustainability or other aspirations).

There are a few industry standards for this, but a model we've had success with is:

Taking the time to properly experiment with your pricing and producing strong models of your business will increase your chances of success many times over – this could be the single most important difference between success and failure.

The Iterative Research Process

This article has a lot of references to Positly for participant recruitment, Google Sheets for analysing results and GuidedTrack for building activities. They are all easy to use and incredibly useful so if you haven't yet signed up for these services I recommend you do so now so you can follow along, look at the examples and templates.

This diagram illustrates how we use these tools in our iterative research process of designing the study, building the study, delivering the study to participants and analysing the data. 

Step 1. Decide on your goals

We don't always have the same goals when it comes to pricing. Some people want to have a low effort lifestyle business so will try and maximise revenue per customer, other people want to scale big and they'll optimise for growth, while many businesses over the long term will probably optimise for profitability.

On the other hand, there is a growing movement of “for purpose” businesses which will be optimising for sustainability and social impact. For this type of organisation profitability may not be the single biggest factor – it could be reach, impact or some other metric.

The pricing structures you decide to test will also depend on the type of business you are running. The most common are subscriptions (like most magazines), one time payments (like most physical products), and transaction fee (percent or dollar – like ticket merchants).

Have a look at what similar products and competitors are doing. However, you may be surprised at how much you can innovate on pricing models. A huge portion of software and now many physical products have shifted from one time payments to subscription models and the early movers have made huge gains in the market.

The way you frame your prices matters. For example, Monthly 1k by AppSumo price their course at $360 per year, they allow $35 instalments over 12 months and they reframe it by telling you that you're only paying $1.15 per day.

Take a moment to think of a few ways that you could frame your prices and then we'll take you through creating studies to test them.

Throughout this post we will provide you with some study templates, however, when building your own studies from these templates it's important to keep in mind how you will use the data later in your analysis. For example, if you are asking about a subscription model, ask how long they would expect to keep the subscription at that price, or how long they have kept the subscription of similar products at similar prices. If your business model will require organic growth then ask how many people they would be likely to refer to your product per month if they were a customer.

I strongly recommend that you don't start conducting studies until you’ve read step 7 and perhaps even built a few pricing models or simulations first. If you do this then you can update your models along the way as you start to get better information from your studies.

Step 2. Define your target market

It's essential that you know who your product is for. Your product has to be solving problems for someone otherwise it's no good to anyone!

If your product aims to serve multiple customer personas you'll need to study them separately (segment them in your analysis at the very least). If this is the first time you're selling the product, you'll probably want to focus on the group that you think is easiest to sell to initially, and then later expand to harder to sell to groups.

Next, determine appropriate screening conditions for your target market. Often these could be quite simple, such as age and gender. Other times it could be more complex such as "people suffering from depression" and this may require special screeners (such as the psychological assessment PHQ-2).

Using Positly you can pick standard demographic attributes for targeting, or carry out a screening activity before your main study.

If your target market is difficult to screen for, or your budget insufficient for a pre-screening round you can always try a “transparent screener” (the participants see all the conditions for the study upfront and then opt-in by declaring that they meet the conditions).

For screening tips, get in touch using the chat button on this page or subscribe to this blog (below) as we'll be posting soon about how to screen participants for your study.

Step 3. Describe your product

It should go without saying that if you are going to be studying the value of your product to customers it is really essential that they understand precisely what the value is to them.

Ideally you will have some kind of prototype (at least some images or diagrams) and a very clear description of what problem (or problems) your product solves.

If you don't have a digital prototype yet that you can link people to, I recommend building a program in GuidedTrack that walks someone through the product. If you use GuidedTrack to build your surveys later on then you can reference this product description program in your pricing studies. See this example of a product description program.

Step 4. Exploratory pricing study

Now that you have a good description and prototype you can start the exploratory pricing studies.

For this we recommend using the Van Westendorp Price Sensitivity Meter (PSM). The PSM is a methodology for determining consumer price preferences, introduced in 1976 by Dutch economist Peter van Westendorp. 

It asks just four basic questions:

  1. At what price would you consider the product to be so expensive that you would not consider buying it? (Too expensive)

  2. 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)

  3. 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)

  4. At what price would you consider the product to be a bargain—a great buy for the money? (Cheap/Good Value)

And then you can produce a nice chart that shows you the sweet spots where your price is most acceptable to most people, and how you can tweak it for your different goals.

Source: Wikimedia

To make your life easy we've built two programs for you that you can access in GuidedTrack using the *program keyword and a spreadsheet that you can copy in Google Sheets.

Van Westendorp Pricing Sensitivity templates:

  1. Study Template Program: demo, customise
    Program to test only a single payment inclusion

  2. Experiment Template Program: demo, customise
    Program to test multiple payment inclusions

  3. Example Experiment Program: preview, copy
    Program that runs the experiment with an example product so you can copy it

  4. Analysis Spreadsheetpreview, copy
    Spreadsheet to analyse the results

To conduct this study with our template simply create a GuidedTrack program with the variables product_name, product_description and payment_inclusions and then trigger the program with the *program keywords (e.g. “*program: Van Westendorp Pricing Experiment”).

As you can see in the code of our example program we simply introduce the activity to the participant and then start the program after setting our custom variables.

Once you've set up your survey program to your liking and given it a thorough test (including a dry run to estimate time for completion) you can copy the share link, open up your Positly dashboard and create a new run with your ideal audience targeting and using the GuidedTrack survey program as your activity link in Positly.

As soon as the data has come into GuidedTrack you can export your data, make a copy of our the analysis spreadsheet, then import your data into the "Imported Data" tab of the spreadsheet.

Viola! Now sitting within the bulls eye drawn by these lines is a starting point for your pricing research that you can start to use to develop offers.

Step 5. Binary pricing experiments

If you have completed step 4 you will have some data on a few different pricing models and how much people value your product. With this data you can develop some pricing models and test them each with a single question pricing study (they will have only “yes” or “no” as options).

The idea behind this is to simulate a conversion rate of someone who lands on your website and is offered your product. Please bear in mind however that a pricing study is still different to real world scenarios, in the real world people are likely to browse around a bit and aren’t put on the spot with a yes or no question. The data here is likely to show you the relative acceptance of different prices (e.g. option 1 is 20% more preferable) and not the absolute conversion rates that you will find in the real world (e.g. 1 in 3 people who visit the homepage will buy the product).

During this type of study it can really help to segment this data by interest level (e.g. “How likely would you be to buy a product like this?”) or customer type (e.g. business vs personal) . Make sure you also ask any questions that may be relevant to your future business analysis (e.g. “On average, how many months have you kept subscriptions for similarly priced products?”).

To make your life easy we've built two programs for you that you can access in GuidedTrack using the *program keyword and a spreadsheet that you can copy in Google Sheets.

Binary Pricing templates:

  1. Study Template Program:demo, customise
    Program to test only a single payment option

  2. Experiment Template Program: demo, customise
    Program to test multiple payment options

  3. Example Experiment Program:preview, copy

    Program that runs the experiment with an example product so you can copy it
  4. Analysis Spreadsheet: preview, copy
    Spreadsheet to analyse the results

To conduct this study with our template simple create a program with the variables product_name, product_description, period and amounts. I also recommend customising the additional variables such as the lifetime_periods_upper and the lifetime_periods_lower so that you can automatically get a calculation of how valuable the customer could be.

Again you can have a look at the the code of our example program and see how we introduce the activity to the participant and then start the program after setting our custom variables. In our example we use the *experiment function to test two different periods evenly.

Run the experiment with your target audience on Positly and then import the data into your own copy of our analysis spreadsheet to gear up for the final round of pricing studies.

Step 6. Test your pricing tiers

At this point I hope you will have a strong idea of what’s resonating with your potential customers and what strategy you’re going to use. Now you can start testing tier of pricing against each other.

This is a good way of testing the broader pricing strategy such as whether you use decoy/anchoring prices, and if you need different options targeted towards different types of customer (e.g. different feature sets or subscription lengths).

To make your life easy we've built two programs for you that you can access in GuidedTrack using the *program keyword and a spreadsheet that you can copy in Google Sheets.

Pricing tier templates:

  1. Study Template Program:demo, customise
    Program to test only a single pricing tier

  2. Experiment Template Program:demo, customise
    Program to test multiple pricing tiers

  3. Example Experiment Program:preview, copy

    Program that runs the experiment with an example product so you can copy it
  4. Analysis Spreadsheet: preview, copy
    Spreadsheet to analyse the results

If you’ve followed the last few steps you should be a pro at customising the GuidedTrack programs for yourself and running the studies on Positly and analysing the results in Google Sheets.

Once you’ve completed the studies and analysis, lo and behold, you have something that looks very much like a successful pricing strategy ready to start testing with real users!

But first… make sure what you go forward with really makes business sense in simulations.

Step 7. Simulate your pricing models

I recommend starting to build your simulation models right at the beginning and refining them along the way, but if you haven’t done it yet, you really must do it before going live.

A model can be really simple, and built in your favourite spreadsheet program or they can be more advanced. A simple model can take a few seconds to a few hours to build and is really worthwhile. Even complicated modelling can be more straightforward than you think if you use the right software, the right templates or follow the right expert advice.

During the modelling it’s a great opportunity to sanity check the results of the studies. If something seems odd (e.g. people more willing to pay $25 than $20) then it may just require further studies to either confirm or disconfirm (odd doesn’t necessarily mean false).

Have a look through some of my templates below as a starting point. Ideally you will flesh your models out with as many relevant variables and the best estimates you have for them so that you can then start to refine them.

When it comes to modelling this is the exact mentality to keep in mind:

“everything should be made as simple as possible, but not simpler”

Simple spreadsheet modelling

Spreadsheets are the bread and butter of business. Here are a couple of spreadsheet models that took me a few minutes to put together:

Monte Carlo simulation modelling

Often you can get a better idea of the possible and probable outcomes by using number ranges (upper and lower estimates) instead of simple average estimates. If you’d like to use number ranges I strongly recommend the tool Guesstimate which runs 5,000 Monte Carlo simulations (a popular forecasting method which was inspired by the simulations required for the Manhattan Project when developing the atomic bomb).

Here are three Guestimate models that took me roughly 15 minutes each to build:

The importance of why simulations are important can be demonstrated in this lifetime pricing model simulator.

At first glance, the $25 price looks like it a better option with a higher revenue per visitor. However, once you account for organic growth and churn rates, the higher value of scenario 4 ($25 price) doesn’t outpace the cost of its lower signup rate and is eventually overtaken by scenario 2 ($15) which has a signup rate of ~42% vs the ~35%. 

Secondly, the one off price in scenario 5 has the highest revenue in this model, but chasing revenue alone could interfere with the organisations goals of customer growth.

The prices you choose will have to make long term sense for the business and modelling with this style of simulation one of the best ways of avoiding those mistakes.

Go to market... and keep testing!

Getting pricing right is difficult, especially for completely new ventures.

If you are clear on your pricing goals, who your customer is, what you are selling them and how they feel about different pricing models you will be in a strong position to go to market (or change your offering).

By taking the time to thoroughly study the issue you can increase your odds of success many times over – it’s a discipline that more new businesses would benefit from.

If you would like help with your pricing studies, please don’t hesitate to get in touch using the chat window on screen.

If you have any questions, suggestions, feedback or experiences to share, please join in on the comments below.  Feel free to subscribe to get notified of future updates to this blog.

Still interested in pricing strategies? I recommend these three articles: 8 Pricing Strategies for Your Digital ProductHow to Price Your Products and How to Price Digital Products.