How to find the right pricing for your new product or service

Your new product/service innovations will survive only when the price is right. Your target audience must be willing to pay the amount you’ve quoted.

And this is where most businesses struggle—pricing. Even the most ground-breaking innovation might fail to capture the audience if the price is too high or too low.

But wait… what determines the correct for price your product?
Product teams often rely on strategies like cost-based pricing (production cost + desired profit margin) or competitive pricing. These strategies can be risky because an unforeseen market movement can erode your profitability. Additionally, they are not always fit for innovators due to the lack of market information on new products or services. It’s tricky for them to ensure that the price matches their customers’ willingness to pay (WTP) and perception of value.

The ‘Sweet Spot’ in Pricing… And the issue around it.

Seasoned innovators test different pricing strategies to set an ideal price. The goal is to attract customers and make sustainable profits.

We’ve seen several companies lose track when finding this sweet spot. Some come up with their preferred, predetermined price level. But our goal here is to identify a price range that suits your target audience and then test its viability.

The winning price level accounts for market trends, product/service value, and purchase behavior. We’ve learned that in innovation, a value-based and data-driven pricing approach works best. In our business design projects, we cover pricing strategy with a pragmatic 3-step approach.

Our 3-level Pricing Strategy

What confirms that the price is right? Your customers. So why not use real market evidence to price your offerings? This is where our approach lies.

Extracting answers from the market itself, our 3-level testing defines optimal price points with high accuracy.

Evidence Level 1 – Trend Research & Simple WTP Surveys

A good pricing data point is to simply ask. It gives you a base to set your price on.

As part of a discovery survey, we ask the target audience “This is the product/service (say, a new well-being service for elderly citizens). What would you pay for it?”

The replies offer preliminary insight into consumer interest and their WTP levels. It displays the ‘stated behavior’ of your audience, which tells you if you’re thinking at the same price level as your consumer. For example, if you value your service at €500, but your consumer stated their preferred price as €50, you probably need to rethink things. This finding is rather rudimentary and calls for finer research.

Next, a detailed search trend analysis finds the market price levels and shows how you can set yours. This strategy involves running a Google search about your service. Discussion forums, reviews, and similar places help identify a ballpark price range where your product/service will grab appeal. It gives you initial info into the prevailing market sentiment and customer demand, showing how consumers react to the prices of similar services. It also gives you insights into how big the consumer pain is with regard to your innovation.

Do they consider €500 too expensive for your service? What price range are buyers comfortable at?

Evidence Level 2 – Advanced Quantitative Research

An in-depth, quantitative market research delivers multi-level insight into customer sentiments to identify the acceptable price range for your business goals.

Based on this scenario, the simple yet powerful Van Westerndorp Test works wonders. The test, in the form of a specific survey, presents 4 prompts to the target audience, asking them to input price points for each.

Here are the questions asked:

• What price would you consider the product or service too cheap to be of good quality?

• What price would you consider the the product or service a great buy for the money?

• What price would you consider the the product or service to be a bit expensive—so that you’d have to think before the purchase?

• What price would you consider the the product or service too expensive to buy?

Evidence Level 3 – In-Market Testing

The 3rd stage offers strong quantitative and in-market evidence to understand your target audiences’ purchase intent. It incorporates 3 different techniques to zero down on a final price point.

• Smoke Testing (A/B) – Perfect for new product/service innovations, this approach displays an MVP on a website, supported by a description of its features and value offerings. The website A/B tests the different price points recorded in stage 2 and measures which one performs best. The advantage of a smoke test is that it can be done both on- and off-brand. Here you can see a smoke test in action in one of our projects.

• Crowdfunding – A crowdfunding campaign tests the feasibility of the price point derived in Stage 2. Besides the price point, the campaign also identifies the volume of interest in your product/service. This develops an ideal pricing and investment strategy.

• Pre-Sales – Targeting the early adopters, and setting different prices at a pre-sales stage determines what works and what doesn’t. This technique is suitable for brands with a strong reach and an established reputation.

The technique you choose depends on the stage you’re at. While Smoke Testing and Crowdfunding are fit for products even in the ideation or development stages, the Pre-sales method suits better to further validate existing price points in a later stage.

Why this works

The approach we follow feeds on actual market evidence and measured customer intent to arrive at an accurate, validated price point. This price depicts the perfect balance between profitability and value, identifying the desired ‘sweet spot’. It is also fit to test new business models, strengthening your decision-making abilities.

Key Takeaway

Pricing your innovation defines its success. A price that does not match your customers’ WTP and market evidence significantly limits your business performance. But setting the right price is a sensitive task, as it involves a detailed study of your product’s market. The key is to test different price points after determining a particular price range using pricing strategies and surveys.

We crack this code with our strategic 3-level approach. From high-volume research to intent-based experiments, the process covers it all. Our pricing strategy framework leverages real-time market evidence and customer sentiment to land on a validated price point.