A Field Guide to pricing serves as a quick reference for pricing research professionals.

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A GUIDE TO PRICING
RESEARCH
By Ismail Nizam & Ali Kasa

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A GUIDE TO PRICING
RESEARCH
Ismail Nizam & Ali Kasa
Introduction
The very fundamental principle of economics is that the
purpose of economic activities is the allocation of
resources among the members of the society to maximize
the societal welfare. In order to achieve this noble
economic objective, each resource stock should be
employed in the activity that achieves the highest
distributional efficiency.
As Adam Smith explains, the price of products and
services produced by using resources from the society is
an ‘invisible hand’ that influences the resource allocation
within the society. In a society where some sorts of
economic activities exist, the price plays four basic roles
in the overall economic affairs of the society.

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The roles of price in an economic society can be briefly
explained as follows;
• The price determines what goods and services are
to be produced and in what quantities?
• The price determines how these goods and
services are to be produced?
• The price determines for whom the goods and
services are to be produced?
• Price determines to the behavior of consumers
and producers in relation with each other.
In this ‘A Guide to Pricing Research’ the economic
theoretical underpinnings of price and pricing will be
briefly discussed. A Guide to Pricing Research will
provide the readers quick insights of how to conduct
pricing research. Different pricing research techniques
with suitable illustrations will be presented to guide a
better understanding of the concepts. Although economic
perspectives are presented in various sections of the
guide, a major focus is on pricing research as a part of
marketing research.

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SECTION 1 – THE MULTI-DIMENSIONS OF
PRICE
1.1 The Economic Dimensions of Price
A very basic definition of price can be understood if you
ask someone the question ‘what is price?’ The simple
reply which majority of people are expected to give is;
‘how much I pay to buy a good or service’. In line with
this fact from our experience as shoppers and consumers,
a simple definition of price is the amount of money we
pay to acquire something we desire.
To take this definition to a more technical level, it could
be reiterated that price is the ratio of the amount of
money needed to acquire a given quantity of what we
desire. For example, if you spent $50 to buy three
lunches, then the price of each lunch is $16.67. Thus, the
definition of price can be expressed as;
ܲ‫ ݁ܿ݅ݎ‬ =
ܶℎ݁ ܽ݉‫ݐ ݕܾ ݀݁ݒ݅݁ܿ݁ݎ ݕ݁݊݋݉ ݂݋ ݐݑ݊݋‬ℎ݁ ‫ݎ݈݈݁݁ݏ‬
ܶℎ݁ ‫ݐ ݕܾ ݀݁ݒ݅݁ܿ݁ݎ ݏ݀݋݋݃ ݂݋ ݕݐ݅ݐ݊ܽݑݍ‬ℎ݁ ܾ‫ݎ݁ݕݑ‬
The economic theory suggests that the price determines
how a firm decides on production techniques, the amount

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of production and what resources input proportion it is
going to use. Profit maximization is one of the prime
objectives of firms. Given this, firms will always try to
minimize their costs of production and maximize profits.
The main focus of this section is not examining price
from sellers’ perspectives, but to examine the buyers’
behavior in relation to price. The buyers have primarily
two decisions to make when deciding on whether to
make a purchase or not. Firstly, what products or service
should be purchased and secondly, how much to pay for
each product/service. The purchase decision depends on
a number of things. It depends on the price of the
product/service itself, the price of other competing
products/services, the income of the buyer, the tastes and
preferences, etc.
Buyers as humans are assumed to be rational in making
purchase decision. The rationality in the context means
that they choose among the various options the one that
maximize their satisfaction or, in other words, the utility.

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1.2 The Psychological Dimension of Price
The perceptions based on prior experience and new
expectations can also influence the price. The psychology
of price decision involves a categorization process
wherein the buyers’ new experiences are placed into their
current familiar classifications of experiences. Therefore,
the decision to buy a product at a certain price relies on
whether the price difference between the old and new
price is significant or not. The price difference
insignificance makes the buyers to conclude that the two
are same and they would act the same way as in the past.
The psychological dimension of price believes that
buyers are not always rational. It assumes that the buyers
can become emotional such that the rational effect is
offset by their emotional effect. Thus, the purchase
decisions are not always made rationally.
Yet, the two dimensions of price cannot be considered as
two individual theories that marketers can choose either
of them. A better approach of looking at these two
dimensions is assuming that there are inherent

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relationships between the rational effect and the
psychological or emotional effect. A certain stage, a
buyer may be using complete rationality approach to buy,
while in certain other situations he may be emotional. So,
the marketers’ approach should be to address the shifting
phenomena between the rationality and emotionality.
1.3 Price vs. Quality
The empirical studies concerning the subject matters of
price awareness and price consciousness indicates that
the buyers do not simply use price as a measure of cost,
but also as a measure of their perceived quality. This
implies that the price and the perceived quality are
correlated. This research evidence is the foundation of
some of the advanced pricing techniques such as Price
Sensitivity Meter which will be discussed in detail later.
1.4 The Principle
Sometimes, businesses experience unexpectedly low
sales in some of the best products they have developed
just because the pricing decision was wrongly executed.
A wrongly priced product will most probably remain on

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the shelf. One of the common mistakes the managers
make in pricing is that they fail to adhere to the basic
principle of pricing. The fundamental principle of pricing
dictates that the price should be set to reflect customer’s
perceived value of the product. This principle suggests
that the buyers’ preferences or choices would rely on
how they assess the quality or the benefits to be received
from the product/service relative to the cost or
opportunity cost of the decision. Therefore, one may
argue understand that the buyers’ perceptions of value
symbolize a tradeoff between the qualities (benefits)
relative to the sacrifice they perceive by making the
purchase decision. The perceived value, therefore, can be
formulized as:
ܲ݁‫ ݁ݑ݈ܸܽ ݀݁ݒ݅݁ܿݎ‬ =
ܲ݁‫)ݏݐ݂݅݁݊݁ܤ( ݕݐ݈݅ܽݑܳ ݀݁ݒ݅݁ܿݎ‬
ܲ݁‫݂݁ܿ݅݅ݎܿܽܵ ݀݁ݒ݅݁ܿݎ‬
The formula represents that the perceived benefits is a
function of perceived quality and perceived quality and
perceived sacrificed is related to price.

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1.5 Conceptualizing Perceived Value
Based on the above discussions, it is now easy to
conceptualize the perceived value as a concept that has
interconnections with many other variables. The
conceptual model can be verified and tested by
employing advanced quantitative techniques such as
Structural Equation Modeling.
This conceptual model illustrates how a customer arrives
at a purchase decision or intention. The ultimate purchase
decision is based on perceived value which is determined
by many other variables such as actual price, perceived
quality and perceived monetary value. The perceived
quality is a function of three or, perhaps, more variables.

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In the model, perceived quality is determined by actual
price, seller reputation and brand name.
From marketers’ point of view, it is now quite easy to
address the issues of perception of buyers. The
conceptual model clearly gives a direction for marketing
activities and how they should be focused on different
variables. For each selling organization, the model can be
quantitatively tested to determine the strength of each of
the above relationship by using Structural Equation
Modeling.
1.6 Complexities of Pricing
As discussed earlier in the section, price has two
dimensions – economic and psychological dimensions.
This makes pricing a complex decision for marketing
managers. Given the diverse nature of human and varied
behaviors in different environments the pricing is further
complicated by dimension conflict. When economic
dimension and psychological dimension conflict each
other, it is very difficult to decide on a suitable pricing
strategy. This conflict is simplified to mean the conflict
between the rationality and emotionality. When

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consumers have a mix of rationality and emotionality
without either dominating dimension, then the marketer
will be placed in a dilemma.
For consumers whose decision making are dominated by
rationality, a pricing strategy that maximize the perceived
monetary value and perceived quality will work as long
as they are taken care of appropriately. When consumers’
decision making is dominated by emotionality, using
psychological pricing strategies may work effectively.
The solution to the dilemma is pricing research. Pricing
research will revealed the degree of rationality or
emotionality exercise by the consumer in making
purchase decisions. The next section of this guide will be
focused on pricing research to simplify the pricing
complexities.

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SECTION 2 – RESEARCH BASED PRICING
2.1 Introduction
The previous section is a very fundamental discussion of
the dimensions of price which largely dictates the
consumers buying intention. In the present section, we
will focus on how pricing research can be used to come
up with an appropriate pricing for new products as well
as existing products or services.
The traditional pricing practices of marketers were not
based on market research as a basis for pricing strategies.
However, due to the integration of markets and increased
competition due deregulation of various industries,
marketers can no longer make decisions based on mere
guesses. Decisions must be based on information about
the target market. Information pertaining to the
consumers, competitors and the environment of the target
market is crucial for successful strategy formulation.
Pricing is directly related to business profitability. Thus,
firms must be fully equipped in terms of information
before finalizing pricing strategy. The need for pricing

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research is coined with the need to earn profit. Of the
marketing mixes, price is the only mix that has a direct
inflow of money to the business, which makes price very
important part of marketers’ decision making.
The nature and value of research depends on the firm’s
pricing objective and strategy chosen. For example, if the
firm’s pricing strategy is cost based pricing, then the
research nature to find about consumer preferences and
competition intensity may not be very useful. Likewise,
if the pricing is competition based pricing, and then
research about consumer willingness may not provide
useful insights into pricing decisions. However, if the
pricing is customer or market centric, then the nature of
research is customer focused and the value of such
research is at high stake.
2.2 Research Dimensions
The previous sections discussed the two dimensions of
price and the relationship between the dimensions. It was
stated that in certain cases price may be dominated by

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any of the two dimensions, namely economic or
psychological dimension.
Therefore, research dimensions concerning price can be
defined by three different categories.
(1) Research under the assumption that consumer
evaluates price on rational basis
(2) Research assuming consumer buying decision is
based on emotions
(3) Research assuming that consumer buying
decision is determined by a mix of rationality and
emotionality in different degrees.
Whatever the underlying assumption, any pricing
research must address three basic research issues.

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(1) Single vs. Multiple Products: The issue here is
whether the price sensitivity will be tested for a
single product or a brand or in context of multiple
products which are competing. In case of new
products, like of which does not exist in the
market, the price sensitivity will be tested in
isolation. One of the challenges in new product
pricing research is allowing consumers make an
informed decision regarding the questions in the
research. As a new product, consumers may not
have proper information that will guide them fully
the decision making process. Therefore, the
(1)
Single product
vs. multiple
product
(3)
Single vs.
multiple
price
(2)
Direct vs.
indirect
approach

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research design chosen for new product pricing
research must facilitate consumer decision
making in an informed context. In case of new
products where many alternatives exist in the
market, the price research cannot be conducted in
isolation.
(2) Direct vs. Indirect Approach: The second issue is
whether the consumer responses to the price
should be tested directly or indirectly. A direct
approach is used when the rational element is to
be emphasized. In direct approach, customers will
be asked if they would be willing to pay a specific
price for a product. This would enhance buyers’
rational thinking rather than perceptions or
beliefs. In contrast, an indirect approach asks
indirect questions such as those about brand name
or advertising. Here, the research assumes that
consumer perceptions or belief dominates the
decision making.
(3) Single vs. Multiple Price: If the researcher
wishes to emphasize on consumer rationality,
then testing sensitivity or willingness of price,

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must be based on multiple prices. A single price
decision places restriction on the degree of
rationality that can be exercised. If question about
a single price, without anything to compare or
reflect, is given to evaluate, the consumer
decision will be largely based on emotions,
perceptions and beliefs.
2.2 Research Types
Pricing research can be classified into three based on the
objectives of the research. The research aimed at
understanding the willingness of consumer to pay for a
product/service or products/services can be known as the
Willingness to Pay (WTP) research. Sensitivity research
is one in which the sensitivity of consumers to a given
price or range of price is measured. It also includes
research aimed at measuring the highest and lowest
acceptable price as well as optimum price. Last, category
of price research is value research which aims at
measuring how consumers value a certain offerings.

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2.2.1 Willingness To Pay Research
The willingness to pay (WTP) which is also known as
reservation price can be defined as the price the
consumer is willing to pay at most for a given quantity of
goods or service. Understanding the willingness to pay is
a crucial part of market research, especially for the
pricing decisions. There are basically certain research
methods which could be employed in order to assess the
willingness. WTP research could be conducted at the
point of purchase or in other situations which is
appropriate for the product/service under study.
In this brief guide, we will limit our discussion of WTP
research methods to only three methods;
2.2.1.1 Transaction Data
Transaction data method can be considered as the most
reliable and accurate research method for pricing
decision because the data are actual data from customers’
interactions with the actual product/service. The data for
pricing research is collected by scanning data when
customers exit the payment counter. This can also be

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done by scanner which records the eye and facial
expressions of customers at the shelves while they
compare and contrast products before deciding to buy.
The data collected can be used for designing promotion
campaigns and also pricing the new products. The actual
reactions and preferences are recorded, analyzed and
used by the marketer in determining the price and offers.
2.2.1.2 Survey
This is one of the most common types of data collection
in any research. A survey in the pricing research context
means the process of collecting data relating to consumer
behavior with respect to price in a given situation. In
certain cases, survey method may be more useful than
transaction data for new products. This is because the
transaction data relates to existing products or services,
which may not be suitable for the new product.
In designing a survey for pricing research, the survey
must be designed carefully because pricing is one of the
important aspects of the overall marketing strategy. One
of the common instruments which apply a survey method

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is when the researcher wishes to construct a Price
Sensitivity Meter. Price Sensitivity Meter will be
discussed as a separate section later.
2.2.1.3 Contingent Valuation
Contingent valuation is a process which can be used to
price a product after the product is developed. There are
two types of contingent valuation. In open-ended
contingent valuation, the researcher asks the consumers
to state their willingness to pay for the whole product or
changes in certain product attributes, features and
designs. This could be effectively used during the new
product development stage of prototype testing stage.
Open-ended contingent valuation method can be used to
determine the price for the new product using the
prototype. The second method of contingent valuation is
close-ended contingent valuation where actual products
or prototypes are provided for respondents to touch and
feel, but only displays are used and respondents are ask
to state if they would buy the displayed product at a
given price.

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2.2.2 Price Sensitivity Research
The term price sensitivity can be defined as the degree to
which the price of products affects the consumers’
purchasing decisions. The sensitivity analysis is
borrowed to marketing from the concept of price
elasticity of demand in economics. The price elasticity
measures the responsiveness or sensitivity of demand to
price.
The price sensitivity research started taking form in
market research due to the limitation of intuition based
pricing as intuition does not truly reflect the products’
price potentials. Price sensitivity research is a systematic
process of collecting data, analyzing them and making
decisions based on both qualitative and quantitative
information.
Two approaches to price sensitivity research will be
discussed here; conjoint analysis and sensitivity analysis.

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2.2.2.1 Conjoint Analysis
Conjoint analysis comprises a vast array of techniques
used to measure the value consumers place on certain
attributes or features of product or service that defined
the product/service. This is an optimum research method
that combines consumers’ real-life experiences and
statistical techniques to model actual market decision
making.
Conjoint analysis quantitatively calculates a metric of
desirability for each product/service attribute based on
consumer feedback. The total desirability aggregated
from all attributes adds up to what is called as full
desirability score. The existence of co-desirability
between less desirable and high desirable attributes is
called as trade-offs. For this reason, conjoint analysis is
also called as trade-off analysis.

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2.2.2.2 Sensitivity Analysis
The primary objective of price sensitivity research is to
determine the range of prices that are acceptable to pay
for the product or service. The sensitivity can be gauged
by two approaches; a direct questioning approach which
was developed in France in 1950s and Price Sensitivity
Meter which go beyond the direct question approach.
Direct Question Approach
In direct approach, the upper and lower price thresholds
are determined by asking two direct questions in the
pricing research survey.
• What is the minimum price you would be willing
to pay for the product/service or a brand
specified? Any price below this would make the
product or service quality doubtful.
• What is the maximum price you would be willing
to pay for the product/service or brand specified?
Prices over this would make consumers think it is
not worth paying.

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An Example
The business in the example is a service provider who
conducted a sensitivity survey to determine the
acceptable registration fee for first time service
subscribers. The two survey questions were asked as
follows;
Q1: What is the minimum price you would be willing to
pay as the subscription fee for our service? (Please
cross)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Q2: What is the maximum price you would be willing to
pay as the subscription fee for our service? (Please
cross).
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
A small survey was included in the monthly account
statement which was sent to 500 customers. The
customers who completed and sent the survey by post are

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given a 10% waver of that month’s bill. Of the 500
customers to whom the survey was sent, 390 returned
completed survey and all 390 were usable.
After data are collected, a frequency distribution for the
two questions was prepared as shown in the table below;
As shown in the table, the responses as for the minimum
subscription fee ranged from $3 to $8 where $4 and $5
together made the majority. The maximum subscription
fee ranged from $7 to $13 where $11 was chosen by 30%
of the respondents. The AL (acceptable low) fee was
determined by the reverse cumulative frequency for
Frequency Too Cheap Acceptable Frequency Too Expensive Buy Price
Price % % AL % AH BP
1 0.00 1.00 0.00 0.00 0.00 0.00
2 0.00 1.00 0.00 0.00 0.00 0.00
3 0.15 1.00 0.00 0.00 0.00 0.00
4 0.25 0.85 0.15 0.00 0.00 0.15
5 0.25 0.60 0.40 0.00 0.00 0.40
6 0.20 0.35 0.65 0.00 0.00 0.65
7 0.10 0.15 0.85 0.05 0.05 0.80
8 0.05 0.00 1.00 0.10 0.15 0.85
9 0.00 0.00 1.00 0.15 0.30 0.70
10 0.00 0.00 1.00 0.20 0.50 0.50
11 0.00 0.00 1.00 0.30 0.80 0.20
12 0.00 0.00 1.00 0.15 0.95 0.05
13 0.00 0.00 1.00 0.05 1.00 0.00
14 0.00 0.00 1.00 0.00 1.00 0.00
15 0.00 0.00 1.00 0.00 1.00 0.00
Minimum Price Maximum

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question, Q1 (Minimum price). The AH (acceptable high)
was the cumulative frequency for question, Q2
(Maximum price). The BP (buy price) shows the range of
acceptable prices which is obtained by AL – AH.
Note: Horizontal Axis shows prices and Vertical Axis shows
cumulative frequency (proportion of respondents).
The graph above is then constructed to obtain the price
points. According to the graph, the acceptable price range
is between $5.5 and $10 (indicated by the two vertical
dotted lines). It is also possible to determine the optimal
price from the graph. In this case, the optimum price is
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
AL
AH
BP

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$8 – the proportion of respondents who consider this
price acceptable is 85% (cumulative frequency).
A Note of Caution
In any price sensitivity research, it is always advisable to
give a range of prices for respondents to choose in the
survey. If the question is open ended, the standard
deviation of the data may be high, which will result in
poor results.
Price Sensitivity Meter
The Price Sensitivity Meter was developed by a Dutch
Economist, Peter Van Westendorp, in 1970s. PSM is
probably the most frequently used technique in pricing
research. PSM is a relatively easy and precise technique
which can produce highly reliable results if the dataset is
of good research quality.
The PSM is based on two theories. Firstly, the theory of
reasonable price assumes that customers can examine a
product or a concept and give a rough estimate of how

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much the product or the concept would cost. Secondly,
price-quality relationship which assumes that price
signals quality and too low price may be too bad quality
to buy.
Therefore, the premise on which PSM is founded is that
the humans are realistic in price judgments and the value
people place on quality.
In PSM research, the researcher asks four questions about
price preferences of customers. They are;
Q1: At what price would you consider this product to be
a bargain – a great value for money?
Q2: At what price would it start getting expensive, but
still worth considering?
Q3: At what price would it be so cheap that quality is
doubted?
Q4: At what price would it be so expensive that is not
worth considering?

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When using PSM technique for New Product Pricing, the
survey must include a very clear description of the
product for better results. If the actual product is
developed, it is best to use the actual product or a
prototype during the survey as a demonstration. This will
give the respondents better understanding and thus, are
more reasonable in their judgments.
After the data collection, the cumulative frequency for
the four questions is run using statistical software. The
cumulative frequency for Q1 and Q3 will be reversed
(inverse cumulative frequency) before plotting the for
cumulative frequencies against the price. This is to
ensure the interactions discussed below;
Findings from PSM
The PSM reveals some very useful information for
pricing decisions. There are various price points in the
PSM graph which has different interpretation and offer
guidance in pricing decisions.
• Optimum Price – This is one of the important
findings of a PSM. The optimum price is the price

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at which the product sales will be maximized.
Any other price would result in lower sales than if
priced at the optimum price. The optimum price is
determined by the price point where the
percentage of respondents for Q3 (Too Cheap)
and Q4 (Too Expensive) equals. In other words,
the price at which Too Cheap Curve and Too
Expensive Curve intersect.
• Indifferent Price – This is the price point where
the curves representing Q1 (Bargain) and Q2
(Getting Expensive) meet. Empirical studies
suggests that the indifference price could be either
the median price the consumers actually paid for
a similar product or the average price of a product
sold by a market dominating seller.
• The Minimum Acceptable Price – MAP is
determined by the price point where the
proportion of respondents who considered “Too
Cheap” and “Getting Expensive” are equal. In
other words, the point where Curve for Q2 and
Q3 intersect each other. This means at any price

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below this point, the quality of the product will be
perceived by customers as doubtful.
• The Maximum Acceptable Price – This is the
price where the “Bargain Curve” and “Too
Expensive Curve” equates each other. Any price
above this would be considered by customers as
not worthy to consider, because the perception
will be “too expensive”.
• Range of Acceptable Price – The range of
acceptable price is price points between the
minimum acceptable price and the maximum
acceptable price.
An Illustration
The following Chart is a Price Sensitivity Meter. The
chart is presented to better explain the meaning of the
above price points. The vertical axis represents the
cumulative frequency (proportion of respondents) and the
horizontal axis denotes the prices;

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Price Sensitivity Meter
Price Points Labels on Chart
Optimum Price OP = $4
Indifference Price IP = $4
Maximum Price MxP = $5
Minimum Price MnP = $3
Acceptable Price Range MxP – MnP = $3 to $5
0
10
20
30
40
50
60
70
80
90
100
$1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00
Too Cheap Too Expensive
Bargain Getting Expensive
OP
MxPMnP
IP

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CONCLUSION
Pricing is one of the complex decisions that marketing
managers have to make. It may be because of inadequate
knowledge of pricing research techniques or perhaps the
organizations do not allocate a budget for pricing
research. Often times, the pricing is based on intuition
and this process has proven problematic given the
growing competition and new technology.
Pricing research is an important aspect of market
research because pricing the products/services correctly
determines the success of marketing to a great extent.
With this guide, we hope that the readers get an idea on
how to conduct pricing research. This guide is an
introductory guide and for mastering of pricing research,
attending pricing research trainings and reading on the
subject is important.
Contact Authors:
Name E-mail
Ismail Nizam nizam@egnatia.biz
Ali Kasa ali@egnatia.biz