Pricing, and the product features available at a certain price, is another piece of the go-to-market web of marketing strategies that can either make, or break, your company.
In the best of scenarios, a good pricing strategy serves to increase your market share, prop up your brand values, and yield favorable profit margins. After facing a variety of unusual market challenges in 2020 and 2021, it’s time for building products manufacturers and suppliers to return their focus to product development and pricing strategy planning.
How to Price Products Going into 2023
It’s important that manufacturers and suppliers start making moves to ensure that product lines are varied enough with offerings that are good, better, and best. Where it was common to cut the “good” product lines in 2021 to align with reduced manufacturing and logistics capacities, it needs to become common to reintroduce product lines with an entry level price point.
Our data and other information being released throughout the industry shows that affordability is going down, price sensitivity is increasing, and product availability will improve to an okay degree where competing manufacturers have multiple products on the shelf for a true comparison and choice to be made by customers. Take note that once buyers are not using availability as their major decision factor, pricing and their “willingness to pay” will matter most in their purchase decisions.
Because customers were overall pleased with trying new products and will continue a willingness to try alternative brands to avoid premium prices and save where they can, building product manufacturers and retailers need to avoid a short sightedness of assuming people will always buy mid- to high- priced products when given the choice of a lower priced alternative, even if not a known brand.
Builders and contractors are responding to pricing pressures from homeowners and build-to-rent investors to complete the project cheaper as material costs remain high and homebuyer affordability is now at a 10-year low. Researching alternatives is one way that contractors will achieve this to cope with the other cost pressures facing their business.
How to Develop Competitive Price Point Products
First and foremost when developing competitively priced building and home improvement products is to focus on price elasticity. Price elasticity measures the change in purchase intent, or consideration, of a product in relation to the change in its price, its features, and in comparison to competitor offerings.
By having product lines and features that solve customer needs in ways that are “good, better, and the best”, companies can create a more resilient base of SKUs that have acceptable price ranges.
Your product development team has two primary options for developing this base of “good, better, and best” SKUs while considering the effects of price elasticity on product demand.
Option 1: Feature Enhancement Refinement
Your teams need to first develop a deeper understanding of current customer pain points and how those pains correlate with feature & benefit preferences. Equipped with this understanding, your brand can refine and relaunch eliminated SKUs or adjust existing offerings to reintroduce a more competitive priced product.
Option 2: Launch a new product with entirely new features
SKUs that were eliminated may be best left off the table in lieu of products that better address unsolved customer needs and the emerging need for more affordable options that do the job good enough to get the sale.
Pricing Research Methods to Understand Price Elasticity
To know at what price point the marketplace will support, you can conduct pricing research as part of your product development efforts. There are three primary pricing research methods used today: Conjoint Analysis, The Van Westendorp Approach, and the Gabor-Granger Approach.
Option 1: Conjoint Analysis for Pricing
Conjoint Analysis for pricing research is the most widely accepted approach because it can deftly handle the necessity to compare hundreds of product feature variations. Another reason to prefer Conjoint Analysis is the ability to simulate the real-world competitive marketplace and capture more accurate customer intents by forcing trade-offs to be made.
While there are various types of conjoin, the most common is “choice based conjoint”, where respondents are presented with variations of product options, product features, and price points and then asked a simple question: “which one would you buy?”
In this way, Conjoint Analysis serves to provide detailed decision making information about feature evaluation and a customer’s willingness to pay. You can also determine how much more a customer would be willing to pay for certain features, such as a power tool with a rubber over-mold on the handle vs. one without, or a walk-behind mower that comes with 3 speeds vs. a single speed.
Traditionally used in product development for new or re-engineered products, conjoint can also be a great solution when price sensitivity increases in the market. This is the methodology that our team at The Farnsworth Group applies when conducting product development and pricing research for building products manufacturers.
Option 2: Van Westendorp Price Sensitivity Model/Meter
The Van Westendorp Approach is a straightforward pricing sensitivity modeling tool to administer. The approach asks respondents four questions to determine the “Acceptable Price Range.” Those questions are:
- At what price would this product be so cheap that you would doubt its quality and not consider it? (called the “too cheap” price)
- At what price would this product be a bargain – a great buy for the money? (called the “acceptably cheap” price)
- At what price would this product seem expensive, but you would still consider buying it? (called the “acceptably expensive” price)
- At what price would this product be too expensive for you to consider? (called the “too expensive” price)
The Van Westendorp Approach to Measuring Price Sensitivity is a less scientific and trustworthy approach to conducting pricing research than Conjoint Analysis. Because the respondent’s purchase intent ratings are typically not being made in a realistic competitive context, this approach lacks the rigor of evaluating true market forces impacting a customer’s purchase decisions.
Despite its lack of rigor for a matured, competitive marketplace, there are scenarios when the Van Westendorp Approach is a good first step, such as for brand-new-to-the-world products that lack an established competitive context. Use this approach to conducting price sensitivity research when you want to identify an acceptable price range of products. (Image Source)
Option 3: Gabor-Granger Approach
The Gabor-Granger Approach to conducting market research for product pricing is the least favorable method of the three. Because the structure of the approach assumes an initial price, the results are thereby subjected to a level of anchoring and the results tend to be biased. The pricing used during questioning could be wrong, thereby skewing the reliability of the study results.
Further, the way the questions are administered make it clear to research respondents that they are participating in some sort of pricing game. Beyond this, the respondent usually is not comparing the test product against relevant competition and the approach is limited to typically studying just a single or a very few variations of a product concept.
Both the Van Westendorp and the Gabor-Granger Approaches share a primary weakness: few versions of the product concept can be tested and competing product options are entirely ignored, thereby creating the possibility probability of an invalid study if one of your competitors offers a similar product at a lower price point.
The Gabor-Grander Approach is not all bad, though, and can still be a preferable option for pricing research in scenarios where you’re looking to determine revenue optimizing price points. Do bear in mind, though, that a revenue optimized price may be different from a profit optimized price point.
Conducting Product Pricing Research with The Farnsworth Group
Approaching quickly is an increasing degree of price sensitivity among contractors and homeowners alike after an extended period of low price sensitivity. As product availability becomes a less prominent purchase motivator among robust product categories, the need for entry level price point products that may have been cut from your product lines will become ever increasing to ensure your brand maintains current and growing market shares.
Our market research team applies the principles of conjoint analysis and modeling to provide recommendations on which combinations of product features are most desired and at which price points. The result is a product and pricing strategy customized to increase your sales.