The Cost of Pricing: How Price Sensitivity Analysis Can Help Your Product or Service Succeed

With such reputable companies as Circuit City and Linens N’ Things closing their doors in 2009, it is clear that consumers are holding their purse strings tight, and being much more conservative in their spending.  The days of frivolous spending are behind us, or at least taking an extended vacation.  In these tough economic times, pricing a product or service properly can mean the difference between success and failure for a company.

When the Segway was launched in December 2001, the annual sales target was 40,000 units.  But due in large part to its high retail price tag, reaching anywhere from $5,350 to $6,400 (2009, MSRP1) only 30,000 units were sold from 2001 to 20072. Other notable products and services that have failed or struggled to live up to their potential have included McDonald’s Arch Deluxe burger, a premium priced burger designed for a sophisticated palate, and music conglomerate Tower Records who charged top dollar for music and accessories, by as much as 90% more than competitors3, until it collapsed in 2006.  In order to accurately price a product or service, companies need to know who their customers are, and what they find valuable.  McDonalds failed to realize that its customers were not interested in paying significantly more for a slightly different burger.  Tower Records refused to acknowledge that its customers could download music or buy products elsewhere for less.

Using price sensitivity analysis can establish the value consumers place on individual attributes.  The National Technology Readiness Survey4 conducted by Rockbridge Associates in 2009, which measures technology beliefs and behaviors, asked respondents who were planning to purchase an electronics product in the next year how much more they would be willing to pay for a product that was “green certified” over an identical product that was considered ”normal”.  By repeatedly asking this question at different price intervals, Rockbridge was able to establish the value different consumer segments place on one attribute, in this case it was green certification.

Rockbridge discovered that most consumers would purchase the green product over a regular product if they are the same price, but as the green product’s price increases, consumers’ inclination towards it decreases.  Not surprisingly certain groups with different attitudes toward the green movement are willing to pay more or less for the product.  For example, those labeled “Green Tech Leaders” are much more willing to pay extra for a green certified product, with as much as 12% willing to pay $200 or more. On the other hand “Anti-Greens” are not willing to pay anything more than $25 extra. Starting in 2007, Rockbridge began using the NTRS to identify six distinct consumer groups within the overall adult consumer population, and continues to track these segments5. To learn more about Rockbridge’s Green Technology Segmentation, click here.

Price Sensitivity Analysis

By conducting price sensitivity analysis, Rockbridge was able to identify segments of the population that consider green certification of electronics valuable, and the price they are willing to pay for it. This will help clients target the right population with the right message, thus lifting their bottom line in an otherwise tough economy.

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2“When to Dump That Great Idea”
3“ The day music died? No, but Tower Records is: Fans mourn news that 46-year-old bankrupt chain will be liquidated”
4The 2009 National Technology Readiness Survey, Rockbridge Associates, Inc.
5“Why Should My Company Care About Being ‘Green’?”